As real estate investors we all have projects at various phases in the pipeline. Projects that are completed, those that are in construction, and those that are still under contract.
The impact of the current global circumstance on each of these will be different. It’s clear that the scope of the economic impact is going to extend beyond a few months. Governments are only now starting to come to terms with this stark reality and setting more realistic expectations with the general public. For example, the City of Toronto told its residents to expect another 12 weeks of lockdown.
At this stage we are focusing on only two things.
Protecting our investors and ensuring that our existing projects remain healthy
Ensuring that our family remains safe and our household well supplied for the long haul.
For many of us, the focus has shifted to the basics of human living. That means making sure you are maintaining focus on keeping your family safe. Trips to the grocery store that in December were taken for granted, now are a process involving risk and immediate detox as soon as you leave the store. Nearly nothing is as it was.
We have responsibilities to our investors, to our stakeholders, to our partners and to our families.
You response to the current market conditions will very widely depending on your circumstance.
If you are a landlord, you’re concerned with whether tenants will pay rent on the first of the month. Many jurisdictions have put a moratorium on evictions which creates the incentive in many people’s minds that they no longer need to pay rent.
Even some tenants who are receiving unemployment benefits may choose to capitalize on the moratorium on evictions and not pay their rent.
Our vacation rental business in the Rockie Mountains is currently 100% vacant. Our lender has offered a 3 month mortgage payment holiday. We have also brought additional capital into the business to further protect the business from possible collapse. At this stage we have about 7 months of cash reserves. That may not be enough and we may have to do even more to ultimately protect the business and our investors capital.
So far today we had are down about $6,000 in retail rent collections compared with last month, but we don’t have a full report. We’re completely sympathetic to the plight of businesses that have been forced to close due to the pandemic.
The fact is, very few retail clients will pay rent. This will become a huge issue for commercial landlords in the coming months. Eventually this will cascade and become a huge issue for commercial lenders. Banks are getting a bailout package, but many commercial buildings have non-bank lenders including private lenders, insurance companies, and commercial mortgage backed security lenders.
Deal sponsors who have tried to close deals in the past two weeks have reported that lenders have pulled out in some cases. In other cases, they’ve changed the terms of the deal and asked for substantial additional cash reserves. One investor I spoke with yesterday had a deal fall apart when the lender required and additional $750,000 in capital at the closing table. These stories are becoming routine.
If you have a closing coming up, now is the time to seek extensions from the other side. You can expect that there will be delays and that the delays will be extensive. These negotiations require a recognition by the parties that a third party that is not part of the transaction is the cause of the delay. Then there is the entire question of what valuations will look like when the market emerges from this pandemic. I expect that many more deals will get canceled or renegotiated.
For the time being, in our business we’re focusing on execution of projects, protecting our projects and by extension our investors, and taking care of our families.
