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Owners of apartments and residential rental units are encouraged to be proactive in dealing with potential rent payment issues during the COVID-19 crisis. (Google Street View)
April rents are coming due and there are concerns from both tenants and landlords about non-payments due to the COVID-19 pandemic.
“These are scary times, but you don’t have to be scared, especially if you’re organized and have a game plan,” SVN Rock Advisors Inc., Brokerage CEO Derek Lobo told more than 2,000 viewers during a webinar on Wednesday.
The 30-minute presentation focused on rent collection strategies.
Lobo said apartment owners have to look at their situations and whether it’s more important to take a long-term or short-term view about potentially lowering rents. Reducing rents reduces the value of buildings, but might be worth it for an owner facing an immediate liquidity crunch.
“If someone moves in at a cheaper price, then you’re stuck at that cheaper price until they move out again. But, that could be the right decision for you to make today,” said Lobo.
Offer tenants, employees compassion and respect
“Tenants are nervous and confused about their safety and their financial well-being,” said Lobo.
Now is the time for landlords to help tenants where they can, to build a sense of community, and to take the high road on goodwill.
It’s the right thing to do and “will go a long way to building your reputation as a professional apartment owner in your community, whether you’re large or small,” according to Lobo.
Common amenities in apartment buildings, aside from laundry facilities, should be closed to concentrate on keeping people safe.
Notices should be placed on bulletin boards and around buildings outlining safety and hygiene standards and protocols related to health guidelines. Similar information should also be sent to tenants via newsletters.
Documentation of the measures should be kept as proof landlords provided information to tenants. This protects building managers from potential legal actions by tenants.
Protecting building staff members is also paramount. They should be informed about risk levels and given the tools and training to help tenants comply with guidelines designed to prevent the spread of COVID-19.
Lobo reiterated his assertion from his March 20 webinar that apartment owners should consider paying these building staff members a one-time bonus, or doing other nice things for them, to show appreciation.
Front-line staff members working directly with tenants are taking more health risks because of their jobs.
Prepare now for the future
This crisis could be a long-term situation and landlords should avoid being locked into panic decisions. They should also be preparing for the months following the end of the current crisis.
“When you’re negotiating leases or renewing leases, think strategically about when you want that lease to come due (so tenant turnover happens in months where the landlord and the overall rental market is ready to lease the unit),” said Lobo.
Some tenants are rescinding move-out notices because they can’t, or don’t want to, move in the midst of a pandemic.
To prevent this from becoming more widespread, Lobo recommended getting ahead of renewals and not waiting until a tenancy is up to renegotiate.
Tenant risk assessment
Derek Lobo of SVN Rock Advisors. (Image courtesy SVN)
Different types of apartment buildings, units and tenure have different risks of tenants defaulting on rent payments, according to Lobo.
Buildings in affluent areas with plenty of seniors are considered low-risk.
Lobo said apartments with many students who have moved back in with their parents after colleges and universities were closed, or young professionals who may lose their jobs due to business slowdowns or closures, are often newer or recently renovated and commanding top-of-market rents.
He believes they present a higher risk of tenants not paying rent.
In between these two risk-profile extremes are 40- or 50-year-old apartments with a mixed group of working-class tenants.
Lobo said bachelor and one-bedroom units present more of a flight risk than two- and three-bedroom suites because tenants living in the former “can move back home or double up and may be living closer to the edge.”
Tenants who have been in their units for a considerable amount of time are much less likely to move out because they’re paying well below market rents.
Lobo advised against letting tenants out of leases. Tenants have signed a legal document and are responsible for paying, just as landlords have signed mortgage documents and agreements with vendors and service providers.
“Start thinking about how this building starts looking one year from now and that will help you negotiate the kind of deferments that you decide to do with your tenants,” said Lobo.
Legislation and rent payments
Ontario Premier Doug Ford said on March 20 that “no person who cannot afford to pay their rent due to financial concerns amid the COVID-19 pandemic will be evicted.”
Manitoba’s government has suspended rent increases, starting April 1.
That province as well as Ontario, Quebec and Prince Edward Island have also halted all non-urgent hearings before landlord-tenant tribunals. This effectively prevents evictions resulting from non-payment of rent.
However, tenants whose financial situation is unaffected by the COVID-19 crisis are required to continue making regular monthly rent payments.
Landlords are advised to be proactive and identify tenants who need a payment deferral plan before they default. One of the first steps is to send tenants a letter before April 1 that offers:
* the opportunity to meet in person or by telephone to discuss their personal situation;
* a deferral for April 1 rent payment;
* a payment plan for deferred rent;
* assistance in applying for government grants and payments;
* and information about potential aid that may be able to help them through various government programs.
“You’re helping your residents, but you’re also ensuring that you get a stream of income in,” said Lobo. “This is the time when we’re all helping everybody.”
Rent deferrals
Tenants should be asked to keep lines of communication open and inform landlords if they’re continuing to experience difficulty with their ability to pay rent.
Once April 1 passes, landlords should evaluate who has paid rent and who hasn’t and act accordingly.
Lobo recommends follow-up letters to tenants whose rent is outstanding asking them to contact the landlord so their situation can be better understood.
If tenants still haven’t paid, those who qualify for a payment plan should be sent a rent arrears agreement so something can be tailored to spread owed rent over several months based on each individual’s financial situation.
“If somebody pays you zero rent, that’s a lot worse than someone paying you half the rent,” said Lobo.
One revenue-neutral option could be to use the “last month” rent from their move-in deposit and apply it to April.
The tenant would then pay a premium over coming months to replace the “last month” payment in their account.
Rent increases
Scheduled statutory rent increases could be deferred by landlords. Lobo made two recommendations on how this could be handled:
* Long-term tenants with rents well below the market rate should probably be given their statutory rent increase notice as soon as it comes up;
* If tenants are paying market rent and just completed the first year in the building, or recently had rents raised due to renovations, they probably shouldn’t have the statutory rent increase applied.
“It depends on the tenant, the situation and where his rent is today,” said Lobo. “Remember that you’re in this business for a long time.”
Lobo said a landlord who has applied for a rent increase above the guideline should probably defer it because people have other things to worry about right now.
Lobo said these suggestions apply only to April; the situation should be revisited regularly as circumstances evolve.
Templates for pre- and post-April 1 landlord-to-tenant letters, a rent arrears agreement, and a newsletter from Cohen Highley Lawyers pertaining to issues from the March 25 webinar can be downloaded here.
RELATED ARTICLES:
* COVID-19: Practical lease considerations, what you need to know
* Preparing rental apartment portfolios, projects for recession
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