As owners/landlords, we’ve all been holding our breath a bit for the start of April 2020 and rent collection. But, it is not just us. Lending institutions all over the country are waiting as well.
When to involve your lender
The answer to the question – When should I start talking to my lender during the COVID-19 Crisis? The answer is: now.
In this article, we will talk about:
- News around the industry
- Financial Options
- The benefits of early lender communication
- Information you should have ready to share
News Around the Industry
Since the beginning of March, guidelines and recommendations for social quarantining due to COVID-19 have increased significantly. The impact across the economy has been significant. Here is a line-up of a few headlines across the industry that illustrate the need for owners to start working not only with your tenants but your lenders as well.
- Retailers such as The Cheesecake Factory, Mattress Firm, Subway and H&M making public announcements they will not pay rent in April
- The vast majority of retail tenants are seeking deferments or abatements for rent
- Record numbers of Americans applying for unemployment, rivaling the Great Depression
- Evictions in many cities around the country have been halted or stopped
Across the nation, landlords and tenants are scouring lease agreements for any specific force majeure language. Specifically, both parties want to understand if a pandemic qualifies as a force majeure circumstance. Force majeure is defined is a legal term that translates directly as “superior strength” or sometimes referred to as an act of god event, something that cannot be anticipated or controlled. If a pandemic qualifies as an event, tenants would have the right to not fulfill their rent obligations. However, as Harry Heching, a senior real estate attorney from Davies LLP noted, most leases do not clearly list a pandemic as a qualifying event.
Clearly, this is getting messy. And it is all the more reason to get ahead and attack this situation head-on.
As a business owner, you have a few financing options to consider to get through this period of uncertainty. The first option is, of course, cash reserves. However, this economic downturn could last a while, and you may want to protect those cash reserves.
You may qualify for some of the recently released Small Business Administration (SBA) loans issued as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Specifically, look at the Paycheck Protection Program (PPP), which provides 100% federally guaranteed loans to qualified small businesses. This infographic put out by the U.S. Chamber of Commerce does an excellent job of explaining the program.
Here are some of the highlights of the PPP:
- The loan can be for up to two months of your average monthly payroll costs plus an additional 25% of that amount.
- Loans cap at $10 million.
- Must have less than 500 people in your organization.
- It starts as a loan, but borrowers are eligible for loan forgiveness if they maintain payroll at current levels for eight weeks after the loan is made.
- Non-payroll costs will be covered such as mortgage interest, rent, and utilities. However, but do not plan for more than 25% of non-payroll costs to be covered.
- You can start applying on April 3, 2020, if you are a small business or sole proprietorship
- Independent contractors and self-employed individuals (where many developers, realtors fit) can apply starting on April 10, 2020.
- The loan forgiveness will not be considered taxable income.
- You do NOT guarantee this loan personally.
- No collateral is required.
You may qualify for other federal programs as well. These programs are new and continually changing. Please work with your accountant and qualified SBA lenders for the most current terms.
Line of Credit
Appraisers have seen a sharp increase in the number of appraisals for lines of credit (LOC) over the last month. A LOC is an agreement between a borrower and a lending institution. The LOC could be secured with collateral (often real estate) or unsecured, depending on your situation. As you draw on the LOC, you will be charged interest for the amount you have take out. Many real estate developers/builders regularly use LOC’s, during the early phases of development. You may consider raising the limit at this time.
We will talk more in the next section focused on lenders, but one obvious next step if you are trying to protect cash flow is a loan modification. Essentially, you have four options to consider:
- Forbearance: With forbearance, you can make reduced payments or even skip payments for an agreed-upon amount of time; however, those payments will be due at some time in the future.
- Deferment: In a deferment scenario, you can skip principal payments, and if the lender agrees, sometimes even interest payments as well, for an agreed-upon set of time.
- Loan modification: This is a true modification of the loan terms, whether it is the interest rate or amortization period.
- Refinancing: With interest rates dropping you may want to refinance some of your real estate to get a lower rate or even cash-out on some equity
Another option to consider as part of the CARES act is accessing your 401(k) using a penalty-free withdrawal. While there is not a penalty right now, you will still need to pay income tax on anything you take out. Loan limits have also increased for 401(k) owners. You can now borrow up to 50% of the vested balance. The maximum is $50,000.
The Benefit of Early Lender Communication
We always encourage owners to develop strong relationships with lenders. You need lending partners that work with you not only when times are good, but when there are rough patches as well. And, as well all know, rough patches happen. Clearly, now is a qualifying event.
If you are confused by the programs and your qualifications, you are not alone. Your lender can help you navigate the available federal programs. But they have their ear to the ground and should be aware of other potential local or regional programs too.
Sitting down with your lender, going over your portfolio and sharing your risks will allow you both to strategize on the best use of your financial options. They are talking to lots of other business owners like you, so they may have suggestions on additional streams of revenue for you to consider expanding to at the moment.
Here is the current information you should bring to that conversation:
- Profit and loss
- Balance sheet
- Rent rolls
- Current personal financial statement
- Breakdown of your tenant type with your most current understanding of the likelihood of rent collection
- Information about any strategies you have already started to implement with tenants or other lenders
No one likes to be surprised, particularly with bad news. Start your lender conversations today.
Start Strategizing Now
Now more than ever, it’s critical for you as a real estate company not only to maintain your books in order but also to streamline your processes. You need to find ways to save time, money and make data-driven decisions. Knowing how much runway you have in case your tenants are not able to pay, will be the difference between early conversations with your lenders to craft a good going forward strategy. Or, conversely dealing with the aftermath of not being able to pay your loans and other operating expense. Investing in a system that can help you achieve this quickly and easily is crucial during a crisis.
Once you start working with your lenders, they will require documentation from you to help you navigate these turbulent waters. And, if you apply to any federal program available, these programs will require the same type of documentation as your lenders. Being able to quickly and efficiently provide accurate documentation could be the difference between obtaining additional financial support or not. Going in prepared to meet with your lender, will certainly impress them. Too often, lenders characterize working with real estate owners as “herding cats.” Now is the time to be at the top of your game so they can help you. If you are prepared and have confidence in what you are sharing, they will have confidence in you too.
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Software to Help you Get There!
Having software and maintaining clean records will help you track what is happening with your tenants. Document this now while the information is fresh. This will help you put the entire unfolding timeline together to qualify for current or additional potential financial aid.
STRATAFOLIO was designed specifically for people who own or manage real estate, so you are able to quickly view your aggregated global data for your entire company, or at an individual entity layer. You can view data per each/all legal entities, assets, buildings, units, tenants, or investors. This allows you to either make smart data-driven decisions or share the information as needed quickly.
Request a demo today, so you can start taking advantage of your:
- Total asset value
- Total debt obligations
- Current loan payment totals
- Rent rolls
- Global and entity-specific cash flow
- Asset and tenant type splits
- And more!
Every day you are not using STRATAFOLIO, you are losing money.