Armanino Blog
How the Affordable Housing Industry Can Manage the Business Disruption of COVID-19
April 22, 2020

Due to the COVID-19 pandemic, the affordable housing industry is facing an unprecedented and unpredictable operating challenge. Social distancing measures, government-ordered business closures, and evolving federal and state relief programs have created a maze of decisions for management teams to navigate on a daily basis.

Affordable housing entities can better manage this disruption by examining their operations to understand how interruptions can affect the projects, tenants, lenders, investors, employees, vendors and overall affordable housing market.

Below are recommendations in five key areas to help you plan and manage the impact from the current situation.

Protect the Balance Sheet

In challenging economic conditions, your first focal point should be on protecting the balance sheet. Consider these measures:

  • Update your cash flow projections — You need to know what will happen under different conditions. Build different scenarios now through the end of 2021 incorporating various assumptions, e.g. collection of 100% rent, 75% rent and 50% rent, and increase and decrease in impacted expense items.
  • Intensify the focus on cash flows — Accelerate rent collections by providing incentive for early payment, accepting partial payments or setting up payment plans with tenants. Keep track of subsidy payments. If there are delays in subsidy payments, initiate proactive communication and follow-up to accelerate the pace of subsidy collections.
  • Prudently manage your accounts payable — Prioritize your vendor payments and delay payments where possible. Ask for discounts or set-up payment plans without impairing your operations in the short term. Be opportunistic; it is very likely that your key material suppliers and other vendors are also exploring ways to speed up their cash collections.
  • Explore other methods of managing cash flow — Consider pushing off 2020 distributions to related parties resulting from surplus cash distributions and other related party transactions. Communicate with the general partner, the limited partner and other related parties to request deferral of distributions to 2021 or 2022. Reach out to your lenders and the limited partner and request deferral of the monthly deposits to the replacement reserve for 60 to 90 days. Review provisions of the Operating Deficit Guaranty and evaluate if operating deficits can be funded by the Operating Deficit Guaranty funds.
  • Take advantage of government relief measures — According to the Department of Housing and Urban Development COVID-19 FAQs for Public Housing Agencies, the CARES Act provides that a Public Housing Authority (PHA) can use existing capital funds and operating funds flexibly until December 31, 2020. PHAs will be able to use these funds for “other expenses related to preventing, preparing for and responding to coronavirus, including activities to support or maintain the health and safety of assisted individuals, families and activities to support education and childcare for impacted families”. In addition, the Department of Housing and Community Development (HCD) Guidance on COVID-19 State of Emergency Hardship requests and Status of Monitoring and Compliance Functions also allows use of HCD-controlled operating reserve accounts to pay reasonable required operating expenses. Also, HCD will extend the due date for residual receipt payments to HCD until July 15, 2020.
  • Seek additional state and federal funding — The CARES Act has allocated $12.4 billion in funding for housing and homelessness funding including: $5 billion for Community Development Block Grants; $4 billion for Homeless Assistance Grants; $1.25 billion for Tenant Based Rental Assistance; $1 billion for Project Based Rental Assistance; $685 million for Public Housing Operating Costs; $50 million for Section 202 Housing for the Elderly; and $15 million for Section 811 Housing for Persons with Disabilities.

Manage Operating Costs

  • Dive into your largest operating expense categories, such as payroll, maintenance and insurance. Conduct an in-depth analysis to arrive at cost cutting and revised budgets. Consider communicating with the regulatory agencies as they may have approved these costs as part of the original budget approval.
  • Cutting payroll costs can be one of the most difficult areas to make the right decisions for your organization. Consider various methods such as workforce reductions, temporary wage reductions and furloughs. Evaluate the pros and cons of each option, keeping in mind a goal of retaining valued employees and eliminating poor performers.
  • In management or developer entities, consider SBA loans to support expenses related to payroll, utilities and rent. The SBA has two loan programs to help businesses impacted by COVID-19: the Economic Injury Disaster Loan (EIDL) program and the Paycheck Protection Program (PPP) (click here for more information).
  • Renegotiate security, maintenance and janitorial contracts where possible. Consider setting up payment plans or ask for a discount. Negotiations should be conducted without impairing your operations in the short term.
  • Evaluate your current insurance deductibles and coverages and see whether there is an opportunity to reduce premiums while maintaining adequate coverage. This should include all major policy types, such as workers compensation, general liability and project insurance.

Monitor Development of Projects Underway

  • For new projects underway, if significant hard or soft costs are expected to increase or construction loan interest is expected to increase resulting in the need for additional debt or equity, communicate this to your lenders and investors in advance to avoid last minute surprises.
  • For rehabilitation projects underway, especially senior-assisted living projects, there may be some delays resulting from social distancing to protect the health of seniors. This may lead to timing delays and in turn additional costs which can result in additional debt and/or equity.

Manage Bank Relationships

Maintaining a strong and collaborative relationship with your bank and lenders through COVID-19 challenges is critical.

  • Update your cash flow projections, consider upcoming debt service requirements and evaluate your ability to stay current on these obligations including debt covenants. Inform your bank in a timely manner if there are anticipated shortfalls and engage them to find solutions during these tough times by renegotiating terms or obtaining extensions or waivers.
  • Take advantage of low interest rates and consider refinancing debt and renegotiating pre-payment penalties.
  • Consider additional lines of credit to maintain liquidity and cash flow.

Monitor IT Security

  • Set guidelines for employee use of home and work computers for conducting work activity. Leverage security tools like multifactor authentication and virtual desktop solutions to mitigate risks. Prohibit or limit users’ ability to download sensitive data.
  • Implement an external email banner and conduct and implement SPAM/PHISHING training to ward off attacks.
  • There is increased risk of fraud due to fake electronic invoices. When conducting wire transfers verify wire transfers/routing numbers via phone.
  • Invest in cybersecurity insurance. If there is a ransomware attack and substantial data is lost, then cybersecurity insurance may cover costs of data recovery.
  • Consider conducting a cybersecurity risk assessment to help you map your current security posture, define your security goals and identify and manage your risks. Click here for more information.

Other COVID-19 Best Practices

  • Adopt and implement an emergency protocol plan/business continuity plan to address the COVID-19 situation and future emergencies
  • Limit office hours and have a sign-up sheet where tenants can schedule face-to-face meetings instead of walk-ins
  • Prioritize safety of residents by following social distancing and performing additional cleaning
  • Create an online application system or a drop box where potential applicants can pick-up/drop-off an application and tenants can pay rent and submit repairs and maintenance requests
  • Prioritize work orders to emergency or critical repairs only
  • Notify tenants that non-essential work orders will be delayed until after the shelter-in-place and stay-at-home restrictions have been lifted
  • Create a separate, secured guest WiFi to allow children to participate in online/distance learning; seniors to minimize effects of social distancing by connecting with friends and family via social sites, teleconferencing and emails; and supportive housing tenants to access resources like medical records and job search sites.

For the latest regulatory changes and other information on keeping your organization running through disruption, visit our COVID-19 Resource Center.

April 22, 2020

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