• Ryan McKenna

Best Practices to Mitigate Covid-19’s Impact on Your Properties



The world hasn’t seen a pandemic like COVID-19 in over a decade since the H1N1 swine flu killed approximately 12,460 people back in 2009, but the current COVID-19 is hitting the population around the globe in a far different way, creating a health crisis leading to economic and financial chaos ensuing from a nationwide lock-down with businesses forced to close across a wide variety of industries.

Normal safe havens during a recession like multifamily apartments will still be tested. Although the “people have to live somewhere” concept is comforting in normal times, unemployment claims are likely going to be the most we’ve seen in our lifetimes so it’s hard to predict how many of our residents will struggle to pay rent. Many adjustments need to be made in order to keep the properties running efficiently, safely, and profitably so I’d like to share best practices from our operating partners on what they are doing and how they are preparing for fallout from significant economic shock expected to hit renters and their ability to pay.


Communications with Residents Emphasizing Safety


  • Work with the property management team and ensure clear communications are happening on the ground to protect the health and safety of renters.

  • Cancel socials onsite; post social distancing policies.

  • Ensure residents are aware of the CDC and local recommendations.

  • Be empathetic and compassionate to those impacted by health and income loss.

  • One of the keys to surviving this crisis economically is to continue to rent vacant units but it’s tough to practice social distancing when you’re taking prospective tenants on a tour of the property and available apartments so the answer: offer virtual tours.


Prepare Investors


  • Increase communications – this might be weekly from monthly or monthly from quarterly now.

  • Detail preparations and action plans to preserve capital and their investment.

  • It would be prudent to message that distributions may be stopped or reduced ahead of this crisis as most deals have a preferred return catch up over the life of the project.


Build Cash Reserves & Limit Maintenance


  • Stop renovations or significantly reduce based on current demand.

  • Delay all unnecessary operational expenses during crisis like routine maintenance orders and limit maintenance work to critical jobs.

  • Halt or delay all capital expenditures that are not required.

  • Be proactive and consider stopping or reduce distributions to preserve adequate operational cashflow.

  • Start renegotiating contracts with all of the property’s vendors. This would include landscape companies, HVAC companies, plumbers, cable and phone companies, maintenance contractors - everyone and anyone involved in the maintenance and upkeep of the multifamily property. This is a critical time to cut expenses as some income may be lost to unpaid rents due to layoffs and reduced hours for tenants.

  • Minimize all non-essential expenses:

  • (Example) Stop indoor pest control for now - folks can't go inside apartments now. Limited to exterior.

  • (Example) Cleaning pool 3x per week vs once per week since we are sheltered in place - no one can socialize around the pool.

  • (Example) Stop any unnecessary capex like updating landscaping that is not needed right now.


Keep Occupancy Up & Maintain Rent Collections


  • One of the keys to keeping the property economically viable is to maintain rent collections as high as possible. If a tenant claims to have lost a job or has been given reduced hours, require them to fill out a questionnaire and show proof of their unemployment claim. This will enable them to be put on a payment plan for their rent, but be sure they understand that it doesn’t mean that the rent is forgiven. That’s why it’s important for you to require proof to prevent tenants from taking advantage of the situation, who might decide to stop paying rent even if they still have a job.

  • Focus on renter’s willingness to pay. Offer incentives / rewards for on time payers:

  • (Example) Do a raffle for a cash prize or offer gift cards to tenants that pay on time.

  • (Example) Offer a small discount to residence who pay their full rent early or on time.

  • Offer any renter whose lease is coming up in the next three months annual renewal now at no increase in rent.

  • Accept credit card payments for those who are compromised at no fee.

  • Waive fees for late or partial payments.

  • Limit but allow some deferral payments program on a case by case basis (not advertised).

  • Another idea is to offer your tenants the opportunity to apply their security deposit towards a reduced monthly rent payment. For example, if a resident has a $1,000 per month rent payment and a $1,000 security deposit, their monthly rent is discounted to $500 so that they can cover two month’s rent with their security deposit. In return, the resident must sign a new 12-month lease and sign-up for security deposit insurance. The residents pay $10 per month per $1,000 in security deposit insurance, which covers damages and unpaid rent.

  • Ensure you track all conversations with any renter on any program above. With no eviction rules being enforced in many cities we need to be careful all conversations are documented about why someone can’t pay or partial pay (job loss, health loss, reduced pay, etc.).


Understand Lender Programs, Government Initiatives and Local Restrictions


  • Start discussions with lenders on your options such as potential forbearance of existing loan with a goal of at least 3 months of no principal and interest, tack onto back end of loan.

  • If possible, with lower rates, see if refinancing is available to lower holding costs.

  • Understand other government assistance programs in stimulus packages so you can know what renters might receive (unemployment, direct payments, duration, etc.)

  • Be aware of local restrictions around evictions during this time.

  • Update underwriting model with reduced cash flow expectations.

  • Revise stress test and sensitivity models.

Summary:

The current COVID-19 pandemic is wreaking havoc to our nation’s health, as well as the employment status of many workers, so preparation and clear communication with all parties involved (property management company, renters, investors, and support organization like lenders and government programs) is key to mitigating the fallout. Start by implementing safety precautions and then get creative to keep occupancy high and maintain rent collections while showing empathy and compassion to those affected. Cashflow and reserves will become of utmost importance here in the short term to weather this storm so with proper planning now we can get ahead of the curve and ride out this challenging time.

CONNECT

  • White Facebook Icon
  • White Instagram Icon
  • White LinkedIn Icon
  • White Twitter Icon
  • White YouTube Icon
TRANSPARENT LOGO WHITE.png
Copyright © 2020. McKenna Capital, LLC. All rights reserved.
No Offer of Securities—Disclosure of Interests

Under no circumstances should any material at this site be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the Confidential Private Offering Memorandum relating to the particular investment. Access to information about the investments are limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments.