If you are a landlord with residential or commercial tenants, you’re likely facing difficult decisions to mitigate the economic impact of the COVID-19 pandemic. Leases, financing, managing cash flow, supporting employees and protecting your business all play into building your strategy.
With information about government incentives changing at a rapid pace and uncertainties still ahead, consider the following to help create a smoother transition to the new normal.
As a residential landlord, have you determined your strategy around tenant requests for a reduction of rent? Tenants will have been impacted differently by the current economic environment and a process will need to be in place to review their requests.
For commercial leases, consideration should be given to whether you are providing a deferral for the entire portion of rent owing or if only the base rent is deferred with the tenant continuing to pay their share of the operating costs. Your strategy will vary depending on the situation.
A critical member of your team will be a lawyer who understands leases. They should be consulted to understand the obligations under the current lease and what documentation should be signed if a rent deferral is given.
Your accountant will also play a key part in helping you understand the changes to your cash flow if rent is deferred. Any changes in rental revenue or operating expenses should be incorporated into the cash flow with different scenarios included.
It is important to note for commercial leases, the goods and services and harmonized sales taxes (GST / HST) are still payable even if rent is deferred or the tenant does not pay on the scheduled date – unless the amount receivable is considered uncollectable. The most recent economic support announced by the government allows a deferral until June 30, 2020 for most HST payments. This should be monitored to ensure it applies to amounts you owe or if there will be a further deferral announced later.
If the due date for rental payments has been adjusted, there are measures that can be taken to defer the payment of the related GST / HST owing. Please contact your advisor for details.
Communication with your lender is key in situations where your cash flow will be reduced. You may have difficulty meeting financial covenants or require additional financing. Upfront discussions on the reductions in revenue will be appreciated by your lender and avoid surprises later.
Financial institutions are offering extended mortgage deferrals; as a landlord, it would be in your best interest to explore those options on a proactive basis with your bank; you can then better assess what action would benefit you.
There also are new financing programs announced by the government and your lender may have details of how this could benefit you or your tenants / customers. Your advisor can help you evaluate your options.
Cash Conservation and Management
As impacts of the pandemic increase, both federal and provincial governments continue to announce financial support programs for businesses, which evolve as details are rolled out. A review of the legislation is key to understanding if you qualify for the relief, including wage subsidies. It is important to have a member of your finance team review the details or speak to your external accountant to understand which benefits you can access to improve cash flow.
Most municipalities across Canada are providing deferrals of property tax payments. As with the change in lease revenue, cash flow forecasts should be revised for this reduction in cash flow.
Review all of your costs to determine which expenses can be delayed or eliminated. Speak to your suppliers to request deferrals in paying invoices. These businesses would prefer to know upfront when you will be able to pay your invoice.
Cost saving measures may include:
- Reducing utilities for facilities not in full operation, i.e., turning down the heat, decommissioning discretionary offerings.
- Reductions to building services to minimize ongoing care and maintenance for the benefit of your tenant, including landscaping, property management and onsite security services.
Income tax deferrals were announced by the federal government for most income tax payments.
When you start making your regularly scheduled instalments, the amount of the payment should be revisited. Instalments are based on the lower of the prior year income tax or expected income tax for the current year. With current year incomes likely lower than prior year, this should result in lower instalment amounts payable.
Consult with your lawyer or human resource provider about what steps you can or cannot implement to manage your employees during this time. Be aware of what your employment contract includes, such as if you can layoff employees with short notice, or if you are required to pay them for a minimum amount of time.
Review the Canada Emergency Wage Subsidy to determine if you qualify for the 75% wage subsidy. There are different methods to calculate revenue to determine if you qualify for the subsidy and other specific definitions included in the legislation. Given the complexity of the revenue calculations and the requirement for employers to attest that their application is complete and accurate, it is recommended to consult with your advisor.
Now might be a good time to understand the federal Work-Sharing program. Work-Sharing is an adjustment program designed to help employers and employees avoid layoffs when there is a temporary reduction in the normal level of business activity that is beyond the control of the employer. The measure provides income support to employees eligible for Employment Insurance (EI) benefits who work a temporarily reduced work week while their employer recovers.
It is possible for a business to provide supplementary income support to a worker who has applied for and is receiving EI. A Supplemental Unemployment Benefit (SUB) plan allows an employee to receive EI benefits and receive SUB plan payments from the employer.
A SUB plan needs to be registered with Service Canada before these payments can be made. The most common SUB plan is income support for maternity or parental leave, but it can also be used for temporary stoppage of work due to illness, injury or quarantine.
Protect Your Assets – At All Levels
As the financial impact of COVID-19 continues to be felt, it is prudent to ensure the investment you’ve made in your assets is protected. It is important to speak to your accountant and legal adviser to make sure this is properly done.
By now you would have implemented new procedures for ensuring social distancing. Ensure you clearly communicate through signage, emails and reminders of the policies in place, particularly in residential housing or construction sites.
At the same time, crimes of theft and vandalism can increase at unattended or under-utilized facilities. Ensure security onsite is maintained or enhanced to reduce the potential for break-ins.
Consider the benefits of upgrades or extraordinary work to facilities while they are not operating at full capacity. Costs could be lower and availability of services higher than normal during these strained circumstances.
Remain vigilant in managing your cyber security and financial affairs. Ensure your employees are monitoring for suspicious requests, emails, texts and do not click on potential ransomware links. Uncertain times increase both your vulnerability to and the likelihood of cyber attacks.
Financial pressures can motivate employees to identify opportunities for additional resources. Ensure your internal controls remain in place and roles are shifted if you now have fewer employees.
MNP is committed to sending regular email updates on government programs to address the pandemic. For more insights, visit MNP COVID-19 Business Advice Centre – a dedicated microsite to providing information and practical solutions on how to manage through the impact of COVID-19.
For more information, contact your local MNP Advisor or visit MNP.ca.