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News, April 27, 2020

Rent Moratoriums: Impact on Pension Fund Investors

COVID-19 has resulted in the unfortunate economic winddown of many businesses as our society seeks to protect itself through voluntary and involuntary shelter-in-place orders. No one is immune from the economic fallout from this slowdown in the economy. Those most affected are small business owners that represent over 80% of the workers of our country, and the resulting loss of jobs in every sector, with retail, restaurants, hospitality, and tourism feeling the greatest impact, is profound.  

While we hope that the Federal government, in discussion with representatives of major U.S. industries including real estate, will create operable programs to help these small business owners and their workers, there will be stress in the system for some time, since support programs are slow to show results and will not have an immediate positive impact on the worker and/or the economy.

Unfortunately, many of the “talking heads” and columnists proposing solutions to the impact of the imposed shutdowns are suggesting a government mandated cessation of rent payments by tenants to their landlords. This is usually coupled with the comment that such a solution would shift the loss to the landlords, who they assert are “large corporations and companies” with strong balance sheets that can absorb those losses and can work with their lenders to restructure debt more easily than small business owners.

Nothing could be further from the truth. Most commercial real estate in the United States is owned by institutional investors, such as pension funds and publicly traded REITs, which are owned by individuals. Pension funds have beneficiaries -- working people, who may be out of jobs and retirees who rely on monthly payments they receive from their pension funds to survive. Many individual investors own REITs directly or indirectly in their brokerage accounts, 401(K) plans, and IRAs. 

The idea that, somehow, those who own investment funds that invest in real estate assets such as office, retail, multifamily and industrial assets, which each of us work in, shop at, or live in, have “deep pockets” and somehow not harmed by the cessation of rent payments is false, and perpetuates the myth companies are somehow different from the shareholders. 

It is our responsibility to debunk this myth and emphasize that mandated cessation of rent payments will directly affect the pension funds and individuals who have entrusted their capital to us. Just as small business owners suffer from loss of the income in their business, our investors, everyday Americans, will also suffer.  

The financial instability caused by the COVID-19 outbreak is a burden we all should share collectively. Rather than point fingers and try to single out those who should bear the load, those who expect institutional investment managers and other real estate professionals to pay the bill should consider who will ultimately suffer from the course of action – individual investors, retirees, and, perhaps, even their own families.

While we hope we can move through the COVID-19 crisis rapidly and that government programs will move quickly to help support those who are most affected, we need to be mindful there are many out there, including investors, who are going to be hurt because of the combined impact of job losses and losses in their retirement and investment portfolios.  

We should impress on our legislators the importance of facing the challenges and taking action in an effective and equitable way so that the burden is not borne by one group versus another.  

We have a shared responsibility for each other so that together we can move through these difficult times and emerge a stronger and healthier community.

Stanley L. Iezman
Chairman and CEO
siezman@aracapital.com

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