Real Estate Industry Alerts Tracker - June 18, 2020 Issue

D.C. Mayor Signs Coronavirus Support Congressional Review Emergency Amendment Act of 2020

Last week, Washington D.C. Mayor Muriel Bowser signed the Coronavirus Support Congressional Review Emergency Amendment Act of 2020 (the Act”) into law. The Act was approved by the District’s City Council (the Council”) in mid-May, and is now effective until September 6, 2020. It amended and consolidated four existing emergency acts that were enacted in the District in response to the pandemic. An amendment to the Act (the Coronavirus Support Clarification Emergency Amendment Act of 2020) has already been approved by the Council to address ambiguities and drafting errors in the Act and is awaiting Mayor Bowser’s signature. The following are some of the protections afforded by the Act, as corrected by the amendment:

Mortgage Loan Deferrals (Residential and Commercial)

  • Any mortgage lender that makes or holds residential or commercial mortgage loans in the District is required to develop a deferment program whereby such lender is required to: (a) provide borrowers with at least a 90-day deferral of principal and interest payments; (b) waive late fees and other fees during the pandemic; and (c) not report such deferred payments to credit reporting agencies as a delinquency. The foregoing requirements are in effect until 60 days after the end of the public emergency period declared by the Mayor.
  • The Act applies to both originators and loan servicers, but it does not cover national banks, federally chartered credit unions, federally backed mortgages loans (Fannie Mae, Freddie Mac or Ginnie Mae, but all three are covered separately under the CARES Act) or federally backed multifamily mortgage loans (as defined in the CARES Act), or to any lender that accelerated a loan or initiated a foreclosure complaint prior to the Mayor’s declaration of a public emergency on March 11, 2020.
  • Mortgage lenders that are not exempt are required to approve deferment applications if the borrower demonstrates that it suffered financial hardship due to the pandemic, and agrees to pay the deferred payment amount: (i) at a date mutually agreed between the borrower and lender; or (ii) the earlier of: (a) 3 years from the end of the deferment, or (b) the maturity date of the loan.

Moratorium on Residential Foreclosures

Residential, but not commercial, foreclosures are banned during the public health emergency and for a period of 60 days thereafter. Residential foreclosures are, however, permitted during this period if the owner (or heir) has not resided at the property for at least 275 days in the 12 months preceding the Mayor’s public emergency declaration.

Tenant Payment Plans

The Act requires landlords of eligible residential and commercial tenants to offer a rent payment plan to such tenants while the public health emergency is in effect and for one year thereafter. The payment plans must be for at least one year and provide for equal monthly payments, unless a different schedule is requested by the tenant. The landlord (a) cannot request a lump sum payment from the tenant; (b) is required to waive any late fee or other penalty resulting from the terms of the plan; and (c) is prohibited from reporting the deferred rent to credit reporting agencies as delinquent. A tenant is eligible for a rent payment plan under the Act if: (a) the tenant is a residential tenant, a commercial retail tenant, or any other commercial tenant that rents space that is less than 6,500 square feet, and is not a franchisee (unless the franchise is owned by a D.C. resident); and (b) the tenant notified the landlord of the tenant’s inability to pay all or a portion of the rent due as a result of the pandemic.

Rent Increases

For the duration of the public health emergency and for a period of 30 days thereafter, rent increases are prohibited for all residential properties and commercial properties” which actually does not include all commercial properties and is defined as retail establishments and any other commercial space that is less than 6,500 square feet and comprises all or part of a commercial building. Any rent increases on commercial properties” (as previously defined) that were made between the beginning of the public health emergency (March 11, 2020) and June 9, 2020, are null and void and required to be credited back to the tenant.

Moratorium on Evictions

Residential and commercial evictions are prohibited during the public health emergency and for a period of 60 days thereafter.
A copy of the Act may be found here and a copy of the amendment to the Act, which is awaiting the mayor’s signature may be found here.

New York City Initiates Rent Freeze for Rent Regulated Apartments

Yesterday, at Mayor De Blasio’s urging, the Rent Guidelines Board (the panel that sets the rent for New York City’s one million rent regulated apartments) implemented a one-year rent freeze. The freeze, which runs from October 1, 2020, to September 30, 2021, also applies to the first year of two-year leases but allows landlords to increase rents by 1% in the second year. The Rent Stabilization Association (“RSA”), which represents 25,000 owners of rent stabilized apartment units in New York City has criticized the move noting that the measure denies owners of small buildings the rent revenue they need to operate their properties, finance capital improvements and pay property taxes. It argued that if rents are being frozen, then property taxes should also be frozen during this period. The RSA also noted that a freeze is not appropriate when New York residents are receiving government stimulus and enhanced unemployment benefits, and when many have returned to work or will be returning to work in the near future as the economy re-opens.

Additional information may be found here.

Illinois Bankruptcy Court Excuses Tenant from Paying Rent Due to Force Majeure Clause

A bankruptcy judge sitting in the Northern District of Illinois excused a debtor tenant from paying full rent during Illinois’ government shutdown ordered in response to the pandemic. In February, a restaurant tenant filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Despite being required by the court to perform all of its obligations under the lease during the pendency of the petition, the tenant failed to pay rent from February through June. The landlord then filed a motion to compel the tenant to make such past due rent payments as well as future rent payments during the pendency of its petition. The tenant argued that the shutdown order issued by Governor J.B. Pritzker in March was a governmental action that hindered” the tenant’s performance and excused it from paying rent under the force majeure clause of the lease. The landlord countered that since the banking system was not shut down, the force majeure clause was not implicated. The lack of money” was specifically excluded as a force majeure event under the lease, and the landlord argued that the tenant could have obtained a loan and utilized the proceeds to pay the rent. Agreeing with the tenant, the bankruptcy judge noted that the lease’s force majeure clause excluded performance by the tenant if the performance of any of its obligations were hindered” by governmental orders and found that the executive order barring on-premises consumption hindered the tenant’s ability to perform its obligations under the lease. However, the judge also found that since the executive order did not restrict delivery, drive-through or curbside pickup, to the extent the restaurant tenant could have continued serving food, it was not entitled to the full benefits of the force majeure clause. The court held that since the tenant admitted that approximately 75% of its square footage had been rendered unusable by the executive order, 25% of its square footage had been available to generate income that could be used to pay rent. Accordingly, the court reduced the rent payable by 75%.

