How Commercial Landlords Can Work with Tenants Impacted by Coronavirus
Coronavirus has impacted nearly every business in the world, and commercial landlords are no exception.
As Coronavirus continues to spread throughout the country, our government is taking drastic measures in order to prevent a significant loss of life.
Bars have been forced to close their doors, restaurants have shifted to carry-out, and limitations have been placed on the amount of individuals that may gather at any given location.
Now, Nashville’s Mayor, John Cooper, has issued a “Safer at Home” order.
This order mandated the closures of any non-essential businesses, which has put an economic strain on not only small businesses, but also national corporations.
With little to no revenue coming through the doors, business owners are finding it tough to cover their expenses, and that includes rent.
Now, more than ever, it’s important for commercial property owners to work alongside their tenants.
Where Do A City-Wide Lockdowns Leave Commercial Property Owners?
But those checks haven’t found their way into the bank accounts of commercial tenants, yet.
Fear of the spread of the virus and government orders to remain self-quarantined have led to a strange stall of our economy.
This halt has massively impacted the hospitality, retail, and entertainment industries, but quickly moved on to manufacturing and professional services.
Facing expenses without revenue, these businesses are laying off and furloughing employees in record numbers with economists estimating at least 1.5 million unemployment applications last week, alone.
The Government Lends a Hand
Fortunately, the government is moving as quickly as it can to provide a crutch to our nation’s business owners.
Soon, most adult citizens will be receiving a government check to help cover their expenses.
Federal student loan payments are on pause and taxes have been delayed in unparalleled fashion.
The PPP and EIDL also seem to be a boon for business owners struggling to retain staff and cover operating expenses.
Many business owners are doing what they can quickly in order to halt the bleeding, but some expenses, such as mortgages and rent, continue on regardless of our economic environment.
So, where does this leave commercial landlords who are also concerned about their expenses?
Remember That We’re All Going Through This Crisis Together
Your tenants are just as worried about covering their expenses as you are.
Both tenants and commercial landlords are going to have to fight through the next few months together.
If you decide to play hardball and won’t work with your tenant, there’s a very real chance that they will be forced to close permanently.
I think we can all agree that allowing a good tenant, who made an attempt in good faith to work with you as their landlord, is the worst case scenario for you both.
Not only would their closure leave your property and (probably) you personally in an undesirable situation, you likely won’t be able to refill that space until far after this epidemic has passed.
Think about it: hardly any businesses are trying to open new locations at the moment.
And there’s a good chance that no only will it take a while for the commercial leasing market to really recover from Coronavirus, but there will also be higher vacancy properties with landlords desperate to fill them.
It is in your and your tenant’s best interest to work together.
Communicate Early, Communicate Frequently
My partners and I own several office buildings around Nashville and my property management company, Parasol Management, handles close to 100,000 square feet of commercial real estate.
With that much space, comes quite a few tenants. And they’re mostly small business owners.
If you’re anything like us, over the last two weeks you’ve been receiving phone calls and emails from those tenants asking how you’re going to handle their rent payments if their business is shuttered.
While our current situation likely won’t be an issue for some of your tenants, I highly recommend that you have a contingency plan in place for a worst-case scenario.
If you feel that your tenants may have issues paying their expenses over the next few months, it would be nice of you to reach out to them and open up the conversation.
If they haven’t done so already, it could be because they’re afraid of how you’re going to act.
I highly recommend a phone call or in-person meeting rather than emails.
It’s very easy to disconnect emotionally from an email or misinterpret written communication.
As always, follow up with an email memorializing what you agreed upon in the meeting.
Take the issue head on and work through potential scenarios with your tenants.
Something to Keep in Mind
Your tenant is likely in a point of economic distress.
This business - their livelihood - has come to a complete halt within a matter of weeks.
Emotionally, its a very challenging time for them.
In times of such high tension, it can be very easy for individuals to get angry and blow up the conversation.
It’s best to enter this conversation with a level head.
Our goal here is to make sure that while your tenant may not be able to afford 100% of their typical monthly payments, that they still pay you something.
However, if they’re unable to do that, we’ve offered a scenario for that case, as well.
Before You Approach Your Tenants
Before you reach out to your tenants, you should refresh yourself on the lease that you have place.
Leases are the governing documents between tenants and commercial landlords, so anything you plan to discuss may already be covered by the lease (though, in case of Coronavirus, highly unlikely).
Some items for commercial property owners to keep in mind:
Is this lease personally guaranteed by one or more of the owners of the business? If so, you as the landlord will certainly have more leverage here.
Does your tenant have any renewal terms, exclusives, or atypical terms that they negotiated for on the front end? If so, you may want to use these as leverage and take them back.
Do your loan documents have any financial covenants regarding rent concessions? If so, you may want to discuss any of the following scenarios with your lender ahead of time.
Potential Renegotiation Options
I’ve ordered these in terms of priority and likelihood of success with the best-case scenario being number one.
