September 21, 2020

By: Bobby Casey, Managing Director GWP

I imagine some of you, like me, have investment properties. Whether you rent out to long term or short term tenants, you probably thought your property could be a stream of income.

COVID-19 turned all that on its ear, didn’t it?

Airbnb rentals took a huge hit. They allowed people to cancel their reservations due to the extenuating circumstances of the pandemic. Understandable, considering airlines were pretty much shut down. How can they be expected to show up for a reservation if they have no means of getting there?

I get it. Investments are risks. I don’t think anyone who bought investment properties anticipated the kind of government intervention we are seeing now with COVID-19, though.

It’s one thing to take some precautions. But a good number of states and cities decided to just shut down. What started off as 15 days to flatten the curve, turned in to 7 months of rationed market activity with mayors and governors controlling that valve.

Restaurants, hotels, live theater and entertainment, sporting events, conventions all canceled. Every occasion people had to visit somewhere got pulled.

When those jobs were deemed nonessential, people lost their livelihoods. No job means no income. No income means they can’t pay the bills. If you can’t pay the bills, then what happens?

In a normal situation, you’d be cut off. Your utilities would be shut off, and the landlord would likely start the eviction process.

Not what happened this year. 2020 is the year of “I Did Not See That Coming”. People use the word “unprecedented” but honestly it’s more like “unbelievable”.

Everyone who ever thought “this could never happen in the US” is eating their words in 2020, without a doubt.

At the end of March, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act passed. It was a major omnibus package with bailouts, more government funding, loan programs, checks cut to people, protracted and enhanced unemployment benefits, and a form of eviction moratorium:

The CARES Act included a 120-day federal eviction moratorium for renters who participate in federal housing assistance programs or live in a property with a federally backed mortgage. … This ban expired on July 24, allowing landlords to issue 30 days’ notice for tenants to vacate properties.

This contractual suspension is terrible — if not grossly offside — but we can at least say that members of congress were willing to put their names to it and stake their careers on it. It was passed into law by congress.

But what follows is much worse. On Tuesday September 1, “the Centers for Disease Control and Prevention unveiled today it would temporarily – at least through the end of 2020 – suspend most rental evictions for Americans struggling to pay rent due to the pandemic.“

This applies to all Americans who qualified for direct payments under the CARES Act. The tenants would have to demonstrate due diligence in obtaining all forms of government assistance, prove they are suffering hardship directly linked to the pandemic, and prove if evicted they would indeed become homeless or be forced to move into some sort of group housing project.

There’s also some paperwork they would then need to present to their landlord should they decide to try and evict. All in, not really an insurmountable burden.

Meanwhile, property owners at best could file for a forbearance. So a slight deferral on payments.

Basically the CDC is calling the shots and property owners are paying for the privilege. The CDC is totally indemnified as they make these edicts that are somehow legally binding:

“This will be a declaration presented to the landlord, if that landlord approaches a tenant with an intent to evict,” an official said. Because the move is federally mandated, it “would become a criminal offense” if the landlord chose to ignore the declaration.

How does something have legal implications when it’s just a bureaucratic edict from the CDC? Great question. Here’s an excerpt from one CDC officials statement:

“Congress has delegated broad authority to HHS, the Surgeon General and CDC, to take reasonable efforts to combat the spread of communicable diseases, and frankly I think it makes sense for those authorities abroad because we don’t know for any given situation or scenario what steps will be needed to stop the spread,” an administration official said. “[T]he home has been sort of the focal point of people social distancing and building, sort of a safe space themselves over the past few months, and also the fact that if people get kicked out, they may end up in overcrowded congregated living facilities or homeless shelters, and that is a potential recipe for a big spread of COVID-19.”

Basically congress pawned off the responsibility of all of this onto a bureaucracy.

Not collecting rent because you have no occupant is one thing. If you couldn’t fill it, you could sell it or live in it yourself. But not collecting rent from an occupant, and not being able to get rid of that occupant, is rough. The landlord-tenant relationship varies from state to state, and while this is a federal edict, it would have to be handled in a local court.

In some cases, if you sell the property, the tenants come with it along with the existing contractual agreement. If property owners cannot make their mortgages, property tax payments, or afford repairs because they are no longer collecting rent, what happens then? The bank repossesses the property. The state puts a lien on the home for back taxes. The property falls into disrepair losing more of its value.

As many of you already know, my faith in the state runs about as far as I can throw an elephant. If I can avoid any layer of government I do. I lost faith in the system a long time ago. However, the level of trust hanging in the balance when the federal government suspends contractual agreements like this will take a long time to recover, and that assumes the government would make any effort to recover it at all.

People will continue to buy properties for themselves, but there will be such a drastic reduction in rental properties that whatever is passing for a housing crisis now will look like a walk in the park by comparison.

The obvious issue being that once the moratorium is lifted, the evictions will hit like a deluge. Of that we can be certain. This is an estimated $100 billion looming crisis. You can’t just defer it away.

If small or individual property investors can’t trust the state to defend their contracts, and they can’t collect rents, it’s not worth that level of risk. Those who are willing to take that risk, will be larger investors, and will jack up rents and prerequisites proportionately.

Gone are the days of a 600 credit score getting a decent one-bedroom apartment.

Much like how commerce was concentrated into the corporate hands of Amazon, Netflix, and Walmart by declaring small businesses non-essential; so too will rental properties become concentrated in the hands of larger corporations.

Politicians simultaneously want to look like they are doing something productive, refuse to admit they made an egregious mistake, and are tripling down on their folly at the expense of small businesses and real estate investors.

These are some strange times. But investor beware: your contracts might not be as binding as you think.