Landlords at a Loss

Landlords at a Loss

The State of Emergency for DC Landlords

The Condo Connection had the pleasure of representing our client Shirley, who purchased a 1,000 square foot condo in NE Washington, DC. This 2BR, 2BA, 2-level property was purchased as an investment property to serve as her primary income source during her retirement. Shirley officially retired in December 2019 and started off 2020 enjoying her well-earned retirement. At least, that’s how it started.

Like most of us, the absolute last thing Shirley saw coming was a pandemic, and she too, was impacted. Directly impacted. Shirley reached out to me in April and again in May 2020 and was seriously worried. She told me that her tenant lost her job because of the pandemic and had not made a rent payment in two months.

Shirley was sympathetic to her tenant’s circumstances and knew this was beyond her tenant’s control. But the reality was that Shirley just retired from her job of almost 20 years and spent a small fortune to renovate this large, new condo to prepare it for long-term rental, and had just emotionally and psychologically prepared herself for a new chapter of her life that did not involve working a 9 to 5 job, or worrying about money. And things were not going according to plan. Again, while she was sensitive to her tenant’s financial situation, Shirley was not collecting rent, and was really worried about her own situation as well.

When we spoke in May, I helped her explore options, and she had a lot of difficultly with how limited her options were. We spoke again in August and then again in September 2020. By this time desperation had set in and things really started to get serious for Shirley. The tenant had made one rent payment since March 2020, but there was still six months of rent that had not been paid. We started to speak more frequently, and when we spoke in October 2020, as much as Shirley wanted to work with the tenant, she had been carrying the mortgage for months and it was no longer sustainable. She had to take some action regarding her tenant. But our October conversation was way worse than the one we had in May. Shirley had no options, and she wasn’t pleased to hear what I had to say. And what I had to say was all bad. I couldn’t dress it up, make it sound good, or even talk about the light at the end of the tunnel. There was no light, just tunnel.

Fast forward to May 2021. The tenant still occupies the property, and Shirley had still not received any additional rent payments. And the tenant didn’t attempt to obtain rental assistance. Instead of adding to her retirement money, Shirley has been withdrawing from it at an alarming rate. In summary, Shirley’s tenant had been living rent-free for over a year.

Right about now most of you are probably asking, why didn’t she just take her tenant to court to seek remedy her for the outstanding rent? That very question is the segue into this month’s article.

In March/April of 2020, the Mayor of the District of Columbia declared a state of emergency (the Emergency Act) due to the covid-19 pandemic. As a result, the DC Council made some significant changes to the law with regards to tenant protection under the Emergency Act. Here’s an abridged version of what those covid-19-related changes looked like:

•        While tenants were still required to pay their rent, there was no way a landlord could enforce it if the tenant went into arrears.
•        An eviction moratorium went into effect around early April 2020. This prohibited landlords from evicting their tenants.
•        Landlords were prohibited from initiating, filing, or threatening to file any new collection lawsuits.
•        The landlord-tenant court, like most everything else, came to a dead stop.
•        Landlords were prohibited from initiating, threatening to initiate, or acting upon any garnishment, seizure, attachment or withholding for payment of debt, or the repossession of a vehicle.
•        Landlords were prohibited from visiting or threatening to visit a debtor’s household or place of employment.
•        Landlords were prohibited from initiating communication with a debtor via written or electronic communication regarding that debt.
•        A mandatory repayment plan went into effect. This meant that if your tenant was behind in rent payments, the landlord was obligated to offer them a repayment plan for up to year.
•        No late payments may could charged by the landlord to the tenant.
•        No interest on late fees may be charged by the landlord to the tenant.
•        No creative fees to circumvent the above two may be charged by the landlord to the tenant.
•        Rent increases during the Emergency Act were prohibited.

