Updated: Apr 2
Real Estate Investment Rental Housing Crisis
In just a short amount of time, the COVID-19 crisis has escalated into a global crisis. During this storm, New York has also tragically become the coronavirus hotspot of the U.S, and even the world's virus epicenter. At the beginning of this pandemic, the U.S. stock market had their meltdowns about twice a day. Real Estate Investors/landlords also experienced their tenants’ inability to pay rent amid the economic instability due to the pandemic. Landlords could not drive tenants out under the state government order, the value of assets was damaged, and the return on investment fell. As the virus prevailed, landlords and tenants continue at a loss because of the constant update of regulations and orders of the federal and state government.
However, from an investing point of view, investments were originally profitable and compensable. The stock market had evaporated about 30% of its market value in late March. Although it is slowly recovering, it still sits at more than 10% less than before the pandemic. After half a year’s rent, in terms of the ratio of average house price to monthly rent in the United States (that is, how many months’ rent the house price is equivalent to), the major metropolitan area has reached nearly 40-months in 2019. It is possible to pay back the capital, which is still without calculating any related expenditures. In terms of such a value, if the rent is less than half a year, the return on assets will be reduced by about 15%, and it seems to roughly reflect the stock market situation.
In this rare crisis, under the control of various “suspension” orders from the governor, working from home, the bombing of federal subsidies, and various tenant protection laws that have been promulgated in New York and California; plus the basics of the housing court. If the case is closed, how should landlords protect themselves, minimize rent losses, and avoid unnecessary trouble in the future? The following is a summary of the author's comprehensive lawyer practice experience and recent observations.
In this time, many residential tenants and small to medium-sized businesses face financial difficulties and are unable to pay rent. Residential tenants face unemployment and pay cuts, and small to medium-sized businesses such as restaurants and nail shops are unable to open their doors for business.
First, the so-called "Eviction Moratorium" must be explained. Although the states issued various "Eviction Moratoriums" of varying durations, the state government's orders often do not disclose that tenants don’t have to pay rent during this period, nor are they exempt. If the government exempts tenants from paying rent this would infringe upon the landlord's private property rights. If the state government wants to waive rent arrears, it must also compensate the landlord accordingly, so it is not easy to do so in legislation.
For commercial real estate investments, the tenants are affected by government suspension orders and are unable to open doors to do business. There are only a few possibilities for rent reduction by landlords:
(1) Force Majeure clause in force lease
(2) The frustration of purpose,
(3) Impossibility or Commercial Impracticability.
The application of these principles lies in dealing with the impact of "unpredictable events" on the parties to the lease. Commercial real estate investors may be in a more complicated predicament because of the laws involved, and often need to seek the assistance of lawyers. When landlords receive rent reduction requests from their tenants, they should also consider the applicability between the aforementioned principles and the lease. Landlords may consider appropriate rent reduction or extension, especially if the tenant has performed well in the past, it should not be a big loss in the long run. After all, for commercial real estate investors, a good lease, and a record of rent payment is often valued by banks and lenders, a factor that landlords should consider when planning cash flow.
For residential real estate investments, the tenants are often victims of unemployment or salary cuts, or they cannot afford the rent because of medical expenses. In this case, the author recommends three steps:
(1) Understand the situation and know the difficulties of the other party. The landlord and the tenant are both a business relationship and an interpersonal relationship. If you can understand the reason why the other party cannot pay the lease, you will be able to appropriately propose a solution to the problem.
(2) Let the other party understand your difficulties. The pressure of loans and land tax is like a mountain. Let the other party understand this pressure, which is helpful for subsequent communication and mutual understanding.
(3) Consultation and communication. Based on the above two understandings, the landlord can negotiate with the tenant and propose possible solutions according to the situation, such as postponing the rent due date, moderate rent reduction or the landlord can provide further information on unemployment benefits; SME subsidy loans such as salary and wage protection plans and other information to help finance tenants, there is no reason not to pay rent.
As for how to talk about rent reduction specifically? Commonly used rent reduction and rent reduction methods are nothing more than the following:
(1) Within the scope of the tenant's economic position, charge a lower rate for rent during the two or three months of the pandemic. On the one hand, tenants can help the landlord understand their economic position by sharing their current expenses. On the other hand, the tenant can also recognize good faith that the rent is not maliciously owed.
