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Federally- Backed Multifamily (Affordable Housing) Loans COVID-19 Loan Deferral Program

The CARES Act has a major impact on federally-backed funded multi-family communities, and in some instances, may not only delay evictions for 120 days, but in some circumstances may further prevent eviction of non-paying tenants for nearly 1½ years.

CARES Act Federal Loan – Tenant Eviction Protection

While meaning to do good, the CARES Act has seriously surprising results on landlords of federally-backed housing.

First, the CARES Act, signed into law on March 27, 2020, specifically provides that tenants of federally-backed housing may not be served with an eviction notice for 120 days from March 27, 2020, i.e., until July 25, 2020.  In addition, the tenant must be given 30 days to leave the property (i.e., until August 24, 2020).  Furthermore, during that same 120-day eviction moratorium, the landlord may not charge late fees, penalties, or other charges for late rent.

While a landlord may demand rent, they may not collect late rent.  The tenant has the full 120 days to pay rent.  Accordingly, a tenant need not pay any rent until just before midnight, July 25, 2020, and there is nothing a landlord can do about that.  Moreover, the tenant must be given state law notice, wherein it appears that the 3-day notice cannot be served if, under federal law, the rent is not yet past due.1

Rental Housing Covered by the Eviction Moratorium.  This national temporary moratorium on eviction filings pertains to only a limited group of rental housing.  This is for rental housing:

  • Covered under Section 41411 of the Violence Against Women Act of 1994 (34 U.S.C. 12491(a); or
  • Covered by the rural housing voucher program under Section 542 of the Housing Act of 1949 (42 U.S.C. 1490r); or
  • Has a federally-backed mortgage or multifamily mortgage loan[1]

Accordingly, it would not normally affect housing subject to general commercial loan financing.

CARES Act Tenant-Based Rental Assistance.  Because of these concerns, it is important for landlords to encourage tenants to pay rent.  Unfortunately, it was recently announced that CARES Act payments to individuals will not be issued quickly, but will take from several weeks to several months to be released.  On the other hand, the CARES Act provides the Department of Housing and Urban Development (“HUD”) with an additional $17.4 billion in funding, which includes monies for rent assistance, housing vouchers, public housing, and housing for the elderly.  These funds may become available for greater funding of the federal share of rent where tenants cannot pay their personal share of rent – but we do not have as yet any guidance on how these funds are to be allocated.

While tenants cannot be forced to seek assistance, it certainly may help to advise tenants of the need to consider assistance and the consequences that would arise for nonpayment later this year.[2]

Financial Assistance to Landlords

Second, while the Freddie Mac Multifamily approach or Servicing Standard can offer some relief, their program comes with even greater required tenant concessions wherein the tenants need not pay rent during any loan deferral and may extend their payments for an additional 12 months.

For any loan for which the Borrower provides acceptable information demonstrating the hardship it and its tenants face as a consequence of the COVID-19 emergency, Freddie Mac will offer forbearance of up to 90 days (three consecutive monthly payments).  If the Borrower accepts this arrangement, Freddie Mac will also waive any associated late charges and default interest.  However, it comes with several conditions, including rights for tenants to not pay rent as follows:

  • The Borrower must repay the total forborne amount, without additional interest or prepayment premiums, over the ensuing 12-month period.
  • During the forbearance period, the borrower may not evict a tenant based solely on non-payment of rent occurring as a consequence of the COVID-19 emergency, whether it is caused by illness, job loss, reduced hours, or temporary unpaid leave, etc.
  • Borrower must release any claims it has against the lender for any adverse effects on the Borrower or the property due to the extended the eviction moratorium.

Freddie Mac’s Forbearance Agreement to Servicers is non-negotiable.  Borrowers must:

  • repay the missed payments in equal monthly installments over 12 months beginning at the end of the forbearance period;
  • prepay the amounts owed, upon receipt of any business interruption, insurance proceeds or other assistance funds;
  • agree to suspend evictions of tenants who are facing financial hardship due to the current crisis; and
  • permit the affected tenants to repay any missed rent payments over a period of no more than 12 equal monthly installments, without late charges, together with the affected tenant’s regular monthly rent, to the extent permitted by applicable law.

State and Local Eviction Moratoriums

While the foregoing is for federally-backed housing, potentially all loans (as well as federally-backed housing) may be subject to other state and local moratoriums.

In addition to California Orders N-38-20 and N-28-20, local jurisdictions have adopted their own restrictive provisions to not require the payment of rent and to grant longer periods to allow repayment.  Changes are occurring almost daily, among dozens of counties and even more cities which are adopting often first, second and third amendments, to impose ever greater restrictions.  For example, Glendale not only has a rent freeze, and provides that deferred rent need not be paid for 12 months, but said tenants have no duty to prove inability to pay until they actually pay back-due rent.  Federal-backed loans for some communities may be subject to local rules as well where they are more restrictive.

These provisions may place greater strain on multi-family properties, particularly where they are supportive of tenants undertaking a rent strike, as has been proposed in Los Angeles and other cities.  Such actions may place some rental property owners in financial distress situations, for which there may be little remedy.  In fact, presently, the potential for any challenge by court action to these rules is very low.  Courts are not open for business as usual.  And discussions with the Pacific Legal Foundation indicate that they have no plans to challenge any of these orders as constituting an unlawful “taking” of property.

Recommendations

Any owner of a multifamily property seeking to work out a deferral program for loans should work with legal counsel both in deciding whether to use the program or to seek a different option.  The federal loan program only covers a small portion of the outstanding multi-family loans, and therefore, those not covered by that program should expect to work with their current lenders on a case-by-case basis.  Our office has assisted clients in work-outs with lenders where this becomes an issue.


[1] H.R. 748 (March 27, 2020)

[2] HUD Rental Assistance.  https://www.hud.gov/topics/rental_assistance

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