In addition to all this, the DC Council also made broad and sweeping changes to legal compliance as it relates to how landlords may factor their final decision to rent to tenants. For example, a landlord may no longer base a denial to rent to an applicant based solely on the applicant’s credit score. This new, complex, and extensive legislation further restricted landlords, turning an already fragile rental housing landscape into a serious question mark about how small and mid-sized landlords will be able to protect their investment properties, their rental revenue, and their way of life. And while there has been some monetary relief from the city (in May 2021) in the form of tenant rental assistance, the onus was on the tenant to actually take advantage of the assistance. “But if there are no repercussions to a tenant for not paying their rent, then what’s the incentive for them to do so,” asked so many landlords.

Then came the CDC moratorium. In addition to the DC’s Emergency Act, a federal law went to effect via the CDC, Centers for Disease Control. This law, effective September 4^th, 2020 through June 30^th, 2021, prohibited evictions for “Covered Persons,” for non-payment of rent. And things got even more interesting when on May 5^th, 2021 Federal Judge Dabney Friedrich of the U.S. District Court for the District of Columbia, struck down the CDC’s nationwide eviction moratorium on evicting renters. This was an action by the CDC at the order of the former administration.

In a May 5^th, 2021 article, the New York Times reported that Judge Friedrich, who was appointed by President Donald J. Trump, ruled that the Centers for Disease Control and Prevention had exceeded its authority under that law when it carried out Mr. Trump’s order last summer to impose the moratorium. The Times further reported, “the question for the court is a narrow one: Does the Public Health Service Act grant the C.D.C. the legal authority to impose a nationwide eviction moratorium?” wrote Judge Friedrich. “It does not.”

The New York Times also reported that the Biden administration “is beginning to disburse tens of billions of dollars in aid” to assist tenants with the delinquent rents. However, it appears that the federal government is taking the same position as DC, and perhaps other local governments. The aid is going to the tenant and not to the landlord. And while it is uncertain how other states are handling this, in Washington, DC, as explained below, landlords will have to wait for their tenants take advantage of this aid, before it can reach the landlord.

For over a year, it appeared that the city completely tied the hands of landlords to protect their investment properties, their rental revenue, and their homes. Landlords saw their access to the courts cut off, with no ability to address grievances or enforce their lease agreements. With over a year of changes by the DC Council and no access to the court for landlords to protect themselves, DC landlords interpreted the writing on the wall as…Washington, DC sacrificed its DC landlords to protect DC tenants until the DC council eases restrictions, or until the Emergency Act is lifted. Suffice it to say, with an 18-month wait, those restrictions were not lifted quickly.

Larger and corporate landlords who have considerable resources are perhaps much better prepared to weather such a storm, with less impact. But for midsized landlords, and especially the small landlord and homeowners like Shirley in our story above where rental revenue is their primary or only source of income, this is a catastrophic and untenable situation that could quickly and easily sink them. Imagine, all the liability of a tenant, the mortgage on the property, the legal compliance, maintenance and repairs, insurance, and no rental income. In essence, for those DC Landlords who were unable to collect rent from their tenants, it seems DC turned them into temporary, non-profit housing providers. And there was absolutely nothing that landlords were able to do about it.

On April 12^th, 2021, D.C. Mayor Muriel E. Bowser announced the STAY DC program (stronger together by assisting you). This $350 million program was designated to help DC residents pay rent and utility bills. Needless to say, this assistance was much needed and welcomed.

•        First, DC tenants can apply for this assistance right away.
•        Landlords may also apply for this assistance on behalf of their tenants (something that was not available in earlier programs before).
•        Per the application process, landlords may request relief for unpaid rent beginning April 20^th, 2020 going forward.
•        Last, the only problem remaining with this is that as of the announcement of the Mayor’s STAY DC program, DC Landlords still do not have access to the courts to mitigate their losses or get relief. This means that while the eviction moratorium was in place (60 days after the mayor ends the public health emergency, which has been extended to July 2021), landlords don’t have access to the courts to file for evictions until September 2021 (actually November 2021, per DC Law), thereby removing any incentive for a tenant to actually apply for this assistance until then, further minimizing the chances that this relief will find its way to landlords sooner rather than later if for any reason the landlord’s STAY DC application runs into hiccups, or is not approved.