(2) The part of the rent owed may be paid even if the landlord agrees to reduce the rent.
(3) The security deposit will be used first, after the pandemic crisis or after the government lifts the ban, it will be supplemented by adding a little more each month; specific arrears amortized after the crisis.
Due to the impact of the pandemic, issues with moving have arisen. Many buildings have stipulated that tenants cannot move in or out. Even if the moving company is identified as essential business, some moving companies have significantly reduced staff and the rates have soared. Another issue landlords face is that some individual tenants have health concerns even if the lease expires and are reluctant to move, but the new tenant is scheduled to move in.
For existing tenants, since there is no way to force relocation, the landlord is recommended not to force tenants to move out. As for commercial tenants, they should carefully read the terms of the lease and may choose to sign a Surrender Agreement to agree to return the property to the landlord and arrange for the lock to be changed.
If the landlord wants the new tenant to move in, he may consider discussing with the new tenant to postpone the start date of the tenancy, or even consider giving some moving subsidies to get the new tenant to move in according to the contract. Some tenants may not even have the means to pay for the property, leading to the invalidation of the lease and the rent must be refunded. However, commercial leases often have specific delivery terms that should be handled according to the lease.
Due to the country’s “ halt” during this period, it is not easy to find a suitable professional to carry out residential property maintenance. For commercial tenants, there are often provisions for tenant maintenance in the lease. However, for general residence or building, landlords are often responsible for repair and maintenance.
Although the state governments have successively promulgated various types of eviction suspensions, the court has listed "unlawful expulsion" or "emergency repairs" involving rented property as "Essential Matters" and therefore continue to be accepted during the outbreak. Keep in mind that general maintenance may be reasonably suspended due to the pandemic, but urgent and necessary maintenance is still necessary. Otherwise, it may be considered as a violation of the warranty of habitability and may be punished by the government. Therefore, it is recommended that landlords arrange emergency repairs as much as possible within a reasonable time, or agree that the tenant can find the right person to repair, and the reasonable repair costs can be deducted from the rent, as long as the tenant can provide relevant evidence.
Death of Tenant:
This topic may not have been much of a concern to some investors and can be an intimidating topic to talk about. However, the author, in the storm’s center of New York City, did receive relevant consultations during this period, so he was surprised by the ignorance of most landlords on this topic. Landlords should first understand two key points: Death Certificate and Executor or Administrator.
First, it is paramount to understand the proper removal of relics of the deceased tenant. Many landlords who don’t understand the law tend to let people who claim to be family members of the tenant take the late tenant’s belongings. It is important to know that even family members may not have the right to deal with the relics in the law. Therefore, the key is that the person authorized by the court to deal with the estate of the deceased, that is, the administrator (Executor or Administrator), has the right to dispose of it. Of course, some perishable items or cats and dogs that must be taken care of urgently is an exception. At this time, relatives and friends of the deceased family can be accompanied by a third person (such as the landlord or deceased’s estate manager) to deal with specific relics.
As for general legal acts such as leases, rent arrears, and eviction procedures, the landlord can also come to an agreement with the deceased’s estate manager on these legal acts. The estate manager can often request to sublet the property, the landlord can choose to accept the sublet request or refuse. If the landlord refuses, it is equivalent to the termination of the lease. The deceased’s estate manager will no longer be responsible for the lease obligations at that time. If for a specific period of time, the court does not appoint an estate manager, the landlord can directly start the eviction process. As for the waiting period, each state has its regulations. For example, in New York State the waiting period is 90 days.
In summary, the sudden outbreak and the various measures taken by the government in response to the outbreak have profoundly affected many people's lives and economies. Many real estate investors face possible rental losses. Real estate investors can reduce longterm profit losses and protect assets by understanding how to deal with investment risks, strengthening their understanding of relevant laws and regulations, and properly consulting and communicating with their tenants. The author hopes that whether you’re a landlord or a tenant, you can understand and sympathize with the other party during this crisis, and through this pandemic, apprehend the risk management that comes with real estate investing.
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