The “closed” sign has been hanging in storefronts and businesses deemed “non-essential” for weeks. The COVID-19 pandemic has not only infected countless patients, but the economy as well. Though there is hope that the economic downturn will be brief, the national financial dip has wreaked havoc on customer foot traffic and bottom lines. Affected small businesses have reviewed their budgets, crossing key items off of their spending list. But while the businesses can scale back their purchase orders, limit staffing hours, and reduce service offerings, there is one item they have very little control over—rent.
If there was ever a time the landlords and tenants needed to address a few details outside of their lease renewal window, it is now. Tenants across the country are asking questions surrounding their lease and payment timelines. Landlords should be ready with a few answers that address both tenant needs and their building occupancy rates.
Four Ways to Handle Rent Relief Requests
Recessions have happened before. And whether a landlord is seasoned or facing tenant rent questions for the first time, it’s important that he or she makes the right decision per tenant situation. Here is a basic overview of the common ways landlords handle tenant rent relief:
- Rent Deferral: In rent deferral, the landlord can defer the rent payment for a given time frame. However, the tenant will still owe the payments for the period of time they were deferred. The tenants would eventually either pay all of the deferred rent at once, or in payments over time.
- Rent Abatement: In rent abatement, a landlord can choose to forgive a tenant’s outstanding rent payments as long as the tenant stays current with payments from then on.
- Loan Conversion: Loan conversion allows the landlord to convert outstanding rent into a loan at an agreed-upon interest rate, which is amortized over a term that is less than or equal to the remaining lease term. However, the tenant would still make their current rent payments in addition to the loan payments.
- Blend and Extend: Landlords can take this opportunity to agree to a reduced rate in return for a lease term extension, otherwise known as “blend and extend.”
COVID-19 has presented a unique challenge in that reviewing past financials or future budgets can be unhelpful due to the sudden economic shift. It is in both parties’ best interests to handle the relief requests professionally, without dismissing the obligations for both sides. During a time of such uncertainty, there is no one-size-fits-all solution. Each side must roll up their sleeves to find solutions that can sustain them both on a month-by-month basis until things become more certain.
Should Landlords Evict Non-Paying Tenants During Recession?
During a recession, commercial landlords face a catch-22. They either continue to host a non-paying tenant or they evict them and find a new tenant. The difficult truth is that a tenant who cannot pay rent during a recession may actually be the best option in the long run. That tenant may eventually be able to provide the landlord with cash flow faster than the time it would take to fill that vacancy with a new tenant.
For landlords with tight balance sheets, a temporary rent reduction may help provide some middle ground. In this case, tenants may be able to afford the reduced rent rate, supplying the landlord with a small, steady cash flow, helping them avoid a vacancy. While a lower payment isn’t ideal for the landlord, it is a better option than no rent during their search for a new tenant. However, there are a few important guidelines landlords should follow when reducing a tenant’s rent rate.
Due Diligence
Due diligence is a necessary step in landlord-tenant rent negotiations. Before rent rates are adjusted, the landlord should review the tenant’s financial statements and gross sales receipts for the current and prior years. Additionally, the landlord should review real estate taxes for properties comparable to theirs. They should also consider expenses for common areas and current asking rent rates.
Landlords should review current lease terms and adjust language where necessary. The new lease terms remain in place upon the condition that the tenant stays current on the rent payments they agree to. This measure protects the landlord if the tenant defaults. Commercial real estate advisors, such as HBRE medical real estate advisors, can help landlords review their leases and make necessary changes.
Whether facing a pandemic-induced recession, national economic downturn, or individual tenant financial hardship, landlords should be mindful of rent relief options. While an economic downturn is not the best foundation for any lease negotiation, decisions made during this time can have long-lasting impacts. These basic principles of rent relief can make all the difference in tenant loyalty during a recession.
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.
