Early on in the public health emergency, many rental property owners felt left to the wayside. With newfound police powers, many municipalities ushered in sweeping tenants’ protections and this patchwork of new regulatory regimes culminated in our Governor issuing a statewide moratorium on evictions for non-payment of rent cases.
While there were five-alarm fire bells going off for renters, would there be any reprieve for owners?
Forgotten landlords argued that while tenants face job loss and substantial reductions in income as the result of COVID-19, owners face financial obligations of their own. Mom and pop landlords are especially vulnerable without the cash or credit availability to cover their costs when rents aren’t paid. Daniel Bornstein told KPIX Five that penalties that arise when owners are late on their mortgage should be proactively waived across the board.
The collective moan of financially strained owners and operators were eventually heard in a patchwork of relief we’ll go over now.
Fannie and Freddie were prophetic in averting a large-scale crisis in the making by offering mortgage forbearances
Holding or backing approximately 48.6% of outstanding multifamily mortgage debt according to recent data, Fannie Mae and Freddie Mac were one of the first to throw a life preserver to landlords, but with a caveat. Owners could benefit from a mortgage forbearance on the condition that they suspend all evictions for renters who cannot pay their rent because of the coronavirus.
These government-sponsored enterprises understood that since they had no contact with individual renters, the only way to provide genuine relief to renters was to provide relief to the kings of the castles. Missed rent payments translate to an owner’s inability to pay the mortgage, all but guaranteeing the entire property would go into foreclosure. Rental property owners are encouraged to contact their mortgage servicer to inquire about what relief is available.
Governor Newsom brokers a deal with lenders for 90-day mortgage payment relief
On March 25, Governor Newsom announced that many financial institutions have signaled their intention to work with owners who are unable to fulfill their mortgage payment obligations. Onboard is Citigroup, JPMorganChase, U.S. Bank, and Wells Fargo, along with nearly 200 state-chartered banks, credit unions, and servicers.
Specifically, the deal would defer mortgage payments for three months, although borrowers have the opportunity to request additional relief. There is also a pledge not to initiate foreclosure sales or evictions for the next 60 days. Another promise: not to report late payments to credit reporting agencies. Late fees will also be waived.
Select lenders have also implemented deferral plans during this declared emergency, allowing borrowers to put a hold on their payments for up to 120 days. These deferred payments will be applied at the end of the borrower’s loan period. Bank of America was a bit of a pariah – it would only agree to 30 days.
If owners are experiencing a drought in rental income, they are well-advised to reach out to their mortgage servicers regardless of who they are or where they fit into the scheme of the Governor’s deal. After weathering the foreclosure crisis of yesteryears, Bornstein Law can attest that lenders are generally willing to work out a solution with borrowers falling on tough times, as there is no upside for a bank to foreclose on a property. Communication is key.
Landlords attempt to find Uncle Sam to benefit from the federal stimulus package
The Coronavirus Aid, Relief and Economic Security Act, or CARE, was rolled out on March 27 and the temporary economic relief package is best compartmentalized.
Paycheck Protection Program, or PPP
PPP is a $350 billion tranche designed to divert an employment crisis by helping businesses maintain their payroll. Run through banks and credit unions, PPP infuses up to $10 million in loans to companies with 500 or fewer employees. If businesses avoid layoffs, some or all of the loan could be forgiven.
Many rental housing providers, however, have been left on the sidelines because of the interim final rule, which essentially says the payroll of third-party contractors is not calculated in the size of payroll. This is problematic because clearly, although landlords rely heavily on management companies and independent contractors, Section 1102 of the CARES provides that the maximum amount available under the PPP is equal to the lesser of $10 million or 2.5 times the “average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made . . .”
Multifamily hasn’t been cut out completely so much as it has been seriously limited by provisions of the SBA Paycheck Protection Program. Many sectors of the industry, such as residential property management companies with multiple physical locations, passive owners, apartment buildings and those who contract third parties for property management are currently ineligible per SBA guidance.
~ Greg Brown, senior vice president of Government Affairs for the National Apartment Association, quoted in this Forbes article.
We hasten to say that while landlords cannot include payments to certain third parties as payroll costs for the purposes of a PPP application, they do benefit indirectly through PPP loans obtained by their tenants. With owners and operators limited in their ability to obtain direct relief through PPP, let’s move onto a more advantageous, less-publicized program for landlords, namely the Economic Injury Disaster Loan.
Economic Injury Disaster Loan, or EIDL.
Section 1110 of CARES significantly expands this program, which permits the Small Business Administration to grant loans of up to $2 million at a statutorily-capped interest rate of 3.75% and a term of up to 30 years. One component of the program is a shot in the arm of up to $10,000 in immediate funds “within three days” that, under most circumstances, doesn’t have to be paid back. This effectively makes it a grant, versus a loan.
These funds can be used for mortgage payments and other debts and so a hypothetical landlord who does not employ many people but has a substantial real estate portfolio can benefit greatly from an EIDL and receive a forgivable cash infusion to pay their mortgage, utilities, and other operating and maintenance expenses, without regard to the size of payroll.
These dual programs are not exhaustive
SBA Express Bridge Loans are meant to give quick cash of up to $25,000 to small businesses that have a business relationship with an SBA Express lender. The agency is also advertising a financial reprieve through debt relief afforded to businesses who already have an SBA loan and have suffered a financial impact in the wake of the pandemic.
The early report card is in, and it is one of frustration among owners and operators competing with many other businesses clamoring for funds. The East Bay Times tells the stories of many owners who are running into one brick wall after another in the application process.
This exercise is worth pursuing, however, with the same patience and discipline that is already the order of the day. Any red tape, delays, or lack of guarantees only serve home to drive home our advice to communicate with the tenant about their circumstances and work out a mutually agreeable payment plan. Bornstein Law stands ready to facilitate in that dialogue.