The moratorium on evictions during the pandemic could affect the business income losses and revenue projections for many landlords. (Photo: Diego M. Radzinschi/ALM)
The last year has seen significant impacts on nearly every industry's revenue, costs, and in many cases, viability due to the pandemic. It challenged the status quo of relying on historical revenues and trends to project the future. The future became quite uncertain and unpredictable.
By the beginning of 2021, however, many companies had found a new rhythm which, in turn, has restored some of the predictability. Or has it? The answer in many cases is no. In fact, it may have gotten more complex.
Let's dive into some of the key factors to be considered and evaluated when projecting future revenues for purposes of business income losses in today's environment.
Governmental orders
We have hopefully seen our last federally directed, nationwide shutdown arising from the COVID-19 pandemic. However, we are still seeing federal and local governmental orders that have noteworthy impacts on businesses both within and outside of their jurisdictions that need to be considered when evaluating future revenues for purposes of quantifying business income losses.
When evaluating business income losses during the pandemic, it is critical to understand how local governmental orders have changed throughout the pandemic and their impacts. Some observations from the early days of the pandemic will provide insight and a basis on which to evaluate future impacts.
For example, on August 12, 2021, the mayor of New Orleans issued an order requiring proof of vaccination or a negative PCR test for participants in activities with a higher risk of COVID transmission. These activities include indoor dining/bars, indoor gyms/fitness centers, indoor entertainment and large outdoor events. The order went into effect on Monday, August 16, 2021.
Hurricane Ida then caused widespread damage in the New Orleans area less than two weeks later. When evaluating business income losses within the mandated zone, due consideration will need to be given to any fluctuations observed as a result of this mandate. Did "high-risk" businesses see a change in customer behavior after this order was in place? What about similar businesses in neighboring cities? Did they see an increase for clientele that would have otherwise frequented a New Orleans business but decided to go elsewhere to avoid having to comply with the test or vaccination-proof mandate? What about businesses that are not considered "high risk" per se but are reliant on such businesses? Were they impacted? All these factors need to be considered when evaluating the business income losses of companies impacted by Hurricane Ida.
Additionally, many businesses are still recovering from the impact of previous orders which have subsequently ended. For example, on September 4, 2020, the CDC issued an order halting evictions for non-payment of rent. As a result of this moratorium, countless multi-family residences found themselves with large amounts of outstanding rent payables. Upon the expiration of the order, these properties, for the first time in over a year, have the opportunity to evict these non-paying residents. This could result in a significant turnover of tenants but also allow for higher revenues once the eviction and reletting process is completed. How long will the eviction process take? Will local governmental orders extend protections to tenants with remaining unpaid rents? These types of questions will need to be asked regarding claims of this nature.
Further, it is important to understand how governmental orders are received both locally and nationwide in terms of public perception to ensure appropriate considerations are made. Will the mask/test mandate in the city of New Orleans impact local tourism? If so, how? Will tourists feel increasingly more comfortable, or will they stray from the area to avoid the increased requirements?
Impacts on staffing
The United States has offered free COVID-19 vaccines to anyone wishing to obtain them. A sizable percentage of the eligible residents, however, have elected not to receive the vaccine for various reasons. In September, President Biden announced his six-pronged "Path out of the Pandemic" plan. Within the plan is a requirement compelling all employers with 100+ employees to ensure their employees are vaccinated or tested weekly. Recently, OSHA released a similar emergency temporary standard that will affect two-thirds of the private sector workforce. These mandates directly impact the percentage of the population that has intentionally chosen not to get vaccinated and could have a direct impact on staff availability upon implementation. Will these orders encourage more of the population to get vaccinated, or will they drive staff to smaller companies to avoid having to comply? How will any staffing shifts impact business operations and revenues?
Prior year considerations
Historically, we have relied upon prior year revenue trends to project future revenues, and while those from 2020 may be highly volatile, abnormal and impacted by a multitude of extraordinary factors, they can still be an important piece when evaluating future revenues. It is imperative when evaluating losses beyond 2020 to consider not only the current impacts from factors but also what they looked like in 2020. Furthermore, we need to consider prior year losses and how they affected revenues.
For example, Hurricane Ida impacted areas that were also in the path of Hurricane Laura in 2020. For the unfortunate businesses that found themselves affected by both storms, what can we learn from the Laura losses to help evaluate losses from Ida? Or did a business unaffected by Hurricane Laura's destruction see an increase in revenues due to evacuations of the impacted areas? If reviewed in a vacuum, that increase may appear to be due to seasonality or a large spike in recovery (back to pre-pandemic levels) but, in reality, it is driven by an extraordinary event. These considerations have always been necessary, but they are even more important to recognize when evaluating and projecting revenues in today's world.
Policy language
As with any business income loss, the forensic accountant will need to work with the adjusters and attorneys involved to determine whether potential adjustments are appropriate for the loss. These individuals will be able to provide insights into the specific policy language, applicable case law and which factors should or should not be incorporated into the calculation of a specific business income loss.
While there is not a one size fits all solution when it comes to evaluating pandemic revenues, forensic accountants must remain vigilant and flexible in an ever-changing world. Vigilance will enable us to thoroughly evaluate the revenues an insured would have earned but for the loss. Flexibility allows us to adapt our methodologies as needed to accommodate the variety of factors impacting the insured's business.
Jennifer Engle, CPA, CFE is a vice president in J.S. Held's forensic accounting practice. Contact her at jengle@jsheld.com.
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