Owners Owe $26.2 Billion in Debt With a Slow Rent Relief Process and Low-Income Tenants on the Edge
In the more than three decades that Debra Tholen has owned rental properties, this past year was the first time she lost a significant amount of money.
Tholen and her husband got into owning small rentals as a source of extra income and retirement savings. Real estate seemed like a relatively stable and safe bet. But when the pandemic hit and one of her low-income tenants couldn’t pay rent, Tholen dipped into savings to get by. Then the unit’s air conditioner broke and a $10,000 plumbing problem popped up, leaving her with $20,000 in expenses and $8,500 in rental income.
“We’ve been through a lot of crises,” from the Great Recession to local economic disruptions, she said. “The real estate we hold to it has always been producing a revenue stream until now.”
The Centers for Disease Control and Prevention’s federal ban on evictions expired on July 31 after it was extended four times. The ban prevented landlords from evicting tenants for nonpayment in an effort to try to curb the spread of the virus by avoiding overcrowding in homeless shelters and low-income housing.
So while the end is sudden, the effect may take time. The end of the ban is forcing more landlords to decide now whether to continue working with tenants, wait for rental assistance to trickle in or resort to the lengthy and costly eviction process. Collectively, landlords that own apartment units and single-family rental homes are now sitting on $26.6 billion in debt from missed rent, according to the National Apartment Association. Some are increasingly considering selling their properties or already have, surveys show.
For Brennen Degner, the managing partner, CEO and co-founder of apartment investment firm DB Capital Management, the end of the moratorium won’t trigger a mass eviction or insistence from landlords that tenants pay all their owed rent now, lest they risk eviction. Degner said the company will spend the next 30 to 60 days in an exploratory phase, in which leaders will “figure out the rules that we can play by,” he said.
“It’s not as cut and dry as yesterday being July, today being August, and here’s your three-day notice to pay,” said Degner, whose Playa Vista, California-based company owns just under 2,000 units, with properties in cities including Austin, Texas; Salt Lake City; Denver; and Portland, Oregon.
The effect of the national eviction ban only went so far. Some states have their own bans that could still be in place even after the CDC ban expires, such as New York’s moratorium that lasts until Aug. 31, California’s ban running through Sept. 30 and New Jersey’s, which ends two months after the state’s health crisis declaration is officially deemed over. And the Federal Housing Finance Agency and the Federal Housing Administration on July 30 both extended their own eviction bans on borrowers of foreclosed single-family properties until Sept. 30.
Smaller Landlords Struggle
Landlords have filed more than 451,000 eviction cases across the biggest 31 cities in six states tracked by Princeton University’s Eviction Lab, and many of those cases could move forward if no other eviction ban is in place. Some smaller landlords are mortgaging their already paid-off properties, running up credit card debt, deferring maintenance or forbearing mortgage payments to stay afloat.
Meanwhile, tenant advocates are hoping the end of the eviction ban doesn’t sink millions of renters into unstable or overcrowded housing situations.
“The confluence of the surging Delta variant with 6.5 million families behind on rent and at risk of eviction when the moratorium expires demands immediate action,” said Diane Yentel, president of the National Low Income Housing Coalition, in a statement. Yentel and other tenant advocates are still urging Congress to consider a more limited ban on evictions on federally backed properties and urging states to find ways to make the assistance process more efficient. Both tenant and landlord advocates alike say the pace of rent aid distribution is far too slow.
Though Congress allocated $46 billion in emergency rental relief, only $3 billion had been dispersed to tenants and landlords as of May 31, the latest data available from the U.S. Treasury. That does not include Coronavirus Aid, Relief, and Economic Security Act funding that state and local governments may have also poured into rent relief. However, many states struggled to launch the relief programs and are still catching up. While many property owners look forward to regaining control of their properties, millions are still in limbo waiting for rental assistance or opting to eat the loss.
In the case of DB Capital, the company weathered the financial fallout of delayed or entirely skipped rent payments by essentially deferring its payments to investors, Degner said. Instead of a typical year in which the firm would pay out its investors each quarter based on their return on investment, Degner said the company communicated to investors that it would hold off on distributing their funds until it was sure it wouldn’t need to access that cash.
And for the most part, through federal and local assistance programs, Degner said the company has largely received the funds it qualified for, albeit with some delays: “It’s kind of like anything else you deal with, with the city. You filed an application, and you have the wrong box checked, and it’s kicked back to you and you’re delayed for a couple more weeks,” Degner said.
Degner said most of the complaints he’s heard from other landlords regarding a lack of federal or local assistance largely comes down to those owners not being as organized or proactive in completing all the necessary, complex paperwork required to receive funds.
