The Squeeze Is On Mom-And-Pop Landlords Like Never Before

For many apartment landlords, income is down, expenses are holding steady or rising, and promised relief from various governments is slender or nonexistent. Traditional methods to maintain income are off-limits, even in states without eviction bans, now that the federal government has halted evictions for the rest of the year.

After six months of the coronavirus pandemic and a frantic, uneven response by policymakers, landlords are under pressure, and optimism is in short supply among mom-and-pops and midsized owners.

"It's a dire situation," MassLandlords Executive Director Douglas Quattrochi said. "We don't have data on it, because no one is tracking what happens to small landlords. But anecdotally, we hear it every day from landlords. They ask their tenants to pay and hope that's enough to keep their business running. For a lot of small landlords, it isn't."

Though his full-time job is heading MassLandlords, a nonprofit landlord advocacy organization in Massachusetts, Quattrochi is himself a small landlord, renting two floors of a three-floor building. He has received most of the rent he is due, he said, but not quite all of it, and recently had to pay the building's water bill out of his regular income.

"Landlords are also dipping into their savings," he said. "I've talked to many folks who are seniors, and they're tapping into retirement funds to keep going. Their property was supposed to be part of their retirement income, but it's become a net loss."

Another option is to sell out, Quattrochi said. He believes that is becoming increasingly common, based on conversations with MassLandlords members, but also the fact that some members aren't renewing their memberships. They are simply giving up.

At the heart of the problem for small landlords is that one or two tenants who can't pay and can't be evicted can interrupt a property's cash flow in a critical way, California Rental Housing Association President Sid Lakireddy said. Larger landlords might have the cash to compensate for a small number of tenants not paying, but smaller landlords often do not.

"The rent from each unit is very important because there has been no relief from property taxes or utility bills or maintenance," he said. "Small landlords have been walking on a knife's edge since the beginning of the pandemic."

Like Quattrochi, Lakireddy said he is hearing from a lot of landlords who want out — out of being a landlord or, in some cases, out of California.

"I get calls from people who want to quit," he said. "I spoke to an owner of about 100 units recently. This month, he said, non-collection was 7%, and he expects that number to rise. He wanted to sell. Another member was looking at properties in Utah."

Who would buy? There are two kinds of investors interested now, Quattrochi said.

"One is novices who don't understand the implications of the eviction order. They're new to the business and unprepared for it," he said. "Also, larger investors with cash reserves are on the hunt. Not everyone has that much money, especially the mom-and-pops. There will be pressure to sell."

The squeeze on smaller landlords could have a widespread impact because so many apartments are in the hands of such owners. Almost 20 million of the nation's 48 million rental units are owned by individuals, according to the most recent Rental Housing Finance Survey conducted by the Census Bureau in 2018.

Another 18 million or so units are owned by limited partnerships or limited liability corporations, which tend to be owned or controlled by small partnerships, the bureau reported. Only 1.1 million units are owned by REITs, another 1.3 million are owned by large real estate corporations and a similar number are owned by nonprofits.

As various state eviction moratoriums expired over the summer, landlords (at least in some states) began to see the option of eviction for nonpayment of rent return. 

Some of them started to do so, but the latest twist is a mandate from the Centers for Disease Control and Prevention, the goal of which is to shut down most apartment evictions for the rest of 2020, though it doesn't cancel rents. It doesn't provide any additional relief for renters or landlords, something Congress has also failed to do since the CARES Act unemployment supplement expired in late July, putting more pressure on already strapped tenants.

The Urban Institute estimates that nationwide, it would cost $16B a month to directly support tenants, which would also aid the landlords who depend on rental payments.

The CDC, asserting its authority under Section 361 of the Public Health Service Act, issued the order in early September. According to the agency, an eviction moratorium is comparable in scope to other public health measures authorized by the law, such as quarantines or sanitizing a place with known infections, even though such an action isn't specifically mentioned in the law.

The CDC's assertion is problematic at best, said Kelley Kronenberg partner Jason Vanslette, who is with the firm's real estate practice group based in Florida and a specialist in evictions and foreclosures. He said the national moratorium might not hold up in court.

