Owners of real estate are already experiencing the economic impact of COVID-19 as social distancing and other measures directly affect their business. Safety, security, cash flow and valuation considerations will all continue to have an impact on real estate businesses in the weeks and months ahead. Real estate owners will need to be thoughtful, compassionate and flexible while also taking advantage of legislation aimed at shoring up the national economy.
Let’s start with safety. While the COVID-19 virus appears to be transmitted primarily through the air, we know it can linger on surfaces as well. Building owners need to consider the interests of two groups, tenants and employees.
With respect to tenants, most owners utilize property managers to run their properties. In these cases, the owner should make sure they have a good understanding of the procedures the manager has put in place to disinfect and sanitize the property on a regular basis, to monitor the health of the manager’s employees and to enforce social distancing for all employees and visitors. For self-managed properties, the owner is responsible for establishing these procedures and ensuring the safety of employees and tenants.
Have discussions with your cleaning contractor to find out how they can ensure that the building is sanitized frequently. If you are a multifamily owner, consider discussing with counsel what steps you can take to enforce social distancing while staying within the law. Above all, communication is key during these times, so provide regular updates with your tenants so they are aware of policies and procedures in place to protect them and their employees.
With regard to security, owners should focus on two key areas: protection of physical property and maintenance of devices designed to monitor property from a distance.
Most properties are unlikely to need additional security, but retail owners may require some flexibility. Shuttered retail establishments could be at risk of vandalism or theft. Owners should communicate with their property manager or security service to ensure properties are being patrolled appropriately. They should also communicate with tenants about security protocols being followed.
In recent years, many property owners have installed IoT devices without paying sufficient attention to the security of passwords or the protection these devices provide. Property owners should contact their IoT providers to ensure that the devices are secure. As many buildings may be empty, regular physical inspection of the properties should be conducted to ensure that the devices are not malfunctioning.
Cash flow is a big issue on everyone’s mind these days. For the month of April, indications are that most tenants will pay rent, but there is a great deal of uncertainty about what happen next. Properties that serve essential businesses may not see much impact, while many types of retail, office and workforce are likely to face significant declines over the next few months.
This is the time where we all need to show some compassion for each other and work together. The most important thing an owner can do is to communicate with their tenants to understand their underlying cash position and to model out the expected property cash flow in order to have a good understanding of what relief to request and for how long.
Currently the HUD, Fannie Mae and Freddie Mac, as well as a number of states have suspended evictions and foreclosures during the pandemic. Many tenants are contacting their landlords and asking for rent deferrals, with the request that tenants skip rent for a few months and add the missed rent to the end of the lease. Of course, there will be some tenants that never re-open and landlords need to be ready for that.
Some of the remedies for owners during this period are to request a deferral on loan payments, similar to what tenants are requesting on rent, working with vendors to defer payments and taking advantage of some of the relief available in the CARES Act, which include loans and grants as well as tax relief provisions.
Finally, there are valuation issues. The real estate transaction and lending markets have slowed considerably, so existing valuations may not be valid. Property owners need to be aware of this, and should communicate with their lenders and other stakeholders. In order to have appropriate financing expectations going forward, owners need to have a strong understanding of whether value declines are temporary or are more fundamental to the property and will persist.
Some property owners may identify benefits as a result of the sudden changes. For example, a tired retail center that loses a number of tenants permanently may see this as a good time to renovate or reposition the asset. Borrowers who have the valuations, cash flow and a willing lender may wish to refinance debt at lower rates. Other companies will find new ways of doing business remotely that will improve efficiencies and operations.
Weaver’s team of tax, advisory and assurance professionals can assist real estate owners with:
- Understanding and benefitting from the tax implications of the CARES Act
- Real estate valuation
- Cash flow modeling and analysis
- Systems and security advisory
Contact us if you would like assistance in these or other aspects of the real estate business. In an uncertain future, we can work together to make the most of the opportunities that present themselves.
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