Ithaca, New York Says it Will Cancel Certain Rent Payments During Pandemic

While other municipalities have contemplated or are currently contemplating cancelling rents to aid tenants suffering as a result of the pandemic, Ithaca is poised to be the first U.S. city to do so. The resolution would give the mayor the power to cancel rent payable by residential and small business tenants for the last three months. However, under an executive order signed by Governor Cuomo, any such municipal order must be approved by the New York State Department of Health in order to be effective, which has yet to occur with the Ithaca resolution. 

Additional information may be found here.

CREFC’s Guide to the CMBS Marketplace and CMBS Loan COVID-19 Relief

On June 10, 2020, CREFC released its Guide to the CMBS Marketplace and CMBS Loan COVID-19 Relief, which provides readers with a rundown of the CMBS sector and the features of the loans and bonds that provide the basis for many of the decisions servicers are making during the pandemic.

A copy of the guide may be found here.

The New York City Department of Environmental Protection Sets New Procedures for Water Bill Searches

In an effort to protect its 850,000 customers, the New York City Department of Environmental Protection (NYCDEP) has advised title insurance companies that effective May 22, 2020, it is no longer providing access to its computer system to outside users, including municipal vendors. The result is that the water bill information that purchasers and lenders are accustomed to receiving from title companies as a part of the NYC tax search is no longer going to be available. As a substitute, the NYCDEP is offering a Title Read Letter that can be ordered in connection with any NYC purchase transaction. The NYCDEP is authorized to waive water and wastewater charges under certain limited circumstances to protect an Innocent Purchaser” from unknown charges or discrepancies. The Title Read Letter is meant to afford such protection, provided it is requested and received prior to transfer of title and certain other conditions are met. Although the foregoing is not COVID-19 related, it is yet another recent change to the process of closing real estate transactions in New York City that we feel our readers should be aware of.

See Section 3 of the January 6, 2020, Water Board Rate Schedule, which may be found here, for additional information on how to request a Title Read Letter from the NYCDEP and the conditions that must be met to qualify as an Innocent Purchaser.”

IRS Proposes Regulations that Define Real Property for Purposes of Like-Kind Exchanges, Providing Welcome Relief, But the Proposal Has Critical Shortcomings

On June 11, 2020, the Internal Revenue Service (the IRS”) issued proposed regulations that define the term real property” for purposes of Section 1031 of the Internal Revenue Code of 1986, as amended (the Code”).

Prior to 2018, where various requirements were satisfied, Section 1031 made it possible for taxpayers to engage in tax-free like-kind” exchanges of property held for productive use in a trade or business or for investment, and the types of property that could be exchanged included tangible personal property as well as real property. Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act (the TCJA”), amended Section 1031 to limit its application to exchanges of real property, for transactions consummated after 2017 (subject to a transition rule). The TCJA made it essential for taxpayers engaging in Section 1031 like-kind exchanges to distinguish between real property and other types of property, and the proposed regulations provide much needed guidance in this area. However, the proposed regulations also have critical shortcomings.

For additional information please see the full text of this client advisory from Kelley Drye’s Tax practice group, which may be found here.

Heard Around the Industry

Almost 90% of Apartment Households Made Rent Payments in June: The National Multifamily Housing Council (the NMHC”) has launched a tracking tool that provides insight to the residential housing market during the pandemic. It surveyed 11.4 million residential apartment units nationwide and determined that 89% of apartment households in the country made a full or partial rent payments by mid-June. The figure is similar to the percentage of renters that had paid full or partial rent by mid-May. The NMHC’s president noted that while the overall collection numbers are good, there is a growing realization that renters are nonetheless experiencing significant financial hardships during the pandemic. The group is promoting the creation of a rental assistance fund and also the extension of unemployment benefits to avoid future eviction problems as the nation works to recover from the impacts of the pandemic.

Additional information may be found here.

Real Estate Operator Projects a Decline in Homeownership and Growth in Demand for Multifamily Housing: A developer and manager of multifamily apartment units in the Southeastern and Mid-Atlantic regions projects that homeownership will decline to 20-year lows and result in increased demands for rental housing. In a recent report, the company predicts that this shift will result in increased demand for rental housing in the neighborhood of 33%-49% over the next five years. One of the reasons given for the projected decrease in home ownership is tied to marriage rates. Married households are typical home buyers, and a decline in the number of married households is expected to impact the housing market. The pandemic’s impact on present and future incomes will also play a role in the choice to purchase or rent, in addition to other economic factors such as student loan debt, tighter lending standards and the inability to make a down payment.

Additional information may be found here.

Communal Office Amenities After the Pandemic: Building amenities such as on premises fitness centers, cafes and meeting areas have been a big draw for tenants seeking new office spaces. However, as offices begin to reopen, landlords will need to reconfigure public areas to minimize the spread of viral infections by implementing new policies limiting capacity, requiring social distancing and increasing cleaning and sanitizing of common spaces. Landlords will also need to consider other measures, such as reconfiguring office spaces to provide more space between workstations within interior offices and incorporating smart technology and touchless amenities such as touchless elevators, automatic doors and automatic faucets.

Additional information may be found here.