TENANT-MITIGATION STRATEGIES FOR RESIDENTIAL LANDLORDS DURING THE COVID-19 PANDEMIC
News changes hourly. It is nearly impossible to plan because of so much uncertainty. For landlords, though, there is a near certainty – tenants will stop making rent payments. Not everyone, maybe not even most. But there will be many.
We outline some strategies which may be taken individually or in combination. Will they work? We are not sure; we do know that doing nothing will certainly result in reduced rental income.
Know your numbers. It will be easier to explain to tenants your financial responsibilities if you know your operating expenses and debt to be serviced. Drill down and identify all expenses related to the facility (even if it is a single-family home). What are the property taxes? Insurances? Mortgage? Common utility expenses? Landscaping? This can be a good opportunity, if you do not already track these expenses, for you to get a good handle on what the facility actually costs to operate, minus tenants.
Review each lease. Know your obligations first. Have you fulfilled those obligations? Be honest. Review how well you have documented and responded to service requests and complaints. See if the tenant has any fodder.
Know your tenants’ responsibilities. Are there personal guarantees? Security deposits? Duty to replenish security deposits?
Run a credit check and asset search. Determine if tenant has the asset strength to pay all, or part, of the rent.
Determine if you want to retain this tenant. Does she have a long record of timely payment? Or, is he erratic in making payments? Is there an easy, quick opportunity to replace the tenant once evictions are allowed to proceed?
Develop mitigation plans. Not every tenant’s situation will be similar. You will need to develop a set of tools to deal with different situations. Is the tenant furloughed, or fired? Is she actively looking for other employment opportunities? Does he have to move to care for a sick relative? You need to have an idea of what you can offer directly, and what resources to which you can refer them.
Be proactive with tenants. Don’t wait for them to call. Reach out and ask how you can help. This will foster goodwill with some tenants, and it will be looked favorably upon by the courts if eviction becomes necessary in the future. Then look at the tools you have available to offer.
Communications. Being proactive is the first step. Have the tenant explain her plan for making payments. If he asks for concessions it is reasonable to ask for a plan. Make the tenant prove that there are no other assets, guarantors, or options that will save the day. Some tenants will take advantage of the situation and refuse to pay rent even if they have retained their job. Identify those tenants.
Continue to communicate. Let tenants know of changes in procedures (for landlords with facilities that have common areas), changes in opportunities for relief, and just to check in on the tenants as a goodwill gesture.
Eviction. This is neither practical - courts are closed and/or government moratoriums may be placed - nor warranted as a first option.
Seek Written Documentation. Any renter that asks you to reduce or defer rent must provide you with written documentation that they have suffered adverse financial consequences due to the COVID-19 virus resulting in a “substantial” reduction or loss of income for any of the following reasons:
Sickness with COVID-19 or caring for a household or family member who is sick with COVID-19.
Lay-off, loss of hours, or other income reduction resulting from business closure or other economic or employer impacts of COVID-19.
Compliance with a recommendation from a government health authority to stay home, self-quarantine, or avoid congregating with others during the state of emergency.
Extraordinary out-of-pocket medical expenses.
Childcare needs arising from school closures related to COVID-19.
If you have been impacted by one of the situations above, your renter must provide you with written notice of his or her inability to pay the rent as soon as the circumstances set forth above arise. In addition, in order to temporarily avoid eviction proceedings, your renter is obligated to provide specific, verifiable supporting financial, employment and/or medical documentation of loss of income and reflecting that his or her loss of income is directly attributable to COVID-19.
After the expiration of the local emergency, the tenant must repay within the period of time set by local ordinance or government order.
Be sure any rent reduction or agreement made with your renter is documented in writing through a lease amendment.
Remember, the law does not eliminate your renter’s obligation to pay the unpaid rent. After the expiration of the local emergency, your renter is obligated to repay any deferred or forgiven rent, and you as an owner may seek payment of the unpaid rent.
Credit Cards. Offer tenants the ability to pay via credit card. The vig paid to the credit card servicer is small in comparison to not getting any rent.
Deferral. If financial resources permit, it may be prudent to defer rent for sixty (60) days and then spread the repayment over the next six (6) months, or over the remaining term of the lease. It is completely unreasonable to expect that upon return to work that the tenant will have the two months rent available. Spreading the payment out is reasonable and realistic.
Lease enhancement. In return for concessions seek out lease modifications. Extend the lease term. Utilize all or part of the security deposit. Look to add a guarantor.
Modify rate. Agree to reduce the rental rate now in exchange for increased rent later. Include interest. This is for tenants who are in a secure job with good assurances that they will go right back to work.
Waivers. Forgo rent increases. Waive late fees. Do not report late payments to credit bureaus.
Retirement Plan Loan. The maximum loan which can be taken from a workplace retirement plan is doubling, from $50,00 to $100,000, during the COVID-19 pandemic. Qualified retirement plans, such as 401(k)s, usually limit the maximum loan amount to $10,000 or 50% of the account balance, up to $50,000. IRAs do not allow loans. Borrowers typically have five years to repay a loan or the amount will be treated as a distribution and taxed. Some employers require savers to take a hardship withdrawal over a loan if it's available to them, so check the plan operator or human resources team for details.
Reward responsibility. Offer those tenants who have the ability to continue their contractual obligation incentives such as return of security deposit if they make timely payment s for the next x months. Or appeal to those who may be in a critical industry that is offering additional pay to increase their rent now in exchange for reduced rent in the future. The additional rent may mitigate some of the rent losses sure to come. Retirees and well-heeled professionals may be other target tenants.
Gateway to government programs. The landlord can be a gateway for tenants to access government relief programs. For instance, learn about the unemployment assistance available and then assist tenants with accessing that benefit. The more income which can be put into the tenant’s pocket, the more likely rent will be paid.
Dotting the I’s and crossing the T’s. First, require tenants to agree to confidentiality prior to commencing negotiations, so as to protect landlords in the event that a workout is not reached. Confidentiality should extend to the completed workaround, to include that it even exists.
Make sure that all amendments are memorialized in writing and signed by both parties along with any guarantors. Do not agree to any terms informally through email correspondence.
Don’t think like you always have. Is it the landlord’s responsibility to help file for unemployment, or any other stimulus benefits which may be offered? A month ago, it would not have been. But today…maybe it is to keep the rent coming in. A month ago, everything changed. It is important to become nimble, creative, patient and to not panic.
*This is informational only. It is neither intended as financial or legal advice. Any actions taken in response to this should be considered in light of fast-moving government decrees and administrative actions.