In May 2021, the Washington Post reported that According to an analysis by The National Council of State Housing Agencies, the total of unpaid rent in the District in January of 2021 was between $66 million and $119 million, with an estimated 7,800-15,800 people at risk of eviction when moratoriums end.

On the other side, the Emergency Act is lifted and with much of the protective legislation relaxed and/or removed is it too late for many landlords? Will they be able to recoup the full amount of rent loss, operating expenses and money expended to stay afloat? Have they paid out more than they’ve taken in?

Here’s a question…why not simply take the much-needed rent relief provided by the STAY DC Program and provide it directly to Washington, DC Landlords to address rent delinquencies? Landlords would apply for and receive the assistance by, among other criteria, providing a copy of their tenant’s account ledger verifying delinquency. Once approved, funds would be disbursed directly to the landlord. In exchange for this assistance, the landlord would adjust the tenant’s account ledger accordingly based on the amount of rental assistance received, and, as a stipulation of the relief, would agree to consider the respective rent paid and resolved, not to be subsequently pursued by the landlord. It appears that this is what the program finally provides room for. Still, the introduction of the STAY DC program, while again long-awaited and welcome relief, was late being introduced. But, shouldn’t that have been the first way to help landlords and tenants?

An earlier version of DC rental assistance during covid was limited to tenants and did not allow for landlords to apply for rental on behalf of their tenants, and/or if so, had to be initiated by the tenant. In other words, landlords could not help bringing about their own relief, and still had to wait for the tenant to take action to access this assistance.

Why allow the tenant to control whether or not the landlord, who is providing the housing and suffering the loss from non-payment, will actually receive this desperately needed assistance? And why did it take so long to provide relief for landlords?

If the city had solicited feedback from real estate professionals, these professionals would have told them without hesitation that the best way to help tenants who are behind on their rent, is to provide rental assistance and relief for the tenant, directly to the landlord. Providing rental relief directly to the landlords, early on and from the very beginning, would have been the most efficient, impactful, mutually beneficial, and successful application of aid to assist tenants, and landlords, simultaneously, and equally.

All this brings me to the intentional, triple entendre in the title of this piece. DC landlord’s loss of revenue, their loss of protection, and their loss of options. And it was exactly these three things that my client Shirley expressed to me in her desperate state back in September of 2020 when I spoke with her. The STAY DC program has begun distributing funds for rent assistance, and when I recently spoke with Shirly, she told me that she applied for, and very recently received funds from the STAY DC program for her back rent. She also expressed that she was grateful for the program and the assistance, but says that she still loss more than she got back. “Especially emotionally,” she said.

Being a landlord in Washington, DC pre-covid was already a challenging endeavor. And the new challenges brought about by the covid-19 pandemic and the DC Council’s response to it pushed many landlords to or over the edge, forcing them to significantly increase their expenses to adapt, to sell their investment properties to minimize loss and liability, if they were able to, and/or seriously consider selling. At least two of my former clients came close to abandoning their homes.

Is it Still Worth It?

All this has been an education and eye-opening experience for DC Landlords.

But let’s end here on a positive note. Despite the challenges that many DC Landlords had to endure over the last 18 months, I’ve received several inquiries from clients and customers asking me “is it even still worth it to be a landlord in Washington, DC?” And while the answer to this question will depend primarily on one’s personal and/or professional goals, from an investment perspective, and given the right investment property, my answer remains an unequivocal yes. Real estate investment has excellent historical returns, excellent appreciation, has a low barrier to entry (meaning it is less difficult and not as expensive to buy real estate for investment), is an excellent investment for the workforce population, and is one of the best ways for the average individual to create and accumulate wealth. So many people have, and continue to do exactly this. Covid has not and will not change the characteristics of real estate in this regard because there will always be a need, demand actually, for suitable rental housing. That’s what makes the landlord-tenant industry so unique, special and important.

Real estate is still exciting, fun, rewarding, and a formidable investment vehicle for growth, income and success.

By

Ty Harris