Even so, some landlord groups have argued that moves by lawmakers and other government officials such as the eviction ban are politically motivated rather than needed because landlords are far more likely to work with tenants on rent payments rather than try to replace a tenant and redo a unit for a new renter. And they say moratoriums often just tie the hands of landlords who are trying to evict egregious cases of nonpayment or bad conduct on the part of renters.
Nat Decker, a researcher at the University of California, Berkeley’s Terner Center for Housing Innovation, said the government never intended to hurt landlords by canceling the need to pay rent, “though that is sort of what happened because you’ve got an eviction moratorium without [all] the funds available to make the owner whole, which are just becoming available now in some cases.”
No Financial Cushion
Small property owners account for 48% of the rental housing stock in major metropolitan areas, according to a 2019 American Housing Survey. The vast majority of these small rental properties, including fourplexes, duplexes, single-family homes, small condos, townhouses and apartments, are owned and managed by non-professional landlords who don’t have the financial cushion to last through many months of missed rent, according to a July briefing from the Terner Center, a housing research organization.
This spring, the center surveyed 1,690 small property owners encompassing 29,889 rental units across the country, finding that 35% of them experienced a loss of rental income last year. And about 30% saw declines in rent greater than 10%.
And those landlords with the least financial capital were hurt even more. Among landlords with less than $50,000 in liquid assets that don’t include real estate, about half saw a decline in rental income by about 10% or more, the survey found. Landlords of color also were more likely to see shortfalls in rental revenue in the survey, echoing similar trends in earlier studies in the pandemic.
“You have a chunk of owners out there who don’t have a lot of liquid assets,” said Decker. “A lot of these owners were fine but some of them were in a really tough situation because you don’t have enough properties … or if you’re retired and your tenants stopped paying rent for months on end and you’re in a really tough situation.”
Even though these small property landlords may experience greater financial strain, not all were in a rush to evict tenants. Research has suggested that most evictions during the pandemic have been driven by large landlords that filed 63,000 evictions in the first seven months of the CDC’s eviction ban, according to research from the Private Equity Stakeholder Project, a nonprofit advocacy group.
Among small landlords, most preferred to work with tenants to resolve unpaid rent rather than resort to a costly or lengthy eviction process if the tenant wasn’t more than three or four months behind on rent, the survey found. Among tenants with four to six months in rental delinquencies, about 40% of landlords expected to formally or informally evict tenants. But if a tenant was more than six months behind on rent, landlords were far more likely to see eviction as a resolution, with 70% of landlords expecting to formally or informally evict tenants that were severely in arrears.
The financial strain is pushing many small landlords to consider selling. In another survey of single-family rental owners by the National Rental Home Council, 11% said they were forced to sell at least one property and 12% sold all their properties in the pandemic because of financial pressures.
Many of these small rentals are considered naturally occurring affordable housing because they charge rents below market, Decker said. That has some analysts concerned that a big sell-off in properties by small landlords could further diminish the supply of affordable housing, or else constrict the rental housing stock further.
“If this continues to go on, the lack of funding, the inconsistencies, we’re going to lose our rental housing stock, and if we lose our rental housing stock we’re going to have a much bigger affordability problem on the other side of this crisis,” said Bob Pinnegar, president and CEO of the National Apartment Association, an industry trade group.
A landlord’s proclivity to evict depends on the financial profile of the property and the tenant’s communication, he said: “There will be evictions but it is largely going to be those people that have ghosted on their property owner,” Pinnegar added.
Pinnegar’s group filed a lawsuit in the past week against the CDC on behalf of individual apartment landlords, apartment owners and landlords of virtually any rental property shouldering billions in debt because of missed rent.
The National Apartment Association asserts that owners and landlords faced $57.3 billion in debt at the end of 2020. Another $8 billion in debt was generated in the first quarter of 2021, and roughly $8 billion in more debt was generated in the second quarter of 2021, though that figure is still being finalized. All those figures add up to $73.3 billion in debt. Factor in the $47 billion in federal rental assistance, and the industry is still on the hook for $26.6 billion in debt, the National Apartment Association states.
Pinnegar said the organization and industry professionals feel that they’re at the point where “we don’t have anyone looking at what’s going on” with regard to how landlords can be expected to pay off billions in debt, especially considering that the bulk of apartment owners are individuals who own four or fewer rental units.
While some may view the lawsuit as an attention grab, “you kind of have to acknowledge that they have a point, that the government has, in fact, prevented them from controlling their own property and has denied them any reasonable prospect of enjoying the value of that property,” said Jason Kilborn, a professor of law at the University of Illinois at Chicago’s John Marshall School of Law, in an interview.
He added that the language in the suit, as well as in the association’s public statements, effectively tells the U.S. government something akin to, “‘We recognize we’ve got to be a part of the solution here, but you’ve got to meet us halfway.'”