Look: 40 million Americans have filed for unemployment. Needless to say, unemployment is at its highest level since the Great Depression. To top it off, businesses are closing at an unprecedented rate. As if that’s not enough to deal with, you have to wonder if your tenants will pay rent. If your tenants can’t (or won’t) pay rent, how can you meet your financial obligations?
The good news is that you have several options to collect rent from unpaying tenants. And, there are steps you can take to stay in good financial standing with your commercial real estate loan if you can’t collect rent. Although the pandemic is a stressful experience, dealing with delinquent tenants doesn’t have to be. Here’s your essential guide to handling tenants who aren’t paying.
What Are the First Steps When Tenants Haven’t Paid Rent?
Delinquent tenants were likely only an occasional problem for you pre-pandemic. Now, more tenants are unable to pay rent due to losing their job, rising food prices, or increased spending on healthcare and childcare (to name a few). So, what do you do when a tenant hasn’t paid?
Whether tenants talk to you about being unable to pay rent before or after missing a payment, you should approach the issue sympathetically. Instead of expressing frustration, you should let tenants know you care about their situation. At the same time, you should let them know that you also have financial obligations that depend on their rent payments. It’s in your best interest to retain previously good tenants. So, the first step to managing delinquent tenants is to set up a meeting to discuss options for repaying missed rent.
What Options Can You Offer Tenants to Repay Rent?
When dealing with delinquent tenants, you have many options to recoup some or all of the missed rent. Your response can range from demanding rent in full to forgiving the missed rent entirely. Choosing the right option can be the difference between receiving rent in full or having an empty building with negative cash flow.
When tenants are late paying rent, one option you have is to demand the rent in full. This works best with tenants who have the financial ability but are trying to take advantage of a bad situation. Demanding rent in full doesn’t work well on tenants who can’t pay it. No amount of late fees or other pressure can make tenants pay who simply don’t have the funds.
While this tactic can work on tenants who can pay, it can also cause good tenants to break their leases because of financial hardship. This could cost you more throughout the lifetime of the lease than accepting partial or late rent.
You can also offer rent reduction to retain tenants while still generating income. For the duration of a tenant’s financial hardships, you could reduce their rent. So, rent becomes more manageable for your tenants. Rent reduction can help you retain good tenants who are struggling due to the pandemic. And, reducing (instead of forgiving) rent means that a unit can still generate some income. That way, you keep earning from good tenants – even if it’s reduced for now.
Another option to respond to delinquent tenants is to defer rent during the pandemic. If a tenant can’t pay because of hardships due to COVID-19, you can allow your tenant not to pay rent until they are financially able. However, your tenant will have to pay back missed rent. Your tenant could repay rent either with higher monthly rent or a one-time payment. While this won’t help your cash flow in the short term, deferring rent will ensure you don’t lose revenue during the lifetime of the lease. So, if you need tenants’ rent payments right now, this isn’t the best option. But, if you have other income to meet your financial obligations right now, this could be a good option to recoup rent later.
Create a Loan
Similar to deferring rent, you can also offer delinquent tenants a loan for the amount of rent they can’t pay right now. If a tenant is unable to make 2 months of rent payments, you can turn missed rent into a loan your tenant has to repay. This gives tenants relief from rent until they can get back on their feet. And, it allows you to collect the missed rent over time – such as 6-12 months.
That way, you don’t miss out on any revenue you planned to generate from tenants. And, you’re able to retain tenants who will likely continue being good tenants once the crisis is over.
Use the Deposit
Along with creating a loan for later repayment, another option is using a tenant’s deposit to cover a month of rent. While this is only a short-term fix, it will provide you income for a month. This is a good option if you’re struggling to meet your financial obligations due to tenants not paying.
Plus, it gives tenants time to resolve their financial struggles. Without rent to worry about, tenants can put more effort into finding a job – allowing them to pay rent going forward.
That way, you don’t have to worry about finding new tenants during a global crisis. And, you don’t lose any revenue due to tenant financial struggles.
If tenants can’t pay rent, you also have the option to forgive their rent. For tenants who are months behind on rent, you can forgive past rent. But, only on the condition that they stay current on future rent. Otherwise, you can demand backlogged rent if they miss another payment.
