Real Estate Industry Alerts Tracker - July 2, 2020 Issue
July 2, 2020

 

SDNY Rules Against New York Landlords

A group of Westchester County landlords sued Governor Cuomo in federal court, claiming that he overstepped his authority in issuing an executive order granting a 60-day moratorium on evictions during the pandemic. The lawsuit challenged two provisions of the Governor’s executive order, which temporarily blocked landlords from pursuing eviction proceedings and gave renters the option to apply their security deposit toward their rent payment. The landlords argued that Governor Cuomo’s actions were legislative in nature and overstepped his authority under New York’s Executive Law. Additionally, the landlords were precluded from asserting their contractual remedies under their leases while still being obligated to pay their carrying costs and expenses, which the landlords claim constituted a taking. In a 37-page opinion, U.S. District Chief Judge Colleen McMahon of the Southern District of New York disagreed. Chief Judge McMahon found that federal courts do not have jurisdiction to determine whether Governor Cuomo violated New York state law by enacting his May 7, 2020, executive order pausing evictions through August 19, 2020. She noted that, “[w]hile it may be the case that [the] governor has overstepped his authority under New York’s Executive Law, curing those alleged harms would require this court to ignore the doctrine of state sovereign immunity and principles of federalism embodied in the Eleventh Amendment.” Chief Judge McMahon found that the executive order did not violate the Takings Clause because landlords are in a heavily regulated area of the economy and the executive order was not inconsistent with the regulatory scheme. The order merely postponed the landlords’ ability to collect (or obtain a judgment for) the full rent, but it did not take it away. The Chief Judge also rejected the landlords’ Contract Clause claim, finding that the order postponed but did not eliminate the contractual remedies available to the landlords for the tenants’ breach of the leases.

Additional information may be found here.
 

New York Governor Cuomo Signs Partial Eviction Moratorium Bill

This week, New York Governor Andrew Cuomo signed the Tenant Safe Harbor Act, legislation that passed in the New York State Senate and Assembly in late May. The legislation, S. 8192B, prohibits residential landlords from evicting tenants for unpaid rent accrued between March 7, 2020, and the complete reopening of their area, as long as a tenant can prove in court that they experienced financial hardship during that period. However, a judge can still issue a money judgment against the tenant. The legislation has drawn criticism from residential landlord groups who are still restricted from evicting tenants, but also from residential tenant groups concerned that it does not go far enough to protect tenants who will still be liable for money judgments, which could ruin their credit.

Additional information may be found here.
 

Fannie Mae and Freddie Mac Extend Forebearance to Landlords of Multifamily Properties

This week, the Federal Housing Finance Agency, the government agency that oversees Fannie Mae and Freddie Mac, announced that Fannie Mae and Freddie Mac are allowing servicers to extend the forbearance period for multifamily properties with loans secured by Fannie Mae and Freddie Mac.  Property owners that are experiencing financial hardships due to COVID-19 are eligible for extended loan forbearance of up to an additional three months, for a total loan forbearance of up to six months.  While their loans are in forbearance, owners are required to suspend all eviction actions for non-payment.  Also, if the forbearance period is extended, the loan repayment schedule is modified, or a new forbearance agreement is executed, owners are required to provide the following protections to tenants during the repayment period: (a) not charge late fees or penalties for nonpayment of rent; (b) provide tenants with flexibility to repay past due rent over time and not in a lump sum; and (c) provide tenants with at least a 30-day notice to vacate.  If a property owner’s forbearance period is extended, at the conclusion of the forbearance period the owner may qualify for up to 2 years to repay the missed payments.

Additional information may be found here.
 

