April 8th, 2020
I’m sure you’re getting bombarded with emails on an hourly basis about navigating the current landscape we’re faced with as a result of the COVID-19 pandemic. We’re getting many questions from investors about how to manage through this crisis and what resources are available to assist landlords and real estate professionals. We’ll provide a few points of clarification and our thoughts from the real estate investor’s perspective here.
The new CARES act, the $2.2 trillion stimulus package that was just signed into law, is aimed at bridging the gap while a huge section of the U.S. economy shuts down to limit the spread of the virus. It’s a multi-faceted approach to bring liquidity into the hands of consumers, small businesses, larger companies, the banking system, and the country’s emergency response infrastructure. From the standpoint of the average property owner, there are only a few components of the stimulus package that can easily put money directly in your hands. Rather, the intent of the program seems to be geared towards putting money into the hands of workers, who will then be able to pay their rent, which in turn allows property owners to continue to pay their mortgage and expenses. This is a sensible approach as if it works as intended, each level of this food chain will continue to receive revenues and pass them on as they would under more normal circumstances.
There are a few programs available through the package that can directly fund shortfalls for investors. Through the SBA, the bill allows two types of special loans that may be available to real estate investors or real estate professionals.
The Economic Injury Disaster Loan (EIDL) is perhaps the most appropriate choice for rental property investors. It allows loans of up to $2M in working capital, the first $10K of which can be forgiven even if the loan is not approved. The application is available directly on the SBA’s web site here. It is designed to be used to offset temporary lost income such as rent.
The Paycheck Protection Program (PPP) is the loan program getting the most press since a much larger portion of these loans are forgivable under certain conditions. These loans are designed to be used to pay salaries and payroll for employees, self-employed people, or independent contractors. They will be administered through lenders that already fund SBA loans through their 7A program, so applications will need to be made through a bank. PPP loans may not be applicable to many rental property owners who have no employees, but can be used by real estate professionals and independent contractors to make up for lost income.
Keystone CPA, Inc, an accounting firm that has extensive knowledge of real estate businesses, has provided us with some excellent more detailed summaries of these loan programs as well as some detail on new tax benefits available to real estate investors as part of this stimulus package:
Keystone SBA Loan Program Summary
Keystone Coronavirus Related Tax Changes Summary
They will also be providing continued updates from the accounting perspective here. Of course, consult your own CPA for tax advice regarding your individual situation.
In addition to these loan programs and tax relief, many lenders are offering mortgage payment deferrals for homeowners and investors experiencing hardship arising out of the Coronavirus pandemic. The government sponsored enterprises, Fannie Mae and Freddie Mac have suspended foreclosures and evictions at the federal level, but many other banks have also agreed to offer mortgage payment forbearance if borrowers contact them. California governor Newsom reached an agreement with approximately 200 banks in the state to offer mortgage deferral for up to 90 days if necessary for residential loans. This would apply for mortgages on properties containing 1-4 residential units. For commercial loans on properties with 5 or more units, banks are approaching these requests on a case by case basis. Our recommendation is to contact your mortgage servicer as early as possible if making your payment will present a hardship. These deferrals do not relieve borrowers of the duty to pay, they only delay the payments.
As expected, the California state government as well as many local jurisdictions have enacted a variety of tenant protections. Governor Newsom initially authorized cities to craft their own emergency eviction moratoriums, then on March 27th issued a statewide ban on evictions of renters who have been affected by COVID-19 through May 31st. Renters are required to provide documentation of their hardship and would still be obligated to pay the rent in a timely manner, though a specific time frame is not included. Some cities have adopted additional protections. The city of Los Angeles has frozen all rent increases of properties that fall within the cities Rent Stabilization Ordinance (RSO).
Our recommendation is to work closely with your property manager and tenants to proactively communicate what relief is available with a clear explanation of these policies. As of this writing, April collections from our property management partners have been surprisingly healthy, despite all of the news. We should know more next week as most payment grace periods are up on Monday. It is also likely that May rent will be a more significant hardship for many tenants than April. We’ll have to take each month and each new piece of news as they come.
We will continue to provide updates as we receive more information as the situation surrounding the virus evolves. With the incredible rate of change in the public and private response to the pandemic, there will undoubtedly be new developments on an almost daily basis. Please don’t hesitate to reach out directly if you’d like to share some personal experience or have any additional questions. We hope you and your family are staying safe, healthy, and sane.
Thank you,
