How Tenants & Landlords Can Try to Navigate COVID-19

As the COVID-19 pandemic continues, numerous businesses have shut their doors for good. Yelp’s Local Economic Impact Report from June 25, 2020, states that there have been nearly 140,000 business closures recorded on Yelp since March 1, 2020. Unfortunately, 41 percent of those businesses have permanently closed.

The highest closure rates come from retail, restaurant, beauty and fitness industries. In the month of March alone, the National Restaurant Association reported that 3 percent of restaurant operators had to close permanently.

Many national tenants, like Starbucks and H&M, have told commercial landlords that they won’t be making rent on time or at all over the next several months. Unlike national tenants, small businesses can’t just state that they won’t be paying the rent.

A Chain Reaction

Shelter in place orders, temporary closures of non-essential businesses, social distancing guidelines and worry for public health and safety have all contributed to a decrease in traffic for most small businesses.

With less traffic comes less profit, leaving many small business owners struggling to make rent. As more businesses ask for relief from their landlords to stay afloat, local landlords run the risk of bankruptcy as well.

Landlords face their own expenses—from personal living expenses to building maintenance, property taxes, and insurance. Some landlords may not be able to afford rent relief, nor are their lenders willing to provide relief. Mortgage covenants in loans could leave some landlords unable to modify leases, and insurance policies may require minimum occupancy levels.

What Landlords Can Offer Tenants

Is your small business struggling to make ends meet? Are your commercial tenants unable to pay rent? Landlords and tenants must work together to move forward. There are several options landlords can offer to tenants who can no longer afford rent due to the coronavirus. Of course, the lender has to have some input into these decisions made by the landlord, too.

Possible options for rent relief include but are not limited to:

  • Rent reduction. If a tenant can still pay a portion of the rent, reducing the required rent amount could be a temporary solution. The landlord may agree to reduce the tenant’s rent for a period of time or the remainder of the term. Tenants may be asked to waive provisions for expansion or use in exchange for the rent reduction.
  • Rent deferral. Tenants may need immediate relief. If that’s the case, a landlord can agree to defer the tenant’s rent. However, the tenant must pay the deferred rent back later as a lump sum, series of payments or by extending their lease. A landlord and tenant may reach an agreement where rent is deferred but the tenant must still pay fees, like Common Area Maintenance Fees (CAMs).
  • Rent abatement. With this option, the landlord forgives rent for a period of time as long as the tenant remains in the space. Though rent is forgiven, this may mean the tenant must add more months onto their current term or waive certain benefits in their current lease.
  • Short-term percentage rent agreement. Under this agreement, the tenant would pay monthly rent based on a percentage of his or her sales. A short-term percentage rent agreement would typically not be for the term of the lease, but it is an option.
  • Security deposit. Depending on its size, the security deposit could be applied to past due or current rent. Of course, if the tenant were to default in the future, the landlord would no longer have the deposit to pay for any damages.
  • Service. If the tenant’s business is service-related, the landlord could ask the tenant to provide a service at a discount in exchange for some form of rent relief.

How Tenants Can Respond to COVID-19

Tenants should reacquaint themselves with their leases, noting the expiration date, provisions, and what counts as defaulting on the lease. Business owners should also contact their current lenders and insurance company to keep them involved in any decisions.

Talk to Your Landlord

For those seeking rent relief, you need to discuss your current financial standing with your landlord. As you discuss a temporary agreement, keep in mind that your landlord wants to keep you as a tenant and the effects of the coronavirus place a strain on them as well.

Tenants should prepare the following as a part of their request:

  • Financial statements
  • Balance sheet
  • Possible concessions
  • Strategies for the future
  • Plans for best and worst case scenarios

Explore Other Resources

The Small Business Administration (SBA) is offering more assistance to business owners at this time. If you haven’t already, exploring SBA resources may help you pay some or all of your rent and expenses in the coming months.

  • Paycheck Protection Program (PPP). The SBA has resumed applications for the PPP, and the new deadline is August 8, 2020 as of the date of this article. The percentage of the loan that must go toward payroll in order to be forgiven has decreased. Small business owners are now required to use up to 60 percent of the amount toward payroll. The rest can be used for rent, utilities and other costs.
  • Economic Injury Disaster Loan (EIDL). The EIDL provides relief to businesses that are experiencing a temporary revenue loss. These loans can be used for operating expenses, employee health care benefits, debt payments and more.
  • Express Bridge Loan Pilot Program. If you currently have a relationship with an SBA lender, your small business may be eligible for a bridge loan. These provide immediate relief in an amount up to $25,000.

Do You Need Assistance?

Commercial One Brokers has helped our tenants and landlords in the Branson, MO area form temporary solutions for this unprecedented time. We don’t know what the future will bring, but we are more than willing to help in any way we can.

Contact us today to see how we can help you.

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