As the number of COVID-19 cases continues to climb, the multifamily housing industry faces a great deal of uncertainty. Panelists at a Baker Tilly webinar discussed the impact that COVID-19 is having on multifamily housing and specifically on development, lending, due diligence, and tax and advisory issues.
“When we’re looking at this pandemic, we’re looking at it through many different lenses, and the virus’s impact has been quite different in each division (of our company),” said Brian Swanton, president and CEO of Gorman & Company, which has 7,000 multifamily units, 90 project locations, three hotels, 10 construction projects and 10 upcoming closings in six states.
“In some ways we’re all unprepared for this pandemic, but honestly in other ways we’re more prepared than we realized,” continued Swanton, specifically citing the financial crisis of 2008 and 2009 as a reminder that his company and many others overcame dark days in the past. “We’ve applied some of those lessons learned to today’s crisis.”
Swanton highlighted three primary guidelines that his company is living by during this unique pandemic:
1. There is no greater priority than the health and safety of your employees and residents. Every action you take and every decision you make should revolve not around the economic impact, but around health and safety, foremost.
2. It’s impossible to over communicate. Communicate consistently with your leadership team and your residents and collaborate with your peers. Do not view other companies as competitors right now. Networking has never been more critical. We all have the same fears, but we don’t all have the same ideas and solutions. Do not be afraid to ask for help.
3. Never let a crisis go to waste. There is an opportunity in every crisis, so make sure you re-evaluate your internal operations, staff, company efficiency, etc. Do not be afraid to take some risks. Study the economic stimulus, advocate for government resources, reach out to congressional and state representatives as well as city council members and mayors, and join advocacy groups to make sure your voice is heard.
Additionally, Swanton cautioned that while most real estate leaders are focused currently on the downtrend, they must also be ready for the ensuing uptrend in the industry and the economy.
Gorman & Company is taking additional steps, including:
“If 2008 and 2020 have taught us anything,” Swanton concluded, “it’s that liquidity is everything and other than the safety of our employees and our residents, liquidity is the second-most important thing in maintaining a viable operation.”
Trevor Tolbert, a senior vice president at PNC, noted that interest rates have been up and down in recent weeks, including (d)(4)s. “Everything is so deal-dependent,” he cautioned.
PNC is honoring almost all letters of intent (LOIs) that they have sent out, but new business is limited with the uncertainty of pricing at the moment. He believes the market will come back. Additionally, Tolbert noted that the forbearance period will apparently go to August 31, 2020, or until the national emergency declaration is over.
Additional cautionary steps that PNC is taking include:
Regarding the Paycheck Protection Program to support small businesses which was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Tolbert wondered, “Will this program run out of money? Maybe. But if it does, we are very confident that it’s going to continue to be funded by the government. If (the $350 billion) runs out, I think there’s more.”
Tolbert added that people should take advantage of rates that we have not seen in 10 years. HUD is pushing affordable deals, but he cautioned that Fannie and Freddie seem relatively conservative and their quotes are taking “a long time,” as they are only underwriting deals that work for them at the moment.
From the standpoint of due diligence, Rob Hazelton, CEO of Dominion Due Diligence Group (D3G), which does HUD due-diligence inspections for mortgage programs and HUD grant programs in all 50 states, noted that travel restrictions are a major issue at the moment, as some states have completely shut down, but generally it’s business as usual.
Hazelton noted that D3G is getting creative with inspections, using remote technologies, including sending cameras to sites with a photo log that instructs what photos are required, as well as FaceTime inspections and drones and of course trying to see the exteriors and the vacant units as much as possible.
In these tough times, D3G is using HUD’s processing clock to their favor. Most HUD loans take 120-180 days to complete the process, so D3G is “kicking the can a little down the road” and letting the underwriting take place for now (and they’ll backfill later this year based on the risk and HUD’s requirements).
Hazelton noted that the CARES Act includes funding for the Community Development Block Grant (CDBG) program ($5 billion), homelessness assistance ($4 billion) and Section 8 tenant-based rental assistance.
Ultimately, D3G is looking to avoid risk for their sites or staff.
“We’re working through unprecedented times. There are no roadmaps. We’re working through this together truly,” Baker Tilly partner Don Bernards said. Bernards, who has been active in affordable housing since 1999, highlighted some valuable best practices for property management companies and owners, including:
Bernards added that access to food is a big deal, particular in senior facilities. In these cases, he noted that it is important to get creative, including exploring grocery delivery.
Regarding rent payments, Bernards highlighted the importance of working with tenants on payment plans. Put yourself in their shoes and understand what people can pay now versus what they can pay later, he said
In talking with tax credit investors, Bernards noted that construction crews are down 40% from three weeks ago. Due to these manpower issues and the ensuing delays, investors are expecting 3-to-6 month delays in projects. Bernards recommends stress testing to make sure your business will be OK. Maybe, he suggests, you can delay making your real estate tax payments for several months so that you can focus on more pressing payments.
Despite the uncertainty surrounding COVID-19, Bernards cautioned that the multifamily housing industry has never been more important.
“The need for workforce housing, for affordable housing, is going to be stronger than ever,” Bernards concluded. “We’re excited to work through this current environment. We’re going to push forward to take care of our residents and our families.”
During this uncertain time, Baker Tilly is ready to help you with practical advice on informing and supporting your employees as well as keeping your business running.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
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