As the coronavirus (COVID-19) pandemic continues and the federal government works to mitigate both the health and economic fallout, operators of low-income housing tax credit (LIHTC) properties face the reality of a decline in short-term rent receipts. The amount of rent received–starting Wednesday, April 1–will drop, with the central questions being how far and for how long. The depth and length of the decline and how tenants, owners, lenders, investors and governments react to the decline will affect both individual properties and, more broadly, the future of affordable housing.
According to a U.S. Department of Labor news release, the United States had a record 3.3 million jobless claims in the week ending March 21, 2020. The number rose to 6.6 million as of the April 2 report[1] as various businesses closed or otherwise curtailed operations. While a few businesses increased hiring, the number was not nearly enough to offset the other losses. There will be more claims, as well as an expected uptick in “underemployed” workers, who have seen their hours or compensation reduced. That means less capacity to pay rent and greater incentive to preserve cash for a suddenly uncertain future.
March rental payments largely occurred before the full scope of COVID-19 became clear and anecdotal evidence suggests March rental receipts were close to normal. However, April will almost certainly be different.
Local, state and federal agencies–as well as a number of private companies–have already mobilized, and continue to do so, to address the issue. To start, consider the protections provided to property owners and tenants in the $2 trillion coronavirus relief legislation that President Donald Trump signed into law on March 27, 2020.
Evictions
The CARES Act mandates a 120-day moratorium on eviction filings and late fees for many multifamily rental properties, including all LIHTC properties. The moratorium on tenant evictions isn’t limited to property owners with federal assistance. Arizona, Delaware, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Rhode Island, South Carolina, Washington, Washington, D.C., and Wisconsin all initiated eviction moratoriums or limitations independent of the passage of the CARES Act. In California, local governments were given permission to impose eviction protection for tenants; a list that the California Apartment Association says included at least 82 jurisdictions as of Monday, March 30.
How Big an Effect?
The drop in rent received–and the moratorium on tenant evictions–is an immediate issue. Apartment owners are generally resigned to the expectation that there will be a decrease in rents received starting in April. The big question is the amount by which total rents will decrease, which is as difficult to predict as any other number associated with the pandemic. As we’ve learned from statistics about the spread of the illness, the number of states issuing shelter-in-place orders and the performance of the stock market, things change daily in a COVID-19 world.
Rent for LIHTC properties could come in at 90% in April. It could come in at 50%. Or it could be less–that’s how difficult it is to anticipate. Regardless of the levels, April rental receipts will provide an important new data point and some direction for the future.
Some developers are already taking steps in anticipation of a sharp decline in revenue. Some owners are offering discounts for April rents. Some have communicated with tenants to request documentation related to their change in circumstances. Some have contacted equity partners and lenders to explore options to address anticipated deficits. Many property owners will view mortgage forbearance as a potential solution to the problem of dropping rent–and they’re right, for the short term. However, it’s important to realize how forbearance works.
Forbearance Isn’t Forgiveness
The CARES Act provides forbearance for multifamily borrowers with a federally backed multifamily loan who experience either a direct or indirect financial hardship due to the COVID-19 emergency. Property covered under this provision must be designed for five or more families with a loan secured by a first or subordinate lien. Loans are eligible if they are, in whole or in part, insured, guaranteed, supplemented or assisted in any way by an officer or agency of the federal government in connection with a U.S. Department of Housing and Urban Development (HUD) program or a program administered by another agency.
That covers virtually all affordable housing multifamily mortgages.
To receive forbearance, a borrower must submit an oral or written request to the servicer, informing them that they are experiencing financial hardship. The initial forbearance period is for up to 30 days, with two additional 30-day periods allowed if the borrower makes a request at least 15 days before the end of an existing forbearance period. Once the 30-, 60- or 90-day period ends, normal payments by the property owner begins.
Forbearance is not forgiveness. Once the period ends, the borrower is responsible to resume regular payments and make additional payments to repay the mortgage payments that were subject to the forbearance. The government and the Government Sponsored Enterprises (GSEs) are expected to issue guidance soon that will provide more details on how their forbearance programs will work.
