Rental Assistance - What Was Overlooked
Over the past two years, rental assistance programs played a very important and critical role in the sustainability of multifamily operations. These rental assistance programs spanned from the Federal, State and Local governing authorities creating an abundance of assistance that renters could tap into if faced with financial hardship.
The majority of these assistance programs relied on the Owner (Landlord) to agree to participate. What does that mean? For most programs Owners had to complete an initial application agreeing to not only accept the assistance but also to agree to certain provisions. Some examples included not processing an eviction while an assistance application was in process, nor raising one’s rent upon renewal, nor charging late fees and/or penalties. The tenant’s ability to receive additional assistance was directly tied to the Owner’s willingness to participate.
For us personally, we enrolled into these programs and, if needed, we provided assistance to tenants who applied for assistance as not all of the applications were straightforward. This not only provided a benefit to the tenant if he/she was facing hardship, but it also allowed us to continue our operations.
Of course with any program that is rushed out there are oversights that are missed in the process. One most notable miss that owners are experiencing now has to do with the receipt of double payment for the same period of time. In other words, as these programs operated independently, tenants often applied for the same delinquent time period to multiple programs. Then when each program provided assistance, the Owner (and sometimes even the tenant) received double payment. Most Owners applied this additional payment to future months, however, that was not the original intent of the assistance. Today, programs have started performing internal audits to recognize this oversight and are making tremendous efforts to recapture these payments. The challenge with this, is the tenant retroactively becomes delinquent, prompting a need for an immediate eviction.
This is further compounded when a sale is triggered. The first issue is there is no requirement (in fact it is not even addressed in most programs) that upon sale a new owner has to participate in the program. The second issue deals with the acceptance of duplicate payment by the previous owner. For example, if the previous owner accepted duplicate payment, he/she is the responsible party for paying back the assistance program. This becomes a problem as the receiving tenant is most likely now delinquent and the current owner now needs to deal with this issue. Of course there are several strategies on how to handle this situation, but the problem remains nonetheless.
When tenants receive assistance, regardless of whether or not they were receiving it from one or two sources, and then later become delinquent the courts have been siding with the tenants (even in historically landlord friendly states). The reason this becomes problematic is because the tenant’s delinquency is once again an issue. Property owners are then forced to shoulder the problem until the court systems allow for the eviction to be processed.
This is a problem for some obvious and not so obvious reasons. First, this is a problem for the property’s owners as their ability to operate is largely based on the tenants paying their rent. With lenders not intimately involved in the eviction process, the awareness of the non-paying tenants so late in the pandemic game appears a problem put on by the landlord, not the tenant/court systems where the fault actually lies. This can be problematic as operations for properties and remaining paying tenants suffer. If an owner is looking to sell or refinance, the presence of bad debt and aging delinquency historically triggers a request for a discount.
A second not so obvious reason, and perhaps the most troubling, is the court systems are thinking they are doing a great service to the tenants by providing a few additional months to find a job and get back on track, but they are not. In our experience, the majority of tenants do not find a job, nor catch up on delinquency. The additional months the court has granted them has now pushed them further into debt (of which they most likely will never be able to recover from) when they inevitably get evicted. This is a major problem, as historically landlord debt is a major criteria when screening a prospective tenant. If the tenant has a high debt from a previous eviction, their chance for being approved at a property significantly declines. So where are all of these COVID evicted high-balance tenants moving? (My guess: some VC group is probably already planning a high fee-based insurance program that we will see rolled out shortly).
So what have we done? We recently removed all of our properties from the COVID assistance programs. The courts are obviously not happy about this, however, we have provided evidence to show how we were forced to take this measure and how it actually has greater long term benefits for our tenants based on the data we have tracked.
Like most programs that are rushed to be offered, long term effects inevitably show up and most of the time, they create greater problems than the one they originally aimed to solve.