New Procedures for Commercial and Residential Evictions in New York

Due to public health concerns that may arise from a surge in eviction matters requiring in-court appearances amid the pandemic, on June 18, 2020, New York State Chief Administrative Judge Lawrence K. Marks issued a memorandum and corresponding administrative order (AO/127/20) establishing certain new protocols for pending and new eviction proceedings, which apply to both commercial and residential eviction matters. Landlords are now permitted to file new eviction matters, but only electronically through NYSCEF or by mail. However, all such cases will be stayed (whether or not an answer was filed) until the expiration of Governor Cuomo’s various executive orders suspending statutory timetables, with the exception of cases that were filed on or before March 16, 2020. In those cases, if all parties are represented by counsel, they are eligible for virtual settlement conferences. Additionally, all residential and commercial eviction filings must now include the following two new documents: (1) an affirmation by the landlord’s counsel (or the landlord, if not represented by counsel), certifying that counsel (or landlord, if unrepresented) has reviewed all applicable state and federal restrictions and qualifications pertaining to eviction proceedings and believes in good faith that proceeding with the case is consistent with those restrictions and qualifications; and (2) a form notice to the tenant (in English and Spanish) informing them that they may be eligible for additional time to respond to the eviction complaint in light of legal directives related to the COVID-19 pandemic, and providing them with a telephone number to call and/or website link to review for additional information. There are different forms of notices for proceedings inside and outside of New York City.

A copy of the memorandum, Administrative Order AO/127/20 and the new forms may be found here.
 

Virginia Supreme Court Lifts Ban On Apartment Evictions; Governor Announces Rent Relief Program

Last week, the Virginia Supreme Court issued an order allowing Virginia courts to resume residential eviction hearings beginning on June 29, 2020, following a series of moratoriums issued by Governor Ralph Northam in response to the pandemic. Hundreds of cases that have been pending, along with hundreds of new cases, are expected to clog the court dockets for the foreseeable future. Residential tenants who can prove they were financially affected by the coronavirus can petition the judge for a 60-day postponement on their eviction proceedings. Additionally, landlords in buildings that participate in federal housing programs or were financed by federally backed mortgages are still restricted from sending notices or commencing evictions until at least late July in accordance with the CARES Act.

In response, Governor Northam launched the Virginia Rent and Mortgage Relief Program, which will use $50 million of the state’s CARES Act funding to help residents facing evictions or foreclosure. In order to be eligible for aid under the program, a household must demonstrate that it is unable to make rent or mortgage payments due to the pandemic. In addition, the rent or mortgage payment must be at or below 150% of Fair Market Rent, as  determined by the U.S. Department of Housing and Urban Development, and household gross income must be at or below 80% of the area’s median income.

Additional information may be found herehere and here.
 

Michigan Governor Extends Suspension of Evictions and Creates Eviction Diversion Program

Last week, Michigan Governor Gretchen Whitmer issued Executive Order 2020-134, which temporarily extends the suspension of evictions under Executive Order 2020-118 until July 15, 2020, at which time Executive Order 2020-118 is rescinded. The order also creates the “Eviction Diversion Program” through which qualified renters who fail to make required payments during the COVID-19 pandemic can obtain rental assistance. Rental assistance is available only for “COVID-19 housing debt,” which is defined as a monetary debt resulting from a breach of a residential lease, a residential executory contract or residential mortgage due to the failure to make required payments as a result of the state of emergency arising from the pandemic. The order “strongly” encourages Michigan landlords and lenders to take advantage of COVID-19 housing debt remedies, instead of pursuing eviction or foreclosure after July 15, 2020. Under the Eviction Diversion Program, an eviction case will be conditionally dismissed. For qualified tenants, the Eviction Diversion Program or other relief fund will pay up to 90% of the rent, provided that if the landlord receives 90% in one lump sum it must forgive the other 10%. If, for example, the landlord receives 45% of the rent from the program, it must forgive 5%, and the tenant would be responsible to pay the remaining balance in twelve equal monthly installments.

A copy of Executive Order 2020-134 may be found here.
 

New Jersey Governor Vetoes 5 Coronavirus Bills

This week, Governor Murphy vetoed five bills intended to address the pandemic’s impact on the State of New Jersey, including the “2020 New Jersey Emergency Rental Assistance Program” and the “New Jersey Hospitality Small Business Emergency Loan Program.” The 2020 New Jersey Emergency Rental Assistance Program would have appropriated $100 million to help residential tenants who have been financially impacted by the pandemic to pay their rent. It would have  directed the commissioner of the Department of Community Affairs to devise a formula to distribute the funds based, in part, on the fair market rents in each county. While Governor Murphy acknowledged the economic hardship suffered by families due to the pandemic, he vetoed the measure for budgetary reasons. The New Jersey Hospitality Small Business Emergency Loan Program would have appropriated $100 million to the New Jersey Economic Development Authority (“EDA”) to provide loans to small hospitality industry-related businesses to cover immediate, unavoidable expenses, other than payroll costs, throughout the duration of the pandemic. Governor Murphy vetoed this bill because it would require the EDA to establish an additional program exclusively for small hospitality industry-related businesses that he claims is nearly identical to other programs that are available to them.
 

