Moratoriums Mean Ongoing Uncertainty for Investors

For investors looking to underwrite apartment properties, the eviction moratoriums from The Centers for Disease Control and Prevention (CDC)  and local state governments are creating some uncertainties.

Essentially, investors will need to discount the value of the rent roll more than normal in some acquisitions. “For investors, it’s just uncertain as to how you can bank on a rent roll or solidify numbers until this [eviction moratoriums] shake out,” says Andrew Rosenberg, a partner at Cassin & Cassin LLP. “Investors will proceed, but they’ll proceed more carefully, meaning they either have better reserves or they pay a higher rate.”

While the moratoriums will hurt revenue, Rosenberg thinks most properties will be fine in the long term. So investors with longer time horizons will still benefit from owning apartments.

“Once this expires, they can operate the buildings as they always have, using whatever rights they have to get rid of people that are refusing to pay,” Rosenberg says. “So I think that is going to make the buildings more marketable. In the medium to long term, you take a little bit of time for people to get their feet settled again and back into the groove. But once they do, especially professional landlords that have a lot of buildings and have systems in place, I think they’ll be able to get back on track there.”

While some investors were expecting distress across commercial real estate earlier in the pandemic, Rosenberg doesn’t see many issues with apartments, even ones that have been hit hard by the eviction moratoriums.

“Banks don’t want to own properties,” he says. “At the end of the day, foreclosing is not a good result for a bank. So they will do what they can within reason. It may be more reserves. It may be an increased guarantee of some of the arrearages. It may be deferring rents or extending the term of the loan a little bit. There are things that they can do to work it out.”

But the desire to avoid owning apartments is not the only thing driving banks. “Banks, especially banks that are relationship banks, will work with borrowers to the extent they can and keep the loans performing in one way or another,” Rosenberg says.

While banks may want to work with lenders, they also have people to whom they must be accountable.

“The big thing for lenders is to show the regulators that their loans are performing,” Rosenberg says. “We’ve seen a number of lenders be fairly accommodating, whether it’s allowing people to apply security [deposits] or allowing people to grant rent concessions. That’s usually prohibited under the loan documents. So now I think you’ve seen a lot of people working together to try and keep everybody alive, so to speak.”