Navigating Your Commercial Lease Through COVID-19
Watch the Video: Business Shut Down by Coronavirus? How to Lower Your Rent Now
Our country is navigating unprecedented territory at the moment.
Every day, we’re learning more and more about the spread of the Coronavirus and the drastic measures our government is taking into action in order to prevent our hospital system from becoming overloaded.
Among these measures are the mandated closures of bars, take-out only for restaurants, and limitations on the amount of individuals that may congregate at any given location.
If Nashville is shortly behind California and New York, we’ll soon be grappling with a city in lock-down, where every business is forced to close their doors.
Where Does A City-Wide Lockdown Leave Business Owners?
Our government officials are working around the clock to halt the spread of COVID-19 and have announced initiatives to help Americans get through this tough economic period.
In coming weeks, it seems that every adult citizen will be receiving a check directly from the government to help with expenses - even federal student loans and taxes have been delayed in unparalleled fashion.
These incentives are wonderful, and I hope they help. But where does this leave entrepreneurs and businesses that are also struggling to keep their doors open?
Fear of the spread of the virus and government orders to remain self-quarantined have led to a near halt in business - first affecting the hospitality and entertainment industries, but quickly moving on 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 this week, alone.
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.
How can business owners help mitigate these costs at the moment?
Remember That We’re All in This Crisis Together
You’re not the only one worried about how business will be impacted by the shutdowns.
Your landlord is, too.
For better or worse, we’re going to have to fight through the next few months together.
The worst case scenario for both you and your landlord is your having to shut your doors and default on your agreement. Not only will that leave your business and you personally in an undesirable situation, after we recover from this downturn, the landlord will still have a vacant space.
Think about it: if you are forced to close your location right now, there likely aren’t any tenants that could backfill your suite.
It is in your and your landlord’s best interest to work together.
Communicate Early, Communicate Frequently
My partners and I own several office buildings and my management company, Parasol Property Management, handles a portfolio of around 100,000 square feet of commercial space.
With that much space, comes quite a few tenants - mostly small business owners.
Over the last week, we’ve been receiving phone calls and emails from those tenants asking how we’re going to handle lease payments for the foreseeable future.
While the economic crisis likely won’t an issue for majority of them, we certainly prefer to have a contingency plan in place for a worst-case scenario.
If you know that over the next couple of months you are going to have an issue paying any of your expenses, notify your landlord well before it becomes an issue.
I would recommend a phone call or in-person meeting rather than emails, as it’s very easy to disconnect emotionally from an email or misinterpret written communication.
Take the issue head on and work through potential scenarios with your landlord.
What You Should Keep in Mind, First
Your landlord is likely in the same position you are with respect to economic distress.
Many real estate owners in East Nashville (and Greater Nashville, for that matter) are entrepreneurs and investors, just like you.
The overwhelming majority of our clients only own one or two commercial properties - and it’s often their life savings and retirement plan.
Missing one, two, or three mortgage payments could trigger a foreclosure with their bank where they could lose everything they’ve earned, so paying no rent is likely not an option.
After all - if a landlord wanted to collect zero rent, they could just evict you.
While you may not be able to afford 100% of your monthly payments, anything is better than nothing.
Review Your Lease
As always, you should review your lease prior to any communication.
After all, your lease will govern how these types of situations are to be handled if you have a Force Majeure clause.
Depending on how your lease is structured, you may have a rent abatement clause that could help kick in a period of free rent for your business considering the circumstances.
You may need to get your attorney involved, too.
Potential Renegotiation Options
1. Maintain The Status Quo
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.
2. Discuss A Partial Rent Abatement
If your business is already being impacted or it’s imminent, requesting a partial rent abatement for a set period of time could be a good option for you. For example, instead of paying 100% of your rent, request to pay 50%-75% of your rent for the next three months. While asking for half off your rent at the moment is certainly aggressive, it couldn’t hurt to ask and open the conversation. Remember - any rent concession at the moment could help keep your business afloat.
My recommendation here is to “give” a bit, too, and not just “take.”
Offer to pay the landlord the difference back over a certain time period - you could even throw a carrot of 6% to 8%+ interest in order for them to do so. If you know your business will recover, that interest is pennies in the long-run and could help incentivize your landlord to accept your offer.
3. Sublease A Portion of Your Space
There are many businesses in the East Nashville, Germantown, and North Nashville areas looking for a temporary home after the tornado.
You could offer up an office, a desk, or storage to these neighbors in need for the next few months to help you cover your bills. Not a bad way to network, either!
Of course, you’ll want to get the green light from your landlord first. In my experience, landlords do not mind your subleasing the space, so long as the business is similar to your use (don’t sublease your accounting office to a plastic manufacturer) and the rent gets paid on time.
4. Rent Deferral
A rent deferral is where your landlord gives you the option to not pay your rent temporarily, but you will have to make it up at a later date.
This scenario is just like what your landlord’s lender will likely do with your their mortgage payment.
While rent isn’t due right this moment, you 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 for you as a tenant, but other landlords may require it to be due within the year.
Rent deferrals are a good option if you absolutely cannot afford to pay any rent but you want to remain in good standing with your landlord.
5. Request Total Rent Abatement
This scenario should be your last ditch effort if the three scenarios above have not worked out.
A landlord will see this as potential insolvency on behalf of your business, meaning you likely won’t be able to recover after this crisis and pay them back.
However, if you do have a good enough relationship with your landlord, this abatement is certainly an option.
Taking this option will certainly require quite a bit of trust between you and your landlord, if they’re able to support the building financially, and they’ll want those missed months added back into the lease.
For example, if you’re requesting the next three months of rent to be abated, offer to have it tacked on to the tail end of your lease at a slightly higher (3-5%) rate. That way, the landlord will still get the full term of the lease plus a return on their time value of money.
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
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