Additional information may be found here.
 

Texas Multifamily Owners File Lawsuit Claiming CARES Act Eviction Moratorium is Unenforceable

Two Texas landlords filed a lawsuit in the U.S. District Court for the Northern District of Texas, Fort Worth Division claiming that Section 4024 of the CARES Act is unenforceable. Under Section 4024, if a residential property participates in a federal housing program or is financed by a federally backed mortgage, the owner is not permitted to provide notice or begin any eviction proceeding against a tenant for failure to pay rent or fees under any circumstances. The landlords argued they were deprived of their rights: (a) to access Texas courts under the 10th Amendment and the Texas Constitution; (b) under their contracts in violation of Article 1 of the U.S. Constitution; (c) to equal protection under the 14th Amendment; and (d) to due process under the Fifth Amendment.

Additional information may be found here.
 

Nevada is Lifting Moratorium on Evictions, Late Fees and Foreclosures

Nevada Governor Steve Sisolak has acknowledged that many landlords and tenants have been impacted by the economic fallout of the pandemic, with landlords unable to collect rent or make their mortgage payments, and tenants concerned about losing their homes. In an effort to balance the equally important goals of ensuring that landlords receive their rent and tenants keep their homes, Governor Sisolak issued Declaration of Emergency Directive 025 (the “Directive”), which, among other things, strongly encourages landlords of residential properties or manufactured home lots and their tenants to resolve payment defaults without resorting to court by the use of the form “Lease Addendum/Promissory Note for Rental Arrearages Due to COVID-19” (a copy of the form may be found here). Entering into this Lease Addendum/Promissory Note is voluntary and parties are directed to enter into any agreements in good faith and set payments and payment schedules that are reasonable under the totality of the circumstances and that consider the tenant's ability to pay. Commercial landlords are also encouraged to enter into rental payment agreements instead of resorting to evictions. Landlords that have entered into such repayment agreements with their tenant must cease any non-payment of rent case and dismiss any eviction complaint that was initiated prior to the entering into the repayment agreement. In addition, the Directive provides that:
 
  1. All summary eviction notices to vacate served prior to March 30, 2020, in which a tenant has not filed an answering affidavit, are deemed stale and void, and all eviction notices that were served from March 30, 2020, to June 25, 2020, in violation of Directive 008 are deemed void. To ensure reasonable notice and an opportunity to respond, all stale and/or void notices to vacate must be re-served in accordance with NRS 40.280.

  2. Certain residential eviction actions (but not cases based on non-payment of rent where the tenant and landlord have entered into repayment agreements) may be initiated or re-initiated, on August 1, 2020.

  3. Certain commercial eviction actions or commercial foreclosure actions, which had been stayed, may proceed, on July 1, 2020.

  4. The provisions of Directive 008 that prohibit residential landlords from charging late fees or penalties for any nonpayment under the lease will terminate on September 1, 2020, but residential landlords are prohibited from charging such fees retroactively for payments that were due between March 30, 2020, and August 31, 2020.

  5. The provisions of Directive 008 that prohibit commercial landlords and lenders from charging late fees or penalties will terminate on July 2, 2020, but such fees may not be charged retroactively from March 30, 2020, to June 20, 2020.

  6. Landlords of commercial space are authorized to lockout tenants as authorized by NRS 118C.200, beginning June 1, 2020.

A copy of Declaration of Emergency Directive 025 may be found here.
 

Heard Around the Industry

Demand for Affordable Housing Assets Remains Strong Despite COVID-19: Historically, affordable housing assets were attractive to investors. Due to the pandemic, and the continued uncertainty in the commercial real estate market, affordable housing has become an even more popular choice for investors. The attraction is due to the fact that rents are backed by the federal or local government and there is an abundance of capital on the debt side. According to one real estate services provider, as a result of these factors the market is not seeing bid-ask spreads for affordable housing deals. In addition, pricing of affordable housing properties has not shifted during the pandemic.

