As a result of COVID-19, the Province of Ontario has closed all non-essential businesses, effective March 24, 2020. While every industry has been profoundly impacted by efforts to help “flatten the curve” and contain the virus spread, real estate has taken a significant hit. These businesses are seeking ways to manage this crisis, limit financial losses and understand what relief, if any, is possible.
Crowe Soberman works with many clients in the real estate industry including brokers, commercial and multi-residential real estate owners, investors, developers, design-build companies and finance providers. Below, we have outlined immediate measures these businesses have been able to take in order to address the impact of COVID-19 from financial and operational perspectives.
Brokerages and real estate agents
Brokerages and real estate agents have been deemed essential services; however, there have been key changes to the way they must operate and there is uncertainty how the market will perform as the pandemic evolves. According to the Toronto Regional Real Estate Board, home sales were down 69 per cent in the first 17 days of April compared with a year ago. Many buyers have decided to hold off on purchases amid uncertain economic conditions. As well, experts are predicting a drop in residential selling prices due to factors including higher unemployment and the slowdown in tourism, which in turn impacts short-term rental business. Despite the market uncertainty, there are still those who need to buy or sell right now, for various reasons. Industrious agents have had to quickly pivot to providing services virtually rather than relying on traditional open houses.
Fortunately, many brokerages and real estate agents may be able to qualify for federal government incentives including the Canada Emergency Wage Subsidy (CEWS), Temporary Wage Subsidy for Employers (TWSFE), Canada’s Emergency Response Benefit (CERB), and Canada Emergency Business Account (CEBA).
Real estate development
Real estate development during the COVID-19 pandemic has obviously become more complex since revenue is project based and profit is earned at project completion. Public show rooms have closed, and economic instability has slowed down new investment, and in some cases existing investors are pulling out of projects. Unfortunately, real estate developers are feeling more pain as the government programs for which they are eligible are limited. However, most real estate development projects will continue to receive financing through the major banks.
Property management companies and landlords
Property management companies and landlords, whether multi-residential, commercial or industrial, have had their struggles. While many landlords received rental payments for April 1, there are indications that collecting rents for May 1 will be a much greater challenge. For the most part, we have witnessed landlords and tenants showing a sense of empathy and community by working with one another. For example, we have seen landlords with multi-residential properties proactively offering to defer rent for one or two months for those in need, creating rent assistance programs or providing other allowances to help tenants get through a tough period. Some larger commercial landlords have announced temporary rent deferral for small businesses or independent businesses. Particularly in the case of commercial and industrial landlords, they recognize the need to work with tenants to help cover costs rather than be trapped in a situation where they have vacant properties over the longer term.
However, the key thing to remember for both tenants and landlords is that a lease is a legal document, and both have rights and obligations to fulfill under it. A tenant cannot simply stop paying rent citing COVID-19. If a tenant has financial difficulties, they should proactively start a dialogue with their landlord and work together. And keep in mind that a rent deferral is not rent forgiveness.
To encourage rent flexibility between commercial landlords and tenants, Prime Minister Justin Trudeau announced a much-anticipated commercial rent relief initiative for small businesses affected by COVID-19 on April 24. In partnership with the provinces and territories (which have jurisdiction over the rental market), commercial rent will be lowered by 75 per cent for eligible small business tenants who pay less than $50,000 in gross rent per month; and have temporarily ceased operations; or have experienced a 70 per cent drop in pre-coronavirus revenues. (This amount is determined by comparing revenues in April, May or June to the same month in 2019. Alternatively, the amount can be calculated by comparing average revenues for January and February of 2020.)
The Canada Emergency Commercial Rent Assistance (CECRA) will provide forgivable loans to qualifying commercial property owners, covering 50 per cent of monthly rent for April, May and June. Effectively, commercial property owners will receive 75 per cent of their pre-coronavirus rental revenues for April, May and June – 50 per cent funded by the government in the way of these forgivable loans and 25 per cent received directly from the tenant. The federal Canada Mortgage and Housing Corporation (CMHC) will administer and deliver the CECRA.
If a property owner does not have a mortgage secured by a commercial rental property, the property owner should contact CMHC to discuss program options, which may include applying funds against other forms of debt facilities or fixed cost payment obligations (e.g. utilities).
More information from the CECRA announcements is included here. Additional details from the federal government are expected in the coming weeks, along with information about rent support for large organizations.
For landlords concerned with how COVID-19 will impact their ability to preserve cash or even pay their mortgage, a six-month mortgage deferral program offered in partnership with Canadian banks, the federal government and the Canadian Mortgage and Housing Corporation has provided some temporary relief. There is concern over how such deferred funds will be paid back at the end of the pandemic. Banks are also continuing to accrue interest on the mortgages.
Deferral of municipal tax and utilities
The deferral of municipal taxes and utility payments for property owners and commercial landlords have also provided some additional assistance during this uncertain period. As an example, on March 16, the City of Toronto implemented at 60-day grace period for property tax payments and payment penalties. The City has also extended the due date for utility bills issues by an additional 60 days to give utility customers additional time to take advantage of the early payment discount. Depending on the municipality in Ontario, there are different arrangements for property tax or bill payment relief. It is important to check with your municipality to see if and what measures might be available.
Finally, these businesses should seek guidance on whether their insurance coverage addresses financial losses as a result of COVID-19. Some commercial property policies may address business interruption caused by disease outbreak. See COVID-19: Business Interruption Claims for more information.
How Can Crowe Soberman Support You?
In these uncertain times, it is essential to remain agile and proactive as the COVID-19 situation unfolds. Having timely access to financial experts, insights and news as quickly as possible is critical—and that’s where we can help.
We have established a dedicated COVID-19 Resource Hub, highlighting areas of business operations that will likely be impacted by coronavirus. Whether you need to discuss your current financial situation and learn what options are available to you, or you want to be guided through the appropriate cash flow management strategies for your business, our team of experts are ready to help you at every step of the way. Please do not hesitate to reach out to your Crowe Soberman professionals for support during these challenging times.
We are in this together.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.