"The question is whether the CDC has overstepped its authority," Vanslette said. "I'm not a constitutional law expert, but I don't see how such a national moratorium is constitutional. This will be challenged, and the result might be an injunction against the order." 

There is also a political aspect to the order, Venslette said.

"No one wants mass evictions, but why this measure? The CDC could have just as easily mandated masks for everyone to control the pandemic, which is a more plausible public health measure, but politically impossible."

Only a few days after the order was issued, a small Virginia landlord filed suit against the CDC in federal court, arguing that the order violates constitutional limits on federal power. It is the first legal challenge to the order, with others presumably in the works.

Aside from constitutionality, the apartment industry vehemently objects to the order on economic grounds.

"The CDC order saddles the rental housing industry with the responsibility of offering a high-cost service while potentially operating at a deficit without compensation," National Apartment Association CEO Bob Pinnegar told Bisnow in an email.

"Rental housing works on extremely narrow margins and, though last paid themselves, owners still need to pay extensive bills to keep their housing operational," Pinnegar said. "Without rental income, and heading into the sixth month without federal rental assistance to bridge the gap, owners are rapidly approaching a financial cliff."

Whatever the future of the CDC order, help from the federal government, at least before the election, is looking increasingly unlikely, Quattrochi said. 

"It's up to the states," he said. "We have enough money. Real estate is still selling. A small tax at closing could cover rent shortfalls for now."

But he also said the political will is lacking, at least in his experience.

"Legislators can get elected without caring about rental housing," Quattrochi said. "We will lose a lot of affordable housing because of the pandemic because landlords can't stay in business, but that isn't going to affect anyone's electoral prospects."

States and localities have thus been left to their own devices to craft relief for landlords, just as they have for tenants. The result has been an uneven patchwork. In some places, according to some observers, local relief has helped smaller landlords.

"So far, mom-and-pop landlords are coping [in Southern California]," Multicultural Real Estate Alliance President Carmen Hill said. "There's rent assistance payments available for landlords and tenants in the city and county of Los Angeles that were affected by COVID, and utilities will not cut off service due to nonpayment.

"Also, for Section 8 tenants, housing authorities have increased payment to offset the tenant's reduced household income," Hill said.

She expressed optimism that California's recently passed AB3088 will also provide a measure of relief for landlords.

AB3088, also called the COVID-19 Tenant Relief Act, mandates a narrower eviction moratorium to replace the California Judicial Council's broad moratorium on unlawful-detainer cases. Under the law, landlords can once again evict tenants who cause nuisances or endanger other tenants, and it allows eviction of tenants who can pay but who refuse, though the onus of proof is on the landlord.

Also, the law doesn't cancel back rent. By Jan. 31, 2021, tenants need to have paid at least a quarter of the rent accrued between September and January, or face eviction.

Some landlords are trying to work out payment plans with tenants, formally or informally.

"We want to keep people in their homes," ACRE Chief Operating Officer Melanie Gersper said. "The real pressure is on the smaller owners. Larger owners are erring on the side of caution and can generally afford to. "

ACRE counts as a larger owner, with about 8,000 units in Florida, Georgia, Ohio and Kentucky, and has the wherewithal to try various strategies to work with tenants, Gersper said.

Recently the company started using a system by tech company Till to provide a flex rent program for residents. One Till product lets tenants pay their rent in smaller chunks, often coinciding with paychecks for those now returning to work.

Till's flexible rent product analyzes a tenant's cash flow and allows smaller bites throughout the month so they can make rent. That not only helps landlords maintain revenue, it also keeps tenants out of the late fee and payday loan cycle, Gersper said.

However landlords try to work with tenants, there are nuances to the problem of nonpaying tenants that further complicate the situation, T&C Management CEO Chuck Sheldon said. His company, based in New Mexico, owns about 1,800 apartment units.

"Our rent collection is about $1M a month, and currently 6% to 8% are delinquent due to COVID," Sheldon said. "When tenants have a true need, we call Goodwill, Catholic Charities or a public agency that might be able to help in the short run, trying to connect tenants with help."

But a certain number of tenants are working the system, he said, opting not to pay because they don't have to and can't be evicted. It is a relatively small number of tenants, but they are causing an outsized problem.

"The system is built on trust," Sheldon said. "When people violate that trust, the system breaks."