As the coronavirus pandemic continues to rattle the global financial and real estate markets, commercial real estate owners are faced with a multitude of issues both short-term, while stay-at-home orders remain in place, and long-term, once the economy slowly reopens and owners struggle to forecast how great the ripples from the unprecedented COVID-19 disruption will be felt. Unlike the daily COVID-19 case updates we receive on the news, there’s no daily count of lost businesses. However, there have been reports of unpaid April rent around the country, along with accounts of how landlords and tenants are dealing with the sudden collapse of a significant portion of the American economy.
- Multi-family rents collected in April were at approximately 92%-96%
- Office rents collected in April were at approximately 90%
- Retail rents collected in April were at approximately 15%-30%
Many in the industry are forecasting that May will bring an even greater decrease in the percentage of rents collected in each of these sectors. In many cases, to survive in the long-term, commercial landlords are being forced to negