COMMERCIAL LEASE WORKOUTS DURING THE PANDEMIC
Where once, landlords and tenants sat on the opposite sides of the table, they are now are navigating a common challenge. To that end, a recent Globe Street article by Les Shaver titled “Tactics to Try in Tenant-Landlord Negotiations” (https://rb.gy/o7yntt) explores ways landlords can work effectively with tenants to deal with external pressures faced by business owners today.
During this time, it would be easy for business owners and property owners to find the impossibility or frustration under these circumstances. But all hope is not lost, and we’ve all witnessed resilient people and businesses staying open despite enormous obstacles.
In my recent recap of the ACRE Mid-Year Review (https://www.ycd-law.com/post/the-association-of-commercial-real-estate-broker-s-acre-mid-year-review-of-sacramento-real-estate) we talked about how landlords realizing that there is not necessarily a better tenant waiting behind the current business owner who is struggling through the pandemic but is otherwise a steady operator. So, what can commercial property owners do to limit collateral damage and create win-win situations?
RENT ABATEMENTS AND TEMPORARY RENT DISCOUNTS
Current tenants may benefit from rent abatements during the pandemic. Rent abatement is an agreement where a landlord decides to waive rent during a specific period. Abatement often occurs at the beginning of a lease to induce a tenant to sign a contract.
If you are signing a new tenant, and you have agreed to an abatement, the preference should be to set the rent at the market and provide a temporary discount. The discount will ensure your property receives the proper valuation at financing with market rents reflected. Keep the discount finite in time to reflect the current market situation.
AVOID RENT REDUCTIONS
Rent Reduction serves the tenant’s purpose. However, it only lowers the market value of an owner’s rents (and overall property value) and cannot be quickly recouped without tenant turnover.
CAPTURE DISCOUNTS AS PROMISSORY NOTES
If you are considering giving a sizeable discount to your tenant, you may want to consider capturing all or part of that discount as a low-interest promissory note to ensure enforcement. If rent is converted to a promissory note then the lease should contain a cross-default provision – a default on the note constitutes a default under the lease.
LEASE MODIFICATIONS OPEN THE DOOR ON BOTH SIDES
If your tenant has requested additional concessions beyond, take the opportunity to claw back some of the original sweeteners made that provided additional or bonus value. For example, perhaps you can claw back extra office space, or require a personal guarantee in exchange for further concessions. If insurance is available to cover work business stoppage or other loss, require purchase with you named as additional insured. Or, you can always extend the lease term to add value to the property in terms of expected lease revenue.
In conclusion, while going through these options might feel like you have already lost, consider the opportunity cost of letting your “best” tenant fold. The next tenant you get might not be coming any time soon.