Multifamily Owners Confused by CARES Act

By MICHAEL AUSHENKER Staff Reporter While politicians talk about emergency aid for renters during the coronavirus crisis, what about the owners of the apartment complexes where they live? Various observers of different sectors of real estate, including multifamily and retail, feel that the $2 trillion CARES Act to provide an emergency financial assistance to prop up the tanking economy puts the burden upon landlords, who are not without their own fiduciary obligations. In the sphere of residential building owners, that burden appears lopsided. According to 2015 U.S. Census Bureau data, mom-and-pop owners, also known as individual investors, own nearly half of the nation’s rental units. “Their bills are piling up and some of them are living month-to-month or living on a fixed retirement income,” said Apartment Association of Greater Los Angeles Executive Director Daniel Yukelson. CARES’ one-time payment of $1,200 for individuals and $3,400 for couples may only cover the rent for one or two months. And these individuals may not receive this cash in time to make their next rent payment. Meanwhile, the moratorium on evictions could push owners into foreclosure. Although Fannie Mae and Freddie Mac will grant mortgage forbearance to owners of multifamily properties, this is just one of many monthly costs rental housing owners face. In addition to cleaning costs to avoid the spread of the virus in apartments, there may also be maintenance repairs and apartment staff salaries. On top of that, “the courts aren’t hearing eviction cases right now,” Yukelson told the Business Journal. There is also the issue of the April 10 property taxes deadline, on which the government has not budged. “Apparently, the banks are not cutting people slack on monthly payment of loans and the tax collector is still looking to get their money in April, unless there is just caused shown, then they will waive penalties,” said multifamily specialist Janette Monfared, a broker in the Encino office of Calabasas-based Marcus & Millichap Inc. “The owners are limited to indirect benefits from shoring up the finances of commercial tenants and changes to the tax law benefiting larger real estate investments.” Rent struggles As head of Apartment Association, which has 10,000 members representing a combined 150,000 rental housing units in Southern California, Yukelson wants the government to be less vague on assistance plans for struggling property owners. And he doesn’t have to dip into his membership to find anecdotes about the types of hardships the situation will present. His own brother-in-law, 72, in Canoga Park, had two tenants default. “That’s $4,000 a month they can’t pay,” Yukelson said. “He didn’t have a retirement plan.” Craig Coan, a real estate attorney at L.A.-based law firm Greenberg Glusker, has authored a report with colleague Sarkis Haroutunian examining how landlords might handle this situation. “It’s not clear whether they’ll impose penalties or not,” he told the Business Journal. “You would think they would push this back as well or spread it out over time, which to me would be the best alternatives. Kind of like they’ve done with the rent deferrals.” While the stimulus dole-outs might mean that renters could be able to make at least some form of rent payment next month, for landlords, these checks are unlikely to go far. Unfortunately, as drafted, the CARES Act does little in the way of providing direct relief for multi-family landlords and commercial property owners whose mortgages are held by non-federally backed or non-traditional lenders. Instead, the stimulus package allocates billions of dollars for companies and individuals. In addition to the federal situation, Yukelson noted, there is also potential peril if California’s Rental Affordability Act (AB 1428), which he calls “Prop 10 version 2.0,” will bankrupt the multifamily industry. The proposed law would hurt property owners’ ability to cover their bottom-line expenses and the cost to keep their properties operational, thereby forcing many to exit the rental housing business, Yukelson said. “When you have higher risk, your insurance and legal fees go up, too,” he explained. As a result of California’s stringent laws, real estate investors are looking for other places to own multifamily. “A lot of money is going into states like Louisiana and Texas,” Yukelson added. In the current atmosphere, property owners are getting a bad rap, often painted in broad strokes as greedy landlords. In response to a social media post slamming landlords’ ethics, multifamily property owner Diane Meyer, of Burbank responded: “I guess my husband and I are part of the ‘least moral of businesspeople.’ Not all landlords are rich. (For) some landlords, that is the money they live off of. I understand many people have been laid off and unemployed and that really sucks, but there are two sides to this. “As a landlord, a person can’t paid rent, as landlords we are missing the money to pay that mortgage,” Meyer continued. “The tenant is still using water and electricity which we still have to pay for. The taxes are due, and the county isn’t giving us a break on the taxes because of the virus. Okay if you have a large apartment building, it could be half the people are having troubles. The mortgage companies are only letting no pay for three months and at the end of the three months you have to pay it all back even though your tenants have six months to pay it back.” “A typical small property owner wants to work things out with,” Yukelson said. “I try to impress people that a lot of owners live month to month, too. It’s not just the tenants.” Even Yukelson and his wife, after seven years of ownership, recently sold a four-unit, rent-controlled building that was built in 1920 and had been in the family for more than 65 years. “We sold it last July,” he said. “I’m getting out before I lose all my equity. It’s gotten ridiculous.” Retail and office Coan has clients on both sides of the landlord and tenant equation, handling multifamily, retail landlords and office tenants. “How do you meet in the middle?” Coan asked rhetorically. Coan has seen a few proactive cases of retail property owners easing tenants’ financial burden. The Irvine Co., which owns such Orange County retail malls as Fashion Island and Irvine Spectrum, sent notices to their tenants offering a three-month deferral to pay back over a year with no interest or penalties. “Others have offered partial deferrals on a month-to-month basis,” Coan said. “One retail center reached out to a lender; the lender said, ‘You need to go into default first.’ … “What I’m seeing is everybody who can is applying for these SBA loans, which is for the benefit of tenants. If they get these loans, they’ll be able to pay their rent.” Coan recommended that both tenant and landlord keep “important all lines of communication” open. Yukelson agreed: “We are encouraging our owners to work with our renters. We’ve been encouraging them to offer partial payments and defer rents.” The typical property owner, Yukelson said, is not “some kind of ATM.” The vast majority of apartment building owners are regular working people — retired teachers, former first responders — who bought a property as an investment because they didn’t have a 401 K plan. “These are not big Wall Street companies,” Yukelson said. “Nobody wants to evict anyone.” Meyer, the landlady, said: “I know for a fact that there will be tenants who will not pay rent just because they think they can get away with it. We have been (cheated) over by plenty from tenants; it’s just not the landlords.” “All this stuff does is depress property values,” Yukelson concluded. “That’s why apartments get turned into condos because no one wants to deal with the regulations associated with being a rental housing provider. It’s just gotten too complicated.” As for the loan solution, Coan said the loans could be processed and dispensed by the end of April. “Personally,” Coan said, “I’m more worried about the landlords. Many of (the landlords not well capitalized) are at risk.” “We’re passing all these laws and acts but are any of them helping the basic landlord-tenant relationship?” he asked. “We’ll see what happens when the rents come in.”