You can also forgive rent for tenants who are current on rent but won’t be able to pay in the future. You and your tenant agree on how many months of rent you’ll forgive. If your tenant misses any future payments, you can demand the rent you forgave be paid back.
Forgiving rent is a good option if you have enough cash reserves to meet your financial obligations without tenant rent payments. It’s much less time consuming and tedious than tracking down rent. But, if you have a large number of tenants who can’t pay, this likely isn’t a good option.
Depending on your financial situation, any of these options can be a good way to address delinquent rent. Regardless of which option you choose to give your tenant, make sure you get any agreement in writing. That way, tenants can’t back out of a deal down the road.
What Should You Do If Delinquent Tenants Create Mortgage Problems?
While the above options provide a range of responses to delinquent tenants, they might not bring in rent payments fast enough. If all of your tenants can’t pay for the next few months, you might be unable to pay your multifamily property loan.
While this is a stressful situation, you can apply for commercial real estate loan forbearance to ensure you stay current with your CRE loan. Even when you’re unable to pay for a couple of months.
What is CRE loan forbearance?
Commercial real estate loan forbearance is deferring your loan payments without accumulating fees, interest, or penalties. So, if you can’t pay your CRE loan right now, you can set up a plan to pay missed payments over a 6-12 month term. In response to the widespread inability of people to pay their mortgages/loans due to COVID-19 economic hardships, Congress passed the CARES Act in March. The CARES Act included provisions allowing borrowers to ask for forbearance.
How do you apply for forbearance?
To apply for forbearance, you need to submit a written or oral request that demonstrates the financial hardship you’re experiencing due to the pandemic. There are no clear guidelines on what counts as financial hardship. So, you should ask your servicer what they look for in forbearance financial hardship documentation.
What are the requirements?
If you have a federally backed multifamily property loan, then you’re eligible for forbearance under the CARES Act. Some federally backed loans include those backed by Freddie Mac, Fannie Mae, and FHA. Many loans aren’t federally backed, so you need to check your loan to see if you’re eligible under the CARES Act.
With a federally backed loan, you can apply for forbearance until December 31, 2020 – or when the federal emergency period ends. Whichever comes first.
Some servicers also require that you were current on your loan as of February 1, 2020 to qualify. So, if you had missed payments before February 1, you may be ineligible for mortgage forbearance. Simply applying for mortgage forbearance doesn’t guarantee that your servicer will grant it. If you don’t demonstrate financial hardship expressly caused by the pandemic or don’t meet other criteria, you’ll be turned down.
What if your loan isn’t federally backed?
If your mortgage isn’t federally backed, you can still discuss forbearance with your servicer. While they aren’t obligated to allow forbearance, your loan servicer might be willing to work with you.
What happens if your servicer grants forbearance?
If your mortgage servicer grants your request, you’ll have forbearance on your loan payment for 30 days. You can extend this by a maximum of 2, 30 day periods – resulting in 90 days total.
You’ll also need to work out a repayment plan following your forbearance period. Your CRE loan payments are simply deferred – not forgiven. So, you’ll have to pay for the months you miss later on. Along with forbearance provisions, the CARES Act also includes eviction prevention measures. If you are granted forbearance due to the CARES Act, you can’t evict tenants who don’t pay for the duration of your forbearance. You also can’t charge late fees or penalize tenants for not paying during your forbearance period. If delinquent tenants are causing you to be unable to repay your CRE loan, forbearance is one option to ensure your mortgage remains in good standing. Although there are many requirements, forbearance might be right for you.
Wrapping It Up
With the economy grinding to a halt in the last few months, 4.4 million Americans each week file for unemployment. People have been told to stay at home as much as possible. But, staying at home has made it difficult for many to afford their monthly rent payments.
Although you might not need to deal with delinquent tenants during the pandemic, it’s important to know your options. That way, you can be prepared to deal with any late payments. And, you can ensure uninterrupted positive cash flow for your property.
Thinking about getting into multifamily investing, acquiring another property, or refinancing an existing one? Consider using CommLoan – an all in one platform that lets you compare lenders and terms with ease. CommLoan strives to empower you with crucial market data – so you can make the right choice for your multifamily loan.
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