Archives for April 2020

For example, a “force majeure” clause in a lease absolves tenants from paying rent when an “Act of God” or an insurmountable man-made interference prevents their ability to meet contractual obligations, so the coronavirus qualifies as force majeure, according to Fields.
Meanwhile, state and local governments, including Los Angeles, Los Angeles County, New York, King County where Seattle is located and other major cities, have enacted emergency legislation prohibiting evictions of both residential and commercial tenants for non-payment of rent during this economic crisis.

“Tenants have become knowledgeable about their deferral rights under state or local laws and many office tenants large and small are either asking for help or simply not paying rent,” Fields says, noting that office landlords also know the rules and both parties are aware that most courts are currently closed.
However, emergency legislation typically only provides for rent deferral, so tenants must pay the rent eventually, generally over a period of three to six months after the deferral expires. Additionally, an office tenant must be able to establish that the COVID-19 situation actually prevents it from paying rent, Fields says. “This may be more difficult for larger corporate tenants that presumably have larger cash reserves and/or access to capital that allows them to continue paying rent” compared to small business tenants.
“We’re seeing asks for relief from companies of all sizes,” says Nick Axford, global head of research at real estate services firm Avison Young. “Workforce characteristics, industry, geographic location, local market conditions, remaining term of lease, and relationship with the landlord are all factors.”
It remains to be seen how the courts will resolve rental disputes arising from the shutdown, Fields notes. But the situation is already putting stress on tenant/landlord relationships, he says. Landlords rely on rental income to fund their own financial obligations and loan documents most likely require the landlord to obtain lender consent before waiving or deferring a tenant’s rent, he says. An institutional landlord and other landlords with low-debt leverage may be able to bear a larger and longer rent deferral than a landlord with low reserves or a heavy debt load, Fields adds. He notes that some institutional landlords have already offered their tenants multi-month deferrals with payback schedules.
How landlords respond to office tenant requests for rent deferrals or reductions will in part depend on the wording of the lease, but in most cases, it will be a matter of individual judgment as much as legality, and will vary widely, adds Axford.
“The size and financial stability of the tenant, the historic relationship with the landlord, and the landlord’s desire to retain the tenant within the building are all factors considered,” he says, noting that the recent U.S stimulus package did not address this issue. The $850 billion in the CARES Act earmarked for businesses and governments provides federal loans that can be used for payroll, rent or utilities expenses, but those loans must be repaid.

Most landlords will expect tenants to seek help from the Small Business Administration (SBA), rather asking them to bear all the pain, in Fields’ view. Under the CARES Act, the SBA will provide businesses with loans of up to $10 million. But landlords should recognize that tenants who seek Payroll Protection Loans (PPLs) from the SBA will want to do so in a manner that allows for complete loan forgiveness, rather than leaving their company laden with debt when the market begins to normalize, Fields says.
As a result, he advises office tenants and landlords to work together to find a solution that will enable both parties to survive, based on what each is capable of doing under the circumstances. “This is not the time to negotiate for the last nickel,” he stresses.

The day after tomorrow

While it is too early predict the exact nature and duration of COVID-related damage, Axford, who served as a lead author on a recent report titled “COVID-19 Impacts on Real Estate,” notes that the call for social distancing will likely change workplace strategies across the board, from traditional office leasing models to flexible office operators.
“On the flexible side, we anticipate the beginning of a consolidation within the flexible operator community where those positioned for growth will absorb operations of those currently looking at survival,” Axford says. “Owners with (co-working) operators in survival mode could be left with viable flex locations and a decision to make.”
While some may attempt to re-lease these spaces to other co-working operators, there will likely be an increase in owner-operator management agreements with proven operators in existing spaces, he forecasts.
Overall, office landlords should expect some changes in how tenants utilize space going forward, according to Fields. “I expect that tenants with contraction rights will look at exercising those rights, and tenants without contraction rights will investigate subletting space. A landlord should review the assignment and subletting provisions of the lease carefully. the lease will dictate the landlord’s response to tenant sublets, but landlords have the right to demand additional security and/or a share in the profits,” he notes. “And where credit is an issue the landlord should consider obtaining letters-of-credit in lieu of a cash security deposit to mitigate bankruptcy exposure.”

The Avison Young report suggests that the working-from-home experiment during the quarantine may accelerate the remote working movement and increase employee flexible working options. “This time is validating that people can work remotely and be productive,” Axford says. That could lead to a significant shift in how corporate occupiers manage their office portfolios.
“Flexible workspace among occupiers was already a growth driver in the sector, with organizations finding it increasingly difficult to commit to long-term leases. This will only be further impacted as we navigate a recession,” Axford notes.
Office tenants will emerge from this crisis having gone through the largest global experiment ever in remote working. This will likely drive corporate demand for flexible lease terms made available directly by institutional landlords.
“Whether an occupier, operator, or institutional owner, financial projections for 2020 have been disrupted and each party must engage in a proactive approach to mitigate short-term risk and realign long-term portfolio management strategies,” he says.
Source: “Office Tenants of All Sizes Are Asking for Rent Relief. Some Institutional Owners Are Offering Them Deferrals”

The U.S. economy has largely frozen as workers and shoppers stay home to “shelter in place” to slow the rapid spread of the lethal coronavirus. Businesses are quickly laying off employees—more than 16 million workers have filed for unemployment in the past three weeks.
“There has never been a period when job loss was so severe in such a short time period,” says Greg Willett, chief economist for RealPage, Inc. “The number of households missing rent payments in April and May will reach unprecedented levels.”
Congress has passed a $2 trillion law to prop up the economy and offer extra support to unemployed workers. But many are still expected to feel the pain of the stalled economy, including many workers who for one reason or other are not eligible for unemployment.

