Real Estate Investors & CARES Act

Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law March 27th by President Trump. This is a $2 Trillion federal stimulus package which represents nearly 10% of the US economy. But what’s in it for real estate investors and what does it mean for those interested in investing in private placement real estate deals? A portion of the CARES package is expected to benefit the commercial real estate industry directly and indirectly as CRE investors brace for an uncertain financial future ahead. This month’s Harbor Drive Investor is going to break it down for you!

Let’s Talk Economics!

At HDH, we always seek to invest in projects located in areas with multiple years of positive job growth, population growth, and household formation. Among other indicators on our radar, these are strong signals of an appreciating real estate market that lead to positive rental appreciation. This in turn increases property values.
But what happens to real estate markets when there’s massive job loss such as we are seeing in the current environment (33 million jobless claims as of the time of this writing)? This is one of the unknowns that investors are quickly trying to digest. According to Yardi Matrix, April rent growth began to show signs of a reversal and it’s unknown how deep this rent decline may be. April collections were strong according to data published by the National Multifamily Housing Council, but we continue to brace ourselves for the months ahead as we get deeper into the pandemic crisis.

The good news is that we believe these economic pressures will bring short and intermediate downward pressure on asset pricing and upward pressure on CAP rates. This will present many incredible real estate investment opportunities soon! We are positioning ourselves and educating our investors on how to take advantage of some of these amazing opportunities on the horizon.

What is Mortgage Forbearance??

One of the biggest takeaways offered to commercial Real Estate Investors from the CARES act is mortgage forbearance. Mortgage forbearance allows borrowers to hit the pause button on paying their monthly debt service if the borrower is experiencing financial hardship because of the Coronavirus pandemic. The program allows borrowers to ‘forbear’ their payment for 30 days with the option to extend for two additional 30-day periods (and possibly longer). This program only extends to federally backed mortgages such as those serviced by Fannie Mae, Freddie Mac, HUD, etc. However, this program does have some strings attached. During the period that the borrower is enrolled in the forbearance program, the operator cannot evict or charge any late fees to tenants for non-payment of rent. Also, the missed payments by the borrower will not be forgiven. It’s unclear at this time how this will work, but it’s most likely that the borrower and the servicer will have to negotiate some new terms for the borrower to re-pay the missed debt payments. This could be spread over the remaining term of the loan, these payments could be added to the end of the term of the loan, or if the borrower/servicer agree, the loan may be able to obtain a refinance. In any case, the loan servicer is still making payments on the borrower’s loan to their investors, even though the borrower has entered forbearance (stopped paying their mortgage) and this is creating a credit problem in the lending markets. Essentially, it’s more difficult today to qualify for a federally backed mortgage regardless of lower rates. Lenders are requiring up to 18 months of principal, interest, insurance and capital reserves to be deposited into an escrow account by a borrower as a safety net for the lender in the event that financial impact of this pandemic gets worse.

The Bottom Line

At Harbor Drive Holdings, we have positioned our portfolio to be well capitalized across the board. We view mortgage forbearance as a last resort tactic in the event there are no other options. Right now, mortgage forbearance is not in our business plan as we tackle the challenges posed by the pandemic. Our collections have remained strong through April, and the trend has continued thus far in May. Given the current economic conditions, we’ve taken aggressive steps at our properties to tackle the uncertain economic turbulence in front of us.