If you’re a real estate investor with rental properties you depend on monthly rental payments to cover the mortgage, taxes, repairs, and other costs. But what happens if the government says, nope, you can’t evict tenants who don’t pay because of the pandemic? And what happens if the courts later determine that the entire eviction moratorium is illegal?
This is where rental real estate is at this moment. Here’s what it could mean for real estate investors nationwide.
- How we got here
The federal eviction ban began last year with passage of the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The law essentially stopped evictions through late July for properties that involved financing associated with the VA, FHA, USDA, Fannie Mae, and Freddie Mac. In addition, state and local governments separately enacted eviction bans. A list of state moratoriums is available online from the Mortgage Bankers Association.
Later, in September, the Centers For Disease Control And Prevention (CDC) issued a “Temporary Halt in Residential Evictions.”
“In the context of a pandemic,” said the CDC, “eviction moratoria – like quarantine, isolation, and social distancing – can be an effective public health measure utilized to prevent the spread of communicable disease.”
Today, the CDC eviction ban has been extended until March 31st. Given that federal foreclosure moratoriums have generally been continued until June 30th there’s reason to believe that the CDC eviction ban will remain in effect past March.
- The eviction moratorium’s impact
The Consumer Financial Protection Bureau (CFPB) estimates that as of December 8.8 million tenant households were behind on their rent.
According to the CFPB, “nearly 10 percent of renters reported that they’re likely to be evicted in the next two months, with the rates highest among Black and Hispanic households.”
However, more than
two three months have passed since the end of December and an eviction crisis has simply not emerged.
But might there be an eviction cataclysm going forward? And what about property investors? How have eviction moratoriums impacted their interests?
- Real estate investors
In rough terms, there are about 83.3 million occupied single-family homes in the US that are occupied according to the Urban Institute. These properties are divided with 68.6 million owner-occupied units (82.3%) and 14.7 million renter-occupied units (17.7%).
The overwhelming majority of investor homes are owned by small investors, but there are large investors in the field. According to The Wall Street Journal, big players in the single home market include such firms as American Homes 4 Rent (53,000 units), Invitation Homes Inc. (79,000 units), and Tricon Residential Inc. (22,000 US units).
RealtyTrac estimates that 90% of all real estate rentals are owned by mom-and-pop investors with 10 or fewer properties.
“Because of marketplace realities the impact of eviction moratoriums falls largely on small investors,” said Rick Sharga, RealtyTrac‘s Executive Vice President, “while eviction rules allow tenants to discontinue monthly payments, property owners remain obligated to pay ongoing costs for taxes, repairs, management, and other expenses. Some may be able to defer monthly mortgage payments by obtaining a mortgage forbearance agreement with lenders, however unpaid mortgage debt is still owed.”
- Are eviction moratoriums legal?
It should come as little surprise that governments at all levels are doing what they can to limit the pandemic’s impact. However, such actions must be within the constitutional framework and on that point, says Judge J. Campbell Barker of the U.S. District Court for the Eastern District of Texas, the CDC eviction moratorium is flat-out unconstitutional.
Barker, a 2019 Trump appointee, explains the issue this way in Terkel v CDC,
During the Great Depression 27 states enacted foreclosure moratoriums. The Supreme Court, in the 1934 Blaisdell case, ruled that the state of Minnesota had the right to suspend foreclosures.
But, the federal government is not a state.
“The question here,” said Judge Barker, “is whether a nationwide moratorium on evicting specified tenants is within the limited powers that our Constitution grants to the federal government, namely, its authority to legislate as necessary and proper to regulate commerce among the several States.
“The federal government cannot say that it has ever before invoked its power over interstate commerce to impose a residential eviction moratorium. It did not do so during the deadly Spanish Flu pandemic. Nor did it invoke such a power during the exigencies of the Great Depression. The federal government has not claimed such a power at any point during our Nation’s history until last year.”
- Barker questions
Barker ruled that the CDC rule was unconstitutional, however he did not issue an injunction stopping the program. The federal government is appealing and no doubt there will be an effort to seek an injunction based on the Barker decision.
The result is that the Barker ruling is likely headed to the Supreme Court, a possibility that raises several questions.
- Why is the CDC moratorium income-based? It only applies to tenants who expect to earn no more than $99,000 in 2021 (or no more than $198,000 if filing a joint tax return), were not required to report any 2020 income to the IRS, or received a stimulus check. The CDC does not explain how COVID-19 infections are limited to individuals on the basis of income; it does not provide an economic shelter for landlords who earn less than $99,000 (or $198,000 if filing a joint return); and it does not explain why the “right” income cut-off is $99,000 and not another number.
- Will the Supreme Court overturn the Blaisdell decision? The Minnesota case is now 87 years old. Can it stand with a modern court in place?
- Do landlords have protection under the Fifth Amendment’s Taking Clause, the requirement that the federal government cannot acquire private property “without just compensation.” In other words, is a landlord’s monthly rental check “private property” under the Taking Clause?
Will the Supreme Court support the Barker ruling or reject it? The Oracle of Delphi, in its best moments, couldn’t predict this one. The ultimate result will not be known for several years.
- Will property investors be compensated for lost rent?
Regardless of what happens with Barker it’s likely that a significant amount of lost rent – but not all of it for all investors – can be recouped by landlords. For instance, the $900 billion COVID-19 stimulus package passed in December included $25 billion to pay rent and utility bills. The $1.9 trillion 2021 COVID-19 relief package includes an additional $30 billion for rental relief.
But what about suing tenants for unpaid rent once the moratoriums end? You may find that recovery efforts are impacted by new state rules. For instance, in California, according to the Orange County Register, “landlords can receive 80% of back rent due between April 1, 2020 and March 31, 2021. Landlords must agree to waive the remaining 20% of the debt and not seek eviction. Landlords refusing to waive their right to evict may collect 25% of back rent.”
To avoid surprises in your jurisdiction, speak with a knowledgeable attorney for the latest details and information before undertaking any action.