Apartment managers are already preparing to the worst. “They are concerned about the ability of residents to stay up to date with their payments,” says Paula Cino, vice president of construction, development and land use policy for the National Multifamily Housing Ccouncil.
The first broad measure of missed rental payments was published last week by NMHC, using data from several tech providers to compile payment information on more 13 million apartment units across the country. The tracker found 69 percent of households had paid their rent by April 5; this compares to 81 percent that had paid by March 5, 2020, and 82 percent that had paid by the same time last year. The numbers were not as bad as some experts feared, but many anticipate the May figures could be worse.
“Challenges are likely to be biggest in the lower-tier product,” says Willett. “Renters in those properties generally have very high rent-to-income ratios, and it is unusual for them to have any financial reserves that would allow them to cope with an interrupted income stream.”
Many apartment managers have audited their own lease files to determine who might be out of work. These managers have reached out to or heard from residents who may have lost income to begin a dialogue. For example, the majority of apartment managers who use RealPage’s property management systems report that they had already reached out before April 1 to their residents to identify those who may have lost income.
“Most landlords are likely going to encourage payment plans that call for residents to pay some portion of their rent every month, rather than skipping payment periods entirely,” says Willett. “The probability of eventual collection of overall debt increases quite a bit with that approach.”
Property managers are also likely ask resident who need forbearance to extend their lease terms, which will give the residents more time to pay off any back rent. “Property owners and operators realize that they will have to work with residents to structure rent payment options,” says Willett.
In the short term, many owners can bear the brunt of the reduced income streams, especially with lenders also showing some flexibility in the heat of the crisis. But if rental income takes a hit for months on end, that will create a larger strain on the sector and potentially trigger loan defaults and delinquencies and make it difficult for owners to cover the operational and maintenance costs at properties that are now being used more than ever. Multifamily owners are not used to having most or all of their tenants on site all of the time, as is the case now with the lockdowns in place.
To protect tenants, Congress, federal agencies and a long list of local governments have imposed moratoriums on evictions of residents of apartments who miss rental payments during the crisis.
For example, the CARES Act passed by Congress imposes a 120-day moratorium on tenant eviction filings and late fees for almost all of the nation’s affordable housing properties.
In addition, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac will offer multifamily property owners mortgage forbearance with the condition that they suspend all evictions for renters unable to pay rent due to the impact of coronavirus.
Cities and states have also passed eviction moratoriums, including most of the places that have seriously considered or passed rent control legislation, such as New York State, California and the city of Seattle.
For example, New York State Governor Andrew Cuomo announced New York state’s moratorium on March 31.
“You cannot be evicted for non-payment of rent, residential or commercial, for 90 days,” said Cuomo in his daily briefing that day.
“On that basis, my daughters have stopped paying me rent. I’m not even sure that their finances have dropped significantly. But I just think they are taking advantage of the non-eviction order that I myself posted. And I resent it. But there is nothing I can do about it, legally.”
Housing advocates like the National Low-Income Housing Coalition also continue to press Congress to pass a national moratorium on evictions and foreclosures.
For any property not covered by these rules, it is unlikely that they could go forward with an eviction anyway. “An eviction typically requires a municipal court filing,” says Willett. “Those courts are temporarily closed right now in most locations. Thus, regardless of whether or not there’s an official moratorium on evictions, they generally can’t proceed at this point.”

The apartment industry largely agrees that evictions should not go forward during the crisis—with some exceptions. Over the next 90 days, managers of apartment properties should not evict renters who can show they have been financially impacted by the COVID-19 pandemic, according to the NMHC—with exceptions for property damage, criminal activity or actions that endanger other residents.
In addition, NMHC and the National Apartment Association have called for further relief and recovery measures to help both tenants and landlords
The list of propopsed measures the groups are pushing for include:

• Create an Emergency Rental Assistance Program to help renter households who don’t currently receive federal rental subsidies but are now struggling to cover housing costs because of the COVID-19 crisis;
• Align the timelines of mortgage forbearance and eviction provisions;
• Expand the SBA Paycheck Protection Program to include multifamily and student housing firms so they can protect their employees and operations;
• Provide critical tax relief for multifamily property owners; and
• Enact critical infrastructure programs to support economic recovery

Source: “Operating Multifamily Properties in a Time of No Evictions”