As the COVID-19 outbreak continues, requiring millions of people to shelter in place, having safe and secure housing is more important than ever. More than 40 million Americans are doing so in apartment homes. In addition to the health threats posed by the virus, many of them are finding their jobs and financial health in jeopardy as jurisdictions move to limit exposure through shutdowns of nonessential businesses.
A record 3.3 million workers applied for unemployment benefits in late March. Given the numbers, the apartment industry is expecting that a good number of residents will be affected by furloughs or job loss. Last week, Congress passed a massive $2 trillion relief package that provides a major expansion of unemployment assistance, payroll support for small businesses and even direct recovery rebates to qualifying households. (Click for the full list of benefits.) These benefits create a broad safety net, allowing many financially affected by COVID-19 to preserve their incomes in totality in the near term.
While this is a positive development, there could be a temporary dislocation while that aid works its way into communities. Moreover, it’s difficult to determine how long before COVID-19 can be abated, allowing workers, businesses and local economies to resume operations. Concerned by these possibilities—and further troubled by the growing number of residents who recently opted to turn off auto payment options, something many believe could be a negative foreshadowing—many apartment operators are looking at additional ways to provide payment relief to their residents. Chief among them is a move to more flexible payment options.
These alternative payment platforms are largely viewed as a short-term strategy to help residents and firms better weather the COVID-19 crisis, but necessity could prove the mother of invention in a world where flexibility and personalization are valued.
A Variety of Models
Last week, NMHC published a set of recommended principles for apartment firms to provide much-needed support for residents and stem a potential cascade of financial hardship. Key recommendations include putting a temporary halt on rent increases; waiving late fees; sharing government and community resources for food, financial assistance and healthcare; and creating flexible payment plans.
With April 1 rent payments rapidly approaching and little clarity around how many residents will be affected by furloughs or job loss, most apartment firms are bracing for an uptick in late payments and skips for April and likely even bigger jumps for May and possibly June.
To help minimize the payment burdens for residents struggling from COVID-19, many firms are looking at flexible payment plans as a good strategy to provide not only financial relief for residents but create a pathway for them to ultimately stay in their homes. The programs can take a wide variety of forms, but we commonly see the programs falling into these main categories:
- Shorter payment schedules.
The industry standard has long been that rent is due on the first of every month. However, the reality is that many residents are self-employed, gig-economy workers or hourly employees, making them particularly vulnerable to economic contraction like we are seeing today. Many apartment firms are recognizing that it may be helpful to better match payment schedules to income flows, allowing people to pay, for example, twice a month rather than once. This allows households to better manage their expenses relative to income.
Some companies are managing this change in house. They are readying their teams for more regular intake, moving residents to online payments or direct deposit to help facilitate the transactions and setting up ad hoc reporting mechanisms to handle the change. Others are looking to third-party providers to help residents determine the best payment schedule and manage the process and paying a fee for the service.
- Deferred payments.
Recognizing that these trying economic times may provide relatively short lived should the spread of the virus be halted quickly, some firms are working with residents on rent deferment plans. Details vary, but the basic model is that firms are offering residents a near-term rent discount (often a heavy discount or zero payment) that lasts a set period of time (typically 30, 60 or 90 days). The deferred rent amount is then parsed out as additional rent to be paid monthly later in the lease. Many are also seeing this as an attractive renewal strategy, often doing things like offering a few months free rent in the short term as an incentive to renew and then adding in the deferred payments to the monthly rent in the last six months or so of the lease.
Details of this type of plan can vary widely, but operators are seeing it as an attractive strategy for helping people through what some expect could be a temporary market dislocation. Deferred payments can provide residents with an immediate but temporary rent reprieve while allowing them to remain in their unit and providing an avenue for the operator to recoup revenue when the economy (hopefully) recovers.
- Security deposit conversions.
Traditionally, renters have secured their leases with a deposit. These deposit amounts can range—sometimes they are determined by credit worthiness and sometimes it’s a flat one-month rent, for example. Given the market challenges today, some firms are allowing residents who are in good standing to convert their deposit accounts into payment accounts, allowing them the option of accessing those funds for full or partial rent payment.
- Incentivizing on-time payments.
Acknowledging that residents may be cash strapped in this economic environment and may have to make difficult choices on what bills to pay, some firms are offering qualifying residents a discount—either a flat discount or a percentage reduction—for those who continue to pay their rent on time.
- Credit card payments.
While many apartment operators have long resisted accepting credit card payments because of the associated transaction fees charged by the major card companies, for some firms, that’s changing in light of COVID-19. Operators report that they are now not only allowing for card payments but, in many cases, absorbing the fees in an effort to give more renters payment options.
These may be the main flex payment models that we see emerging in the market, but this list is not exhaustive. Apartment operators are becoming increasingly responsive to their residents’ financial needs and developing unique plans to responsibly reduce rent burdens.
That said, operators need to put parameters in place to make sure they are protected from fraudulent behavior. At a minimum, most apartment operators are asking residents to provide documentation such as a letter from their employer stating they have been terminated, laid off or hours reduced as a result of the COVID-19 pandemic. Preferably, the letter should be on company letterhead with the residents’ supervisor’s or human resource director’s contact information. If the resident is self-employed, most firms request a copy of the first page of their current or prior year tax return or alternative documentation showing occupation as self-employed.
While many interactions are happening via phone and video chat, many firms are requiring residents sign a written agreement that outlines clear expectations for both resident and operator. An agreement may include the exact time period that the rent flexibility applies, the documentation required to be approved and confirmation that the other lease terms continue to apply, including the obligation to timely pay utilities, future months’ rent and other charges when they come due according to the lease, among other things.
To provide further guidance, many firms are working directly with legal counsel to ensure adherence to lease terms; compliance with applicable laws and regulations; and to protect their rights if the resident violates the terms. There are also emerging concerns that providing different solutions for different renters may trigger Fair Housing compliance issues, so legal counsel is recommended.
New Rules for a New Time
We are in unchartered territory when it comes to the potential effect the evolving economic situation may have on today’s apartment renters. We applaud the companies that are getting out ahead of what is likely to be a devastating jobs picture over the next quarter or more and thinking about alternative payment options that might work for their residents.
Our traditional leasing structure has been inflexible for far too long. One-month security deposits, 12-month lease terms and once-a-month payment schedules no longer reflect the reality of today’s renters’ incomes. More people continue to be self-employed, contract or hourly workers or working on the gig economy, often making their income streams inconsistent or lumpy, as they say. More flexible rent payment options may get us through COVID-19-related near-term challenges, but it very well could also set the stage for a major shift in rent payment models going forward.