Additional information may be found here.

Industrial Real Estate Sector Leads the Way: Last week, the National Association for Industrial and Office Parks (NAIOP) held its I.CON  (industrial real estate conference) virtually. In its June survey, NAIOP’s third tracking survey in response to the pandemic, it noted that the industrial sector showed significant gains in development, acquisitions and deal activity as compared to office, retail, and multifamily properties. The June survey also revealed greater optimism than the May survey did with respect to the duration of the pandemic, with a smaller share of respondents believing the pandemic would last more than a year. The survey noted that fewer respondents are reporting a decline in leasing (49.4% v. 57.2%) or financing delays (16.1% v. 23.3%) than they saw in May. Nearly two-thirds of respondents continued to report permitting delays, but local government restrictions have eased slightly over the prior month.

Strip Mall REITs Continue to Struggle: Strip mall REITS are continuing to struggle as a result of the pandemic and a growing shift towards online retail. BTIG analysts Michael Gorman and James Sullivan are finding that “Strip Center Strip Mall REITS have borne a disproportionate share of the market dislocation related to the coronavirus pandemic.” In the June 25, 2020 report, Gorman and Sullivan state “[t]he group is down 35.5% year-to-date, compared to a 12.8% decline for the broader REIT sector, and a 2.1% decline for the S&P 500.” According to the report, 71% of strip mall tenants are open and operating based on annualized base rent, but the group covered by BTIG only collected 68% of April rents and 60% of May rents. “Tenants that are reopening often do so at lower capacity, and it is unclear what the default rate on deferral agreements with landlords ultimately will be.” The report does, however, cite that essential businesses such as grocery and drug stores have been performing well and such tenants are generally paying rent on time during the pandemic. “For investors looking for exposure, we continue to favor stable, grocer anchored portfolios with positively trending rent collection statistics rather than trying to push further out the risk curve,” according to Gorman and Sullivan.

Additional information may be found here.

Construction Loan Delinquencies Climb Due to the Pandemic: According to Standard & Poors’ Global Market Intelligence Report, construction loan delinquencies for U.S. banks increased by 23.8% in the first quarter, as $3.67 billion in loans were delinquent. Projects were delayed or shut down due to the pandemic or due to related government-mandated shutdowns of construction during the pandemic. One major U.S. bank, with $19.42 billion in construction loans outstanding, had potentially the greatest exposure to delinquencies. However, according to the Standard and Poors’ report, construction loans represented less than 2% of the bank’s loans. Nonetheless, in a conference call this month, that lender’s chief financial officer predicted losses due to the fact that 90% of its commercial real estate loans (including construction loans) had loan-to-value ratios below 70%.

Additional information may be found here.

Trade Association Formed to Help Small D.C. Landlords Fight “Anti-Landlord” Law: The Small Multifamily Owners Association (SMOA) was recently formed as a trade association in order to advance the interest of small and independent multifamily property owners in the greater Washington, D.C. area. Its purpose is to educate, organize and service owners of small apartment buildings comprised of between four and fifty units, as well as to leverage purchasing power and advocate on the members’ behalf. The group’s founder and CEO noted that the trade association is needed to help small landlords bring about change to landlord tenant laws and other regulations that are hostile to landlords in general and disproportionately so to small landlords.

Additional information may be found here.

Office Vacancy Rates at Historic Lows, But Success of Working Remotely May Impact Future Leasing Decisions: According to a report issued by Colliers International, the office vacancy rate in the U.S. rose by 10 basis points in the first quarter to 11.5%. Even so, office vacancy rates are below the average for 21 consecutive quarters, with two-thirds of markets having office vacancy rates below the national average of 10.3%. The report also noted that, as a result of the success of working remotely, companies may reassess their space needs going forward and may consider moving away from central offices to a “more distributed labor strategy.” However, a report issued by Cushman & Wakefield notes that even with this change away from centralized offices, offices will still be utilized. It predicts that office size will generally remain the same. Even as companies allow employees to continue to work remotely, it will not translate to smaller spaces, as they will need greater space to allow for social distancing. The report notes that social distancing requirements may require companies to expand their square footage by 15-20%, depending on their remote work policies.

Additional information may be found here and here.