1. Offer A Partial Rent Abatement
A partial rent abatement is, in my opinion, the best-case for both the tenant and the landlord.
You as the property owner still collect some rent to cover your expenses while your tenant gets a reduction on their overall obligation.
In this scenario, you could offer to collect only a portion their rent for a set period of time - likely the next 30-60 days until the pandemic is expected to end.
So, instead of collecting 100% of your rent, offer 25%-50% off from their monthly rent for the next three months.
If you give a tenant 50% off their rent for two months, that’s essentially a free month of rent, but you still may be able to cover your expenses.
My recommendation here is to then add on more months to the back end of their lease, thereby increasing their original term.
And don’t feel like you only have to add the one month back on - add what you’d like to see.
We have landlords that are offering up to an 85% discount on rent for two months, but they’re adding 4-6 additional months on the end of the lease.
This situation is ideal for any commercial property owner because yes, you are having to cut some losses now, but you’re adding value on at the back end with little up front cost.
If you’re confident that your tenant’s business will recover, that discount is pennies in the long-run and could help create some solid tenant loyalty.
2. Help Them Sublease a Portion of Their Space
There are many small businesses out there that don’t need or can’t afford their own space.
Helping your tenant sublease a portion of their property could be a wonderful option for you both - they monetize underutilized space and you continue collecting rent.
In a sublease, the landlord allows the tenant to lease a portion of their space to a third-party.
This sublease doesn’t cancel the lease that you already have in place with the tenant and it must adhere to all the rules and regulations of your current lease agreement.
Your tenant could offer up an office, a desk, or storage to these small businesses and entrepreneurs in need for the next few months to help them cover their bills.
Of course, you’ll want to vet the sublessee just like you would any regular tenant.
And be sure to remind your tenant that their sublessee has to adhere to the Uses clause in the lease agreement.
3. Offer Total Rent Abatement
Total rent abatement is a fairly drastic measure, but if you’ve exhausted other options, it may be your only choice.
This scenario should come in to play if you’re financially strong enough to withstand a few months without rent and you’re afraid of your tenant’s potential insolvency.
Collecting no rent is certainly not a good sign for your tenant’s business health.
Sure, we’re all weathering this together, but if they can’t even afford to cover one or two month’s rent - especially if you’ve offered partial abatement - then your tenant may be toast anyway.
However, if you do have a good enough relationship with and trust your commercial tenants, this path could be the right one for you to take.
If you’re going to make such a generous offer to help your tenant in the short-term, you should be compensated for the risk you’re taking.
Adding additional term on to the end of the lease, raising rent, or negotiating out any exclusives are all good ways for you to get something from the tenant in return.
4. Rent Deferral
A rent deferral is where you, as the landlord, give your tenant the option to not pay rent but they will have to make it up at a later date.
This scenario is just like what your lender will likely do with your mortgage payment.
While rent isn’t due at this moment, your tenant will still have to pay it back at some point. Whether that balloons in 2 months or 2 years.
Some landlords will prefer to amortize that cost out over the remaining term of the lease, and that may be the easiest to swallow for a tenant, but other landlords may require it to be due within the year.
Rent deferrals are a good option if your tenant absolutely cannot afford to pay any rent and you have a good hand to play here, considering your bank is likely requiring the same of you as the property owner.
5. Adhere to The Original Lease
This scenario should be the absolute, last ditch effort for any commercial property owner.
If the three scenarios above have not worked out and you cannot come to terms with your tenant, you’ll both have to fall back on the governing document: your original lease.
Since a global pandemic is not covered in Force Majeure clauses (at least none that I’ve seen), there may be nothing in their lease that prevents you from demanding rent payments as you normally would.
I always recommend to commercial landlords to consult your attorney about your lease before making any decisions here.
Continue on with business as usual for the foreseeable future. Again - communication is key here. This scenario is best if your business isn’t seeing any impact at the moment but could in the future. Depending on how your lease agreement is written, this is likely the safest route for you and your business to stay out of default of your lease agreement.
If you don’t have a landlord that is willing to work with you, they may take any opportunity they can to force you out - don’t give them a reason to do so.
Need to Ask Something Specifically Related to You and Your Situation?
Feel free to reach out to me directly.
I am happy to review your lease, have a conversation with you and/or your tenant to see if there’s anything we can do to help you during this time.
You should always have a team of professionals in your corner for scenarios like this one, so consult your commercial real estate broker, CPA, attorney, and lender to get a feel for what they’re seeing in the market, too.
About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville. Learn more at www.TylerCauble.com
As a commercial real estate investor, securing financing is a critical component of your journey to building a thriving portfolio. Among the various loan options available, DSCR (Debt Service Coverage Ratio) loans have emerged as a popular choice, particularly for investors seeking to finance investment properties or build a rental portfolio. However, understanding DSCR loan interest rates and how they are calculated is crucial for making informed decisions and maximizing your returns.