In the real estate industry, the first of the month holds a certain significance – after all, it’s when rent payments are due. But this April 1 is quite different, coming amid the steep economic downturn caused by the coronavirus pandemic.
As revenues plunge, landlords must still meet their own payrolls, and make payments on utilities, taxes and mortgages.
Landlords are girding for the very real prospect that the $81 billion owed to them in rent payments, according to Bloomberg, will fall far short as tenants of all kinds struggle to find the cash. Adding to the pressure on landlords, state and local governments across the country have already instituted eviction moratoriums to protect the nearly 10 million people who have filed for unemployment insurance in the past two weeks and the millions more who are out of work and are unable to pay rent.
The landlords’ challenge is also on the commercial side, where more than 47,000 stores have already closed in 2020, according to Bloomberg, reflecting hardship for retail landlords in a sector that was already struggling.
Yet landlords must still meet their own payrolls, and make payments on utilities, taxes and mortgages. It leaves landlords searching for options merely to survive.
While there is no cure-all, there are some simple steps landlords can take:
- Communicate. To begin with, these pressures make it all the more important for landlords and tenants to have active and open communication. Negotiating rent forbearances, deferrals or new lease terms altogether may be an alternative.
- Seek out financing. Then there is possibility of federal assistance. On March 27, Congress approved the CARES Act, a $2.2 trillion stimulus package that opens new avenues and potential benefits for those in the real estate industry.
But each sector’s needs – and answers — are different in the real estate industry, which we help evaluate:
Hospitality and retail
The hospitality industry has been significantly hurt by travel bans and social distancing measures. The luxury and upscale categories, in particular, which rely heavily on conferences for revenue, have had their occupancy rate plummet to an unheard-of 15.7% for the week ended March 21. Markets such as Las Vegas, Orlando and New Orleans, which rely heavily on tourism and conferences, have been the hardest hit.
While there will most likely be more bad news for the luxury class in the coming weeks, steeper declines will most likely come from the lower end of the hospitality sector, if only because luxury doesn’t have much further to go.
Retail landlords are also facing an extremely challenging quarter as their tenants have been forced to shutter doors. Many tenants are already looking for relief as they look to limit costs with no sales revenue. While landlords will have to be accommodating for tenants amid concerns that more retails shops will go dark in the future with fewer tenants to replace them, they are looking for upstream debt relief to prevent a collapse of the industry.
Residential and commercial tenants
Many of these renters, especially those in workforce housing, may not be able to pay what they owe this month. Besides certain income and dependent limitations, every adult with a Social Security number will receive a check from the government that is intended to assist with bills coming due. The speed at which the subsidies from the stimulus package are released will be critical to stem the tide of late or foregone rental payments.
Co-Star, a commercial real estate research firm, estimates that the 42.7 million households renting in the United States will receive approximately $2,000 per household, or $85.5 billion. Residential landlords are hoping that after food and health care costs, some of this subsidy can go to the $53 billion in rental due this month.
On the commercial side, many tenants in office and retail space have had to shut their doors following shelter-in-place regulations. Numerous relief options have become available from the CARES Act to assist with the shortfall. Tenants should be looking at the Economic Injury Disaster Loan Assistance program, the Paycheck Protection Program, and the expected credit facility targeted for midsize businesses.
Landlords also have the opportunity to apply for the same loans introduced by the CARES Act. In addition, apartment landlords have an opportunity to delay their own mortgage payments. Those with a federally backed multifamily mortgage may request a forbearance for up to 90 days.
The borrower is required to affirm financial hardship but is not required to substantiate proof. In exchange, the multifamily owner may not evict a tenant solely for nonpayment of rent and may not provide notice to evict until after the 90 day forbearance period.
The real estate industry benefits from many tax-specific items in the CARES Act. The first relates to QIP, or qualified improvement property. A commonly recognized error of the Tax Cuts and Jobs Act in 2017 required these assets to have a 39-year recovery period and be ineligible for bonus depreciation.
The CARES Act has provided a technical correction to now allow QIP to be depreciated over 15 years and be eligible for bonus depreciation. Real estate owners will also potentially have an opportunity to carry back net operating losses on corporate tax returns or increase the use of active business losses via individual tax returns.
There is no single right answer for each and every real estate owner and operator to survive these revenue shortages. Each one will have to evaluate the needs against the sector and tenant mix, geographic locations and business size. Opportunities are available for the industry as a whole to be well positioned for growth once the global economy gets to the other side of this pandemic.
For more information on how COVID-19 is impacting midsize businesses, please visit the RSM Coronavirus Resource Center.