5 Ways for Real Estate Companies to Manage Cash Flow
Stay-at-home orders and business disruptions related to the COVID-19 pandemic are affecting nearly every asset class of commercial real estate, changing many companies’ financial outlook and need for office space. Job losses in the wider economy are also causing concern in the residential real estate market. With economic uncertainty expected to continue for some time, the first priority for any real estate company right now should be managing cash flow.
On the office side, leasing activity was already showing signs of slowing in March, with negative absorption in four top national markets and higher vacancies in many others, according to Colliers. In early May, 91% of office tenants in a national poll of American City Business Journals readers reported that COVID-19 had negatively affected their business.
Multifamily, for now, seems to be faring better. By May 6th, 80% of U.S. households had paid at least some rent – only about 1.5 percentage points lower than in early May 2019. It’s unclear, however, whether this level of payment will continue as stimulus checks and extra unemployment payments run out. It’s also likely that higher-cost areas, including South Florida, will see higher delinquency rates.
Managing cash flow for the next few months is key. To do this, arm yourself with the right tools to measure and project cash flow. This includes 13-week cash flow models for each property, taking into account possible worst-case scenarios.
Calculate what level of rent delinquency you can support, and know at what delinquency percentage you’ll run out of money. Project delinquencies that could last for a few months, as well as what might happen if delinquencies are not restored after that time period.
With those measurements in mind, consider the following five steps to manage your cash flow.
1. Talk to your lender
For most rental real estate, loan payments and real estate taxes are often two of the biggest expenditures. Communicate with your lender regularly, keeping them in the loop on the business, whether or not you plan to ask for help.
If you have properties that are in a lease-up period, you may want to adjust your forecast assumptions to align with market conditions and discuss these changes with your partners and lenders.
In general, most lenders are not interested in foreclosing on commercial or multifamily property and would rather work with you to amend your financing arrangement. Consider asking your lender for an interest holiday, loan forbearance or restructuring. If you have terms and covenants related to vacancy rates and are concerned that your property may be in danger of violating them, explain the situation to your lender, and try to work together on solutions. In the Business Journals reader poll, 69% of property owners who contacted lenders or loan servicers for assistance reported their request was granted.
Of course, be prepared to share information with your lender, and be aware that they’ll probably require detailed financial information if you do want to make changes to your financing arrangements.
Most multifamily and commercial property owners did not obtain Paycheck Protection Program (PPP) loans; however, if you did, keep in mind that interest payments are among the forgivable expenses you can use the loan for.
2. Consider your property taxes
If you’re still within the local deadline, you may consider contesting your commercial or multifamily property’s real estate valuation in order to reduce your property tax liability. Market declines, construction defects and other changes can decrease the fair market value on which your property is taxed; if you think your assessment doesn’t take those into consideration, it may be worth contesting. In addition, some states offer disaster-related valuation adjustments or tax deferrals.
3. Take stock of other expenses that may be cut or postponed
If you can wait to incur some expenses, you might want to do so. Also, talk with vendors about changing payment terms or obtaining extensions. Explore sourcing changes or reorganization initiatives that might save money. If you work with a third-party management company, they may be willing to renegotiate terms, provide flexibility or institute cost-saving measures.
Maintain spaces as usable, even if tenants aren’t in them or are prohibited from operating; this will help you avoid violating any lease agreements.
4. Consider additional ways of accessing cash
While the PPP loan program may not be available to you, the federal Main Street Lending program and Economic Injury Disaster Loans (EIDL) may provide needed funds. You may also be able to obtain a working capital line of credit to cover short-term needs.
If your property is not leveraged to its capacity, you might consider a mortgage refinance, although this is not a great time from a lending perspective. Many banks have devoted their processing resources and reserves to PPP loans and with vacancies and delinquencies on the rise, they may not want to deal with uncertainties in the value of the underlying real estate.
Another option to consider is looking to non-bank lenders, such as investment funds, family offices and private equity. While you’ll pay a higher interest rate, many of them currently have more funds and evaluation resources available than banks.
5. Work with your tenants – commercial or multifamily – to keep some rent flowing or negotiate payment plans
In many cases, state or local emergency orders, suspension of writs of possession or the CARES Act prevent owners of multifamily or commercial property from evicting tenants for nonpayment of rent. In any case, depending on the individual circumstances, it’s unlikely that evicting your tenants right now is a prudent business move. Many will recover and begin paying rent again, while the tightening economy could make it more difficult to fill vacancies.
It may be worth the effort to help educate commercial tenants about PPP loans, for which rent is a forgivable expense or other loan programs available to businesses. You may also want to suggest they explore whether they may have a claim on business interruption insurance, which could potentially cover rent payments and other losses.
This situation calls for flexibility and creativity – work with commercial or multifamily tenants to find ways to help them pay rent. If they have deposits on their rental spaces, can you mutually agree to apply some of those deposits to rent? (Remember this does expose you to other risks.) Would it make sense to forgo two or three months of rent in exchange for adding two years to the tenant’s lease, or a rent increase that begins next year? Consider which levers you might be able to pull to bring in cash without compromising your long-term financial picture, and remember to add any agreed-upon changes into lease amendments.
The COVID-19 pandemic is an unusual crisis for the real estate sector, and it may require unusual measures to keep your business healthy. Contact me or another member of the real estate industry team to learn more about how Kaufman Rossin can help you explore which liquidity levers are available to reduce cash outflow and increase cash inflow during this time.
Marc Feigelson, CPA, is a Chief Financial Officer at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.