Dear Lease Management friends:
The impact of COVID on the Lease Management World has been extreme, to say the least. as a landlord & leasing agents have scrambled to respond and strategize over the state mandates around state and federal subsidies and eviction constraints, which are currently March 31, 2021 for any unlawful detainer/eviction activities. This COVID crisis continues to place a burden on landlords, as the majority of commercial leases are held by small businesses, without the wherewithal to survive lease payment freezes and have no real understanding of when the COVID impact on ‘normal’ business operations will subside. Many of the more visionary leaseholders are now proactively working with customers to incorporate deferred rent schedules, along with rent guarantees as part of an exercised lease extension, to the existing contract. Leaseholders are aligning these extensions with an SBA/PPP escrow account, to ensure deferred/future payments are secured.
What to do with COVID chaos?
As the COVID epidemic creates chaos and unforeseen challenges, landlords have recognized they now own a new responsibility – that being capital preservation. With current mandates around state and federal subsidies and eviction constraints, which are currently March 31, 2021 – how does a landlord protect themselves from eviction and or default, on an existing or modified lease agreement? The answer is visibility.
Do you know your tenant’s SBA amount? PPP? A lot of tenants have accepted these payments and loans, but are they fully committed to building their business back?
Discernment is required, and policies need to be built to protect the lease.
Simple ways to help increase visibility is to:
- Get a copy of the tenant’s SBA agreement, as part of the deferral/lease extension.
- Get a copy of the tenant’s PPP agreement, as part of the deferral/lease extension.
- Have tenant commit to monthly financial reporting, so that landlord has visibility into business performance.
While the COVID epidemic continues to create a complex and unchartered operating environment for both landlords and tenants, as both are trying to minimize business loss and economic impact. Due to this unique time in business history, there are no precedents for how to strategically align a lease with market ambiguity. This leaves both tenants and landlords in an uncomfortable position, as both are trying to work their leases to their own benefit – with tenants asking for rental forgiveness and deferred rent, while landlords seek to lock in contractually to stop the revenue bleeding.
The answer is knowledge. How many COVID-related addendums have been negotiated during this crisis? Most have little to no experience in this scenario. We recommend renegotiating your leases now while the commercial leasing market remains under a “sky of uncertainty”. Industry experts have advised renegotiating a shorter term with favorable terms until the COVID crisis is over. We recommend finding a trusted partner who is supporting its clients during these economic woes so you can begin lease renegotiations with a strong understanding of market conditions, and strategize potential concessions versus where to hold your position. The variable in all of this is capital, as if you own a property outright, you have a repayment schedule flexibility that others that are paying mortgages don’t have.
How long will this continue?
Although there is no silver bullet, the market’s return is still unknown, so building a lease that you are comfortable with is critical to meeting your financial objectives. In order to be comfortable, you need to understand what the boundaries are, in your given market – and the best way to do this is to talk to an expert so that you can build your lease with full visibility into where you can and can’t flex on your requirements.
Executing a lease modification during the COVID pandemic provides a new set of business concerns for both landlords and tenants – which must be considered before locking into a long term commercial lease. The benefit to the tenant is gaining financial flexibility by restructuring their rental obligations and secure additional operational runway. To secure a runway is vital to restoring business revenue back to pre-COVID levels. This flexibility creates an opportunity for tenants, especially those looking to increase their business for commercial sale, hence an opportunity they do not currently possess with their existing lease structure. The flip side is the tenants are locking into a rent obligation that may be significantly higher than what commercial real estate will be, post COVID. This may create a secondary negotiation, once the COVID transformation evolves into a ‘back to normal’ status, as tenants seek to survive in the post COVID economy. Landlords need to understand this potential challenge when building their lease modifications, and protect themselves with personal guarantees, collateral, and even consider taking a percent of business ownership. Tenants that do not have the strategic background to optimize their operational model or cut expenses in a timely or efficient manner will succumb to economic and landlord pressures.
Don’t be afraid to collaborate
It is in the best interest of both landlords and tenants to collaborate on a lease modification during these unprecedented times. The advice here is for both sides to clearly understand the worst-case scenario, which for the landlord is having a tenant falling short of a new agreement, as a result forcing a default. And, under current COVID moratoriums could extend the period through March 2021 without rental income. For the tenant, the worst case is locking into a rental obligation that exceeds their percentage rent cost model and prohibits profitability/sustainability in the new economy. The advice here is to understand worst-case from both perspectives, before locking into a lease modification.
Ken Royce * Leaseology Inc * Board of Directors
ABOUT Leaseology Inc|
Leaseology, Inc is a North America-based business advisory services firm committed to accelerated marketplace adoption of digital technology, financial management innovation, and business operations practice excellence. These core competencies apply to real estate and equipment portfolios.