Cash Flow Problems
While forbearance would allow reduced payment or nonpayment of mortgages for the designated period, forbearance may not apply to property operating expenses, as there are no national forbearance provisions with respect to these costs.
The annual Novogradac Multifamily Rental Housing Operating Expense Report[2] breaks multifamily property expenses into several categories, many of which were on the rise in 2017 (the last year for which there is complete data). Repairs and maintenance expenses, administration expenses, utilities, payroll expenses and other expenses must be paid by the properties whether tenants pay rent or not.
Mitigating Factors: Section 8, Business Interruption Insurance
A reduction in rent receipts for affordable housing properties could be somewhat mitigated for those with tenant-based or property-based Section 8 contracts. That’s because the federal government makes up the gap between 30% of the tenant’s income and the rent due–money that will presumably still go to the property owner, even if the tenant can’t pay rent. Property owners with more Section 8 renters will still have a reliable flow of income, even if it falls short of what would otherwise be coming in.
According to an annual report on LIHTC residents published by HUD,[3] 28.8% of LIHTC units in 2017 received tenant-based Section 8 vouchers and 24.3% received project-based assistance. That’s a little more than half of LIHTC units.
Another mitigating factor could be business interruption insurance. Theoretically, that will help make up the gap for property owners, but it’s also expected that many insurers will make the case that the insurance doesn’t apply to this situation, since many policies include provisions that exclude coverage losses from a worldwide pandemic.
Best Case, Worst Case
It’s possible to envision a best-case scenario, in which the pandemic ends sooner rather than later. In that scenario, the current stress to affordable housing would only be for a few months and the market would recover quickly as part of a broader economic recovery. Under this scenario, past-due rents may principally represent a timing issue, solved by owners in cooperation with lenders and equity partners in the short term. Those rents could eventually be collected as tenants return to work and the financial consequences of the delay are corrected or absorbed without significant harm to the industry.
The further we move from the best-case scenario, though, the more lasting the potential implications. An extended period could create deep or prolonged deficits at the property level that could stress existing owners–as deficits replace portfolio cash flow, properties struggle to stabilize and investor/lender sentiment changes as they observe declines in their portfolio. In this scenario, there could be an eventual deterioration in the quality and quantity of affordable rental housing – all coming at a time when many parts of the country were already experiencing an affordable housing crisis. Planned properties could be put on hold.
How will developers, investors and lenders view development, investment and lending for new affordable housing development in this environment?
Uncertain Future
The effect of the COVID-19 pandemic and legislation addressing it (enacted, as well as future legislation) is far from clear. The human toll and the economic effect continue to expand and it’s unclear what the result will be.
For affordable housing property owners, there are questions concerning how long the pandemic will last, what percentage of tenants will continue to pay rent, how long property owners can defer and delay payment on debt service and other costs, and what relief might come from future legislation and more.
Affordable housing stakeholders–lenders, investors, developers, property managers, advisors and others–should be braced for the months ahead. It’s prudent to be proactive, but also to not overreact. It’s going to be bumpy for at least the next few months, but the market fundamentals have not changed and the need for affordable rental housing is as acute as ever.
If the availability and expansion of affordable housing remains or is an increasing national priority, simply stopping evictions is not a long-term or even intermediate-term solution. Rather, it simply shifts the burden from the renter to the owners, lenders and investors of affordable rental housing, with potentially serious consequences to the operations of existing properties and new development in the future.
Any real solution must stabilize the nation’s affordable housing stock rather than shift the burden among industry stakeholders. There are existing models for several forms of tenant or property subsidy that could seemingly be adapted, using HUD’s existing delivery and administration framework.
There may be other or better solutions. As the COVID-19 pandemic plays out, one thing is clear: affordable housing property owners, like their renters and virtually everyone, face struggles.
Only the extent is unknown. National assistance is needed.
