April 6, 2020 – All aspects of the commercial real estate world have been rocked by the COVID-19 crisis – renters, landlords, and lenders. Multifamily commercial real estate owners find themselves in the middle of an unenviable situation – on one side, renters that cannot pay rent, and on the other side, mortgage loan lenders requiring continued payment on mortgage loans. This situation has led to two basic questions for multifamily property owners: (1) Can I evict a nonpaying tenant? and (2) What relief can I seek with my mortgage lender?
Much governmental action has taken place over the past two weeks dealing with eviction, mortgage forbearance, and pausing foreclosures. For more information on the current landscape of eviction and foreclosure relief measures in response to COVID-19, click here. The most aggressive actions taken to date impact owners of multifamily properties due to a public policy goal to maintain safe, quality housing for individuals and families. At the federal level, the much publicized Coronavirus Aid, Relief, and Economic Security (CARES) Act (“Act”) signed into law on March 27, 2020, is operative for multifamily property owners.
This client alert discusses the impact of the Act on multifamily property owners. The discussion in this client alert touches on just one small aspect of the Act. For additional information on the Act, please click here.
Discussion of the CARES Act
Sections 4022 through 4024 of Act address forbearance and eviction for properties with federal programs and/or federally-backed mortgages. Section 4022 of the Act, not detailed in this client alert, addresses mortgage forbearance for properties that have federally-backed mortgages for residential real property with occupancy from one to four families. Section 4023 of the Act addresses multifamily mortgage forbearance and Section 4024 of the Act addresses the eviction moratorium for multifamily properties.
Section 4023 of the CARES Act – Multifamily Forbearance Program
Section 4023 of the Act provides multifamily owners with federally-backed mortgage loans the ability to request an up to 90-day temporary mortgage forbearance. There are strings attached.
Who qualifies? – Section 4023(a)
To get in the door, you must meet the Act’s definitional requirements of being a “multifamily borrower” with a “Federally backed multifamily mortgage.”
Section 4023(f)(3) of the Act defines multifamily borrower as “a borrower of a residential mortgage loan that is secured by a lien against property comprising 5 or more dwelling units.”
Section 4023(f)(2) of the Act defines Federally backed multifamily mortgage loan for permanent financing that meets the following requirements:
(a) The mortgage loan must be secured by a first or subordinate lien on residential multifamily rental property designed for occupancy of five or more families; and
(b) The mortgage loan has backing from the federal government. This means a loan that “is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development or a housing or related program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation [Freddie Mac] or the Federal National Mortgage Association [Fannie Mae].”
Requesting Relief – Section 4023(b)
If you are a multifamily borrower with a Federally backed multifamily mortgage loan, then you are eligible to request and receive mortgage forbearance relief so long as:
(a) Your property must be experiencing financial hardship due directly or indirectly to the “COVID-19 emergency,” which the Act defines as the national emergency declared by President Trump on March 13, 2020
(b) Your loan must be current on its payments as of February 1, 2020; and
(c) You must submit an oral or written request for forbearance to your servicer and in that request state that the borrower is experiencing financial hardship as a result of the COVID-19 emergency.
Documentation and Length of Forbearance – Section 4023(c)
After the borrower makes the request for relief, the servicer is required to document the financial hardship. The initial forbearance period is 30 days with the option to extend that forbearance up to two additional 30-day periods for an all-in total of 90 days. In order to extend to the second and third forbearance periods, the Act requires you to alert and notice up your servicer 15 days prior to the end of the then current period. Further, please be aware the forbearance program is only for a limited period of time – it started with the enactment of the Act (March 27, 2020) and ends on the sooner of the termination of the national emergency by the president or December 31, 2020.
Strings Attached – No Evictions During Forbearance – Section 4023(d)
In order to participate in the above-described program, the multifamily borrower that receives forbearance cannot evict a tenant for nonpayment of rent nor charge that tenant late fees, penalties, or other charges for the duration of the forbearance period. Further, the Act provides that the multifamily borrower cannot issue notice to evict until after the expiration of the forbearance agreement, and that such notice must give the multifamily borrower 30 days to vacate after notice is issued. As a result, if a multifamily borrower uses the entire 90-day forbearance period, it must effectively wait 120 days to evict a tenant.
Section 4024 of the CARES Act – Eviction Moratorium
Even if you do not pursue a forbearance program, the Act imposes an automatic and immediate 120-day moratorium on evictions if your multifamily property has some type of connection to a federal housing program or federally insured or supported financing. The eviction moratorium time period is March 27, 2020 through July 25, 2020. During this period, you cannot sue for eviction on the basis of nonpayment of rent nor charge fees, penalties, or other charges for a tenant’s nonpayment of rent. Further, please be aware there is, after the expiration of the moratorium period, also a 30-day notice period required to be made to the tenant, discussed below, which effectively makes this a 150-day eviction moratorium.
