Most conversations with landlords, tenants and customers over the last couple of weeks have revolved around the impact of the COVID-19 Pandemic and its impacts on CRE. During the short term there are some best practices emerging and they are outlined below. Any long-term impacts are pure speculation at this point. The one consensus being that it will get worse before it gets better. As of this writing social distancing is extended until the end of April. This is massive, and there is no manual, but here are some strategies to keep it in perspective and look forward.
First things first. Take care of yourself, and your people. Be kind, be generous and be patient. You can replace real estate, not people. COVID-19, just like all previous pandemics, will pass.
Commercial Real Estate is the infrastructure for society, the fabric of our communities. It is the logistics chain for delivery of goods. The spaces where we go work. The places we shop, socialize, educate, worship and support each other and now those places are mostly closed. What should we do?
Proactive Communication. Landlords, Tenants, Lenders, Vendors and Customers must talk about the situation and work together on a solution. The most important thing here is to communicate!
What about RELIEF? There are as many solutions as there are situations. In the landlord – tenant relationship expect to see relief granted on a case by case basis. If you are an essential business (think Grocery Store) be prepared to show detailed records of your impact if you request relief. If you are a business which is partially open (think restaurant where the dining room is closed but offering drive-thru / delivery services) expect partial relief. Businesses required to close are the most likely to need and receive relief. Force Majeure, Doctrine of Frustration, Doctrine of Impossibility and other concepts are relevant, but are not part of our article here. With that in mind, this is not legal or tax advice. Check with your attorney and CPA to understand your situation.
- Exercise Caution: Be cautious to grant relief which would (or may) impair the recipient’s ability to receive relief from other sources. Specifically, with the $2 Trillion CARES Act. Many are taking the wait and see approach to better understand what is available.
- Business Interruption Insurance: This is a first line of defense. Talk to your agent and understand what your policy says. This could pay the mortgage, rent and possibly other expenses.
- Lease Amendments: Many landlords and tenants are discussing amendments. To the extent the Landlord can afford to, here are some basic restructures of base rents, reimbursable expenses, percentage rents and security deposits we are seeing.
- Base Rent: Relief can be as simple as a base rent abatement for the next month (or three) with an extension of the term at the end. It can also be amortized in some sort of payment plan over rest of the term or next year also known as a “Blend and Extend”.
- Reimbursable Expenses: These additional rents are based, generally, on the area occupied and used. Most often we see this required and not abated or deferred. In the situation where the tenant is required to close, they can be deferred along with base rent.
- Percentage Rent: This is tricky, especially if there is a large component of the overall rent paid as percentage rent. Closed stores do not generate percentage rent. Alternatively, if the tenant is able to open and generate sales some landlords will negotiate for percentage rent until the pandemic passes, then amortize any shortfall and adjust the term.
- Security Deposits: Some Security Deposits may be credited toward rent today and then replenished at a time in the future.
- Prove it: Be prepared to prove impact from the pandemic to your business. Sales volumes, days closed (especially if you are required to close) assistance requested.
- Plan it: Creating and sharing a plan on how you will emerge from this challenge including catching up any deferred amounts will go a long way in obtaining leniency.
The C.A.R.E.S. Act: This legislation provides emergency assistance for individuals and businesses impacted by COVID-19. There is a lot in this Bill. As it relates to CRE here are some of the highlights.
- Unemployment: Expansion and extension of benefits.
- Payroll taxes: Allows employers to delay payments.
- Small Business Relief: Programs focused on preventing layoffs and closures including cash-flow assistance for payroll.
- Large Corporations: Programs for Loans, Loan Guarantees and other investment vehicles to stabilize these companies.
Here are Links to Resources to Share:
- Rental Assistance and Mortgage Forbearance:
- SBA Disaster Loan Assistance
- IRS Tax Payment Extension
- Commercial Paper Funding Facility:
- FEMA Flood Insurance Renewal Extension:
- Coronavirus Aid, Relief, and Economic Security Act (CARES Act):
- “Alert: Key Commercial Real Estate Related Provisions in $2 Trillion Stimulus Deal.”
- Extension on 1031 Exchanges:
- Extension on Opportunity Zone Deadlines:
- “Coronavirus: A Guide for REALTORS®.”
There are lots of resources available. Spend this time to reassess your business. On the other side there will be winners and losers. In our next article we will dive into a Post COVID-19 retail landscape and what we could expect.
Your Carolina Retail Experts are healthy, working remotely, and available to help in any way.
Look UP, Look Forward!
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