Like most of the country, California has seen significant economic impact due to COVID-19. The executive orders from Governor Newsom have required many businesses to close or reduce their operations. Many citizens are still out of work; as of July 2020, the state unemployment rate was 13.3% – down from 16.4% in April. In addition, the orders on moratoriums and foreclosures have affected the normal rights and actions for leases and rental arrangements. These orders are set to expire on September 2, unless the state government can come to some form of agreement. With so much uncertainty in the air for California, and other states as well, landlords and tenants are left with many questions.
Here are a few ways you can navigate these uncertain times, as well as some solutions that have been adopted in other areas around the country.
Landlord considerations
Stay in communication with your tenants and continue talking to them about their situation. You should encourage them to apply for aid, when applicable, such as insurance claims, Small Business Administration Emergency Disaster Fund Loans, or the Paycheck Protection Program. You may also want to direct tenants to local assistance programs run by cities or regional foundations.
If tenants ask for rent concession, evaluate each tenant independently. Here are some factors you should keep in consideration:
- – Is this tenant likely to rent from you long term?
- – Does the tenant’s credit, current financial situation, and prior years’ financials demonstrate an impact due to COVID-19?
- – Does the tenant have a history of consistently paying their rent on time?
- – How much time is there left on the lease?
- – Can the existing lease terms be modified in exchange for a rent concession? Some examples of modifications include the addition of a relocation clause, the elimination of a right-of-first-refusal, right-of-first-offer, expense caps, or similar provisions.
- – Would a personal guaranty increase the tenant’s creditworthiness?
- – What are your cash flow needs?
You should also review your insurance policies, as well as your contractual obligations to lenders and other tenants. Although many insurance policies contain exclusions for situations like pandemics, it’s worthwhile to look into whether your insurer is providing some form of emergency coverage. In terms of loans, many agreements require minimum levels of rent or occupancy or require you to provide a 12-month trailing statement on your rent numbers. To get a loan, you’ll generally need to show that you have a minimal level of cash reserve and cash flow. However, many lenders would prefer to work with you to prevent defaults, so it’s definitely worth communicating with them.
Another thing you should consider is consulting your attorney and accountant. They can evaluate abatement and deferral requests to ensure they’re structured in a way that maximizes the benefits for you and your tenants. Some leases have co-tenancy requirements or require anchor tenants, so you should also think about whether your existing tenants will be impacted if your property no longer meets those lease stipulations. Lastly, what are the long-term market implications for your property? Here are a few things to factor in:
- – The cash flow of the property
- – Occupancy rates
- – Loans or leverages you have on the property
- – How much is the lender willing to work with you? Are they willing to offer a deferral or waiver, payment restructuring, or interest-only payments?
- – Do you have rental interruption or other insurance that doesn’t include a pandemic or epidemic exclusion?
If your tenant owns a business, you may also want to consider factors like their financial health, their credit history, and if they have a guarantor. How much cash does the tenant’s business have on hand? How robust were sales before the pandemic? If their business was already struggling or just breaking even prior to COVID-19, you may be in a position to support them through this time.
These are all questions that you’ll need to consider for each individual and property. If you choose not to provide some form of rent relief, you should also account for the potential vacancy loss and the costs associated with finding a replacement tenant. Keep in mind that the economic downturn could mean fewer renters searching for new housing – and longer vacancy times for your properties.
Some current solutions for landlords
Here are some solutions that have been successful for other landlords and their tenants:
- Apply the security deposit to rent.
- Collect maintenance charges on common areas, but defer the base price of rent.
- Reduce, defer, or abate rent for an agreed-upon period of time, with no repayment. This can be in exchange for more favorable lease terms, such as:
- Extending the term of the lease
- Terminating options
- Rights of refusal/first offer
- Eliminating exclusive or restrictive use provisions
- Reduce or defer rent payments for a set period of time, with payments spread out over the remaining term. If there is less than a year left to the lease and the rent amount is high, draw up a promissory note and have it secured by a personal guaranty until after the term ends.
- Reduce or defer payments for a set period of time, but add on the term to the end of the lease.
- Reduce the rent payment to a percentage rent based on the gross income of the tenant.
- Suspend late fees and/or interest.
- Suspend defaults for continuous operation, co-tenancy, and operating hours.
- Offer rent deferral or abatement for the length of the shutdown; resume rent once the pandemic ends. To avoid problems that could arise with this, add in an end date or cap to the rent deferral or abatement in case the shutdown is extended.
- Consider prohibiting “double-dipping.” This means if a tenant is receiving relief from another source, they aren’t eligible to receive relief from you as well. This allows you to provide relief to tenants who may be in greater need.
- Consider adding confidentiality requirements to any lease modifications you make. This allows you to adjust the terms for each tenant based on their individual circumstances while prohibiting tenants from comparing the terms of their leases.
Tenant Considerations
If you’re thinking about asking for a rent concession, be prepared to provide documentation that proves you need it. This could include bank statements, balance sheets, prior financial statements, evidence of loss of work or business, or other supporting documents. You may also need to show that you’ve applied for financial assistance through disaster relief programs or that you’ve explored insurance coverage.
It’s important to understand that landlords have many fixed costs they’re required to pay, regardless of whether they have money coming in. This includes things like debts services, property taxes, and insurance. Some costs, like security for the property, could even cost more during the pandemic. Check the section for landlords above and evaluate whether a rent concession would be beneficial to you and your landlord.
What happens if you’re not able to reach an agreement? In some states, eviction moratoriums still stand. As of August 25, these include:
- Arizona – extended until October 31, 2020
- California – set to expire September 2, 2020
- Connecticut – extended until October 1, 2020
- District of Columbia – evictions are banned until the state of emergency is officially declared over
- Florida – set to expire September 1, 2020
- Hawaii – set to expire September 30, 2020
- Illinois – set to expire September 19, 2020
- Kansas – set to expire September 15, 2020
- Maryland – evictions are banned until the state of emergency is officially declared over, however, the Maryland Court of Appeals’ hold on eviction proceedings ended July 25
- Massachusetts – set to expire October 17, 2020
- Minnesota – set to expire September 11, 2020
- Montana – evictions are banned temporarily during the pandemic but tenants must meet specific criteria to avoid being evicted
- Nevada – has been phased out since July 31, but is set to expire August 31
- New Jersey – set to expire October 15, 2020
- New Mexico – evictions are banned temporarily during the pandemic but tenants must provide the court with evidence of their inability to pay rent during their eviction petition
- New York – set to expire October 1, 2020
- Oregon – set to expire September 30, 2020
- Pennsylvania – set to expire August 31, 2020
- Virginia – set to expire September 7, 2020
- Washington – set to expire October 15, 2020
- Seattle, Washington – set to expire December 31, 2020
There’s still uncertainty surrounding what will happen after these moratoriums expire, but for the moment, landlords cannot pursue evictions. Although you can’t be evicted, the rent is still due, payable, and will accrue. Once the eviction ban is lifted, your landlord may pursue every legal option to remedy the situation, including eviction. However, with cooperation and understanding, most landlords and tenants should be able to find a mutually beneficial solution.
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