What You Need Know About Rent Concessions and Lending during COVID-19

April was the first month many tenants were unable to pay their rent due to COVID-19 restrictions. With an estimated 1 in 10 Americans now unemployed, property owners are facing a greater number of rent delinquencies than they’ve seen in recent times. Unfortunately, that trend isn’t likely to change as the federal, state, and local governments continue to take measures to quell the spread of the virus. These measures have also limited the ability of commercial and multifamily property owners to enforce rent, evictions, and other lease clauses. Landlords and tenants alike are facing practical and legal challenges, all of which vary by jurisdiction. While things continue to change rapidly by the day, here’s a look at some important considerations.

Commercial Tenant Challenges

Many businesses aren’t able to take advantage of their business interruption insurance during the pandemic. This makes it difficult for commercial tenants to insure against not being able to use their commercial property to run their business and pay rent. Tenants who have received aid under the CARES Act may not be able to use those funds to pay rent either. Not only are they likely to have other pressing expenses, but for small business tenants with payroll forgiveness loans, they’re required to use 75% of the loan funds for payroll expenses in order for the loans to be completely forgiven.

Multi-family and Commercial Landlord Challenges

Landlords across the nation are facing limitations in several ways. Many courts have postponed all non-emergency court hearings including landlord/tenant disputes. The federal government recently issued a 120-day moratorium on evictions involving federally-backed multi-family mortgages. More than 30 states have also placed broader moratoriums on evictions.

What makes this situation even more challenging is there is little to no structure or consistency for aiding landlords during this time. The one exception is for owners who hold mortgages under Freddie Mac and Fannie Mae. Both companies are offering mortgage forbearance for apartment owners if they suspend evictions for tenants who are unable to pay rent due to being impacted by COVID-19. However, choosing to not accept this forbearance doesn’t relieve landlords from the late penalty or eviction moratorium.

Better Lending Support

One important consideration for landlords is that the lending environment now is better than it was in the Great Recession. Early conversations (before a missed payment) with lenders are likely to be more productive than they were over a decade ago. Lenders are being encouraged to be more proactive and being told that the adjustments to loans won’t be subject to the usual penalties. There is essentially more capital available for lenders to utilize.

If you’re considering a buy-in from your lenders, you should be prepared to discuss the measures you’re taking as well as your financial plans. Talk to them about your cash flow, how you plan to keep up with other costs, and the payments you’ll own while rent is at a pause. Tell them which types of concessions you’re considering, including the timeframe and circumstances. The more information you can provide them, the better they’ll understand your circumstances.

Considerations for Rent Concessions

There are many factors you should consider when it comes to rent concessions. First, the lease provisions are still valid. Understand the legal liabilities are for you and your tenants if you don’t allow changes to the arrangements under the lease. Then, you’ll want to think about what types of adjustments you’re willing to make, as well as the circumstances. If you have multiple tenants living at your property, you may want to create a simple questionnaire to assess their circumstances and potential requests. Some questions you should think about are:

• Have your tenants been impacted? Or are they just anticipating an impact?
• Is your commercial tenant’s use of the property affected? How about their income stream?
• Do you need to apply the same concessions across the board to all your tenants? Or can you assess and address requests as you receive them?
• Are your tenants credit-worthy or “loyalty-worthy”? Is your reputation with them going to affect keeping them as tenants or for the future marketability of your property?

If you decide to offer rent concessions beyond delaying rent enforcement, there are several approaches you can take. You can choose to forgive a month or two of rent in exchange for increasing the length of the time of the lease by the same amount of time. Some landlords are opting to completely write off the cost of rent for a month or two, or until things begin to return to normal. Regardless of the arrangements, make sure to document the agreement as an amendment to your lease so both you and your tenant are on the same page about each party’s expectations during this uncertain time.

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