Here is the legislative language that provides for the eviction moratorium, contained in Section 4024(b) of the Act (emphasis added):
“During the 120-day period beginning on the date of enactment of this Act [March 27, 2020], the lessor of a covered dwelling may not—
(1) make, or cause to be made, any filing with the court of jurisdiction to initiate a legal action to recover possession of the covered dwelling from the tenant for nonpayment of rent or other fees or charges; or
(2) charge fees, penalties, or other charges to the tenant related to such nonpayment of rent.”
Is Your Multifamily Property Impacted by this Eviction Moratorium?
To understand this, you need to follow the definitional trail provided in the Act, starting with the definition of “covered dwelling” in Section 4024(a)(1) (emphasis added):
“(1) COVERED DWELLING.—The term ‘covered dwelling’ means a dwelling that—
(A) is occupied by a tenant—
(i) pursuant to a residential lease; or
(ii) without a lease or with a lease terminable under State law; and
(B) is on or in a covered property.”
Next, Do You Have a Covered Property?
Section 4024(a)(2) provides (emphasis added):
“(2) COVERED PROPERTY.—The term ‘covered property’ means any property that—
(A) participates in—
(i) a covered housing program (as defined in section 41411(a) of the Violence Against Women Act of 1994 (34 U.S.C. 12491(a))); or
(ii) the rural housing voucher program under section 542 of the Housing Act of 1949 (42 U.S.C. 1490r); or
(B) has a—
(i) Federally backed mortgage loan; or
(ii) Federally backed multifamily mortgage loan.”
To understand if you have a “covered property,” you must read and analyze the (A) and (B) components of this definition. Subpart (A)(i) references the term “covered housing program” in the Violence Against Women Act of 1994. This reference casts a wide net of federal housing programs, including: (1) supportive housing for the elderly (12 US Code Section 1701q); (2) Section 811 Supportive Housing for Persons with Disabilities; (3) Housing Opportunities for Persons with Aids (42 USC Section 12901, et. seq.); (4) McKinney-Vento Act Homelessness Programs (42 USC Section 11360, et. seq.); (5) HOME Program (42 USC Section 12741 et. seq.); (6) Section 221(d)(3) Below Market Rate Housing (12 USC Section 17151(d)); (7) Section 236 Multifamily Rental Housing (12 USC Section 1715z-1); (8) public housing (42 USC Section 1437d); (9) Section 8 Housing Choice Voucher Program and Section 8 Project-Based Housing (42 USC Section 1437f); and (10) Low Income Housing Tax Credit program under Section 42 of Title 26. Also included in subpart (B)(ii) is a property that participates in the Rural Housing Voucher Programs (under sections 1484, 1485, 1486, 1490m, and 1490p–2 of title 42).
Even if you do not meet subpart (A) of the “covered property” definition, you will be subject to this eviction moratorium if the multifamily property has a Federally backed mortgage loan or Federally backed multifamily mortgage loan under subpart (B) of Section 4024(a)(2). These two terms are defined in Section 4024(a)(4) and (5), respectively, of the Act. These definitions are virtually the same except that “Federally backed mortgage loan” applies to loans secured by properties (e.g., a mortgage lien) that are for occupancy of one to four families (and includes condominiums and cooperatives), and “Federally backed multifamily mortgage loan” applies to loans secured by properties designed for occupancy of five or more families. The secured loan then must be “made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development [HUD] or a housing or related program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation [Freddie Mac] or the Federal National Mortgage Association [Fannie Mae].” Please note, these definitions do not include federal temporary financing arrangements such as construction loans.
Don’t Forget to Tack on the Notice Period
Section 4024(c) of the Act provides for a 30-day notice period in favor of the tenant after the 120-day period discussed above. The language states: “The lessor of a covered dwelling unit – (1) may not require the tenant to vacate the covered dwelling unit before the date that is 30 days after the date on which the lessor provides the tenant with a notice to vacate; and (2) may not issue a notice to vacate under paragraph (1) until after the expiration of the period described in subsection (b) [i.e. the 120-day period discussed above].”
Ulmer’s Real Estate Practice Group is tracking and reporting on rapidly occurring changes in the real estate industry as a result of COVID-19. Please visit the Real Estate Update page on ulmer.com for current updates that may affect you as a commercial property owner, landlord, tenant, developer, or borrower. You can also access our Real Estate Advisor Law Blog for other posts and commentary on the effects of COVID-19 in the real estate industry.
The information provided in this client alert speaks only to the information and guidance we have available as of the date of publication and is subject to change. We will continue to follow further issued guidance and regulations and endeavor to post those updates via our website. Please continue to follow these updates at ulmer.com. This legal update was created by Ulmer & Berne LLP, and is not intended as a substitute for professional legal advice. Receipt of this client alert, by itself, does not create an attorney client relationship. For any questions, or for further information, please contact Kristin W. Boose at email@example.com.