Tensions are high as budgets tighten. The COVID-19 pandemic has strained the economy, and every industry has been impacted in one way or another. With the substantial increase in telehealth visits, online shopping, and other virtual events, “business as usual” has changed entirely. As a result, business owners carry much uncertainty about how to handle commercial property and lease negotiations.
Before any business makes a decision regarding their commercial real estate (CRE) assets, we highly recommend that they speak with a CRE advisor. While the pandemic has created plenty of new variables, economic downturns come and go in cycles. An experienced advisor can thoroughly and skillfully review the physical building, the needs of the business, and the terms of the existing lease. Their expertise provides tenants and (or) landlords with the direction that best fits their business or medical practice.
For those who are sifting through their business financials and making decisions about lease negotiations, here are a few frequently asked questions and answers.
1. What should a tenant do if they cannot pay their rent?
Communication is always the best place to start. Tenants and landlords need to have an open conversation about rent relief. In some cases, landlords can provide rent relief to their tenants. In order to do so, landlords may also require several documents from their tenants. But rent relief requests should be handled on a case-by-case basis.
2. Should a landlord opt out of tenant rent relief and choose to find a new tenant?
Vacancies are never convenient. And while a tenant who cannot pay rent seems costly, deferred rent is better than none at all. Filling a vacancy is often a lengthy process. A vacancy could result in a higher profit loss over a longer period of time than a tenant with rent deferral. However, landlords should still engage in due diligence before entering a new or temporary agreement regarding rent relief. Landlords should do a thorough review of past and projected tenant financials, and should discuss four of the ways they could adjust rent.
3. Should a tenant renew their lease during the pandemic?
There is not a simple yes or no answer for whether a business should renew a lease. Pandemic or not, renewing a lease involves careful planning. A tenant and their commercial advisor should begin reviewing the lease at least one year in advance. The market and the needs of tenants change over time. Tenants or landlords may need to adjust the details of the current lease to better reflect those needs. And, in the case of medical practices, sometimes the tenant requires tenant improvements (TI), which a tenant can request during the negotiations. The lease terms, fees, and even the square footage may also need to change before a tenant renews the lease.
In addition to the typical lease adjustments, the pandemic has raised concern for both tenants and landlords. Each market has felt the effects differently, so lease negotiations will not be the same for all industries or cities. Retail is a prime example, as some companies have faced lawsuits for rent issues, and others have chosen sale-leasebacks to help reduce their debt. Depending on the financial health of the business or medical practice, tenancy and lease renewal strategies will vary.
Like almost every industry, CRE will function a bit differently in the post-pandemic market. We’ve addressed this topic in our recent blog, 3 Ways to Handle Commercial Real Estate Differently After COVID-19. For more resources on the landlord-tenant relationship, how to handle rent relief, or even how COVID-19 is changing building design, visit the “News” tab of HBRE.us.
If you are interested in learning more about investing in commercial real estate, or if you have questions about buying, selling, or leasing a commercial property, please contact an HBRE advisor. Our team of experienced CRE professionals have the skills and insight to assist with all property transactions. To reach out to us directly, email [email protected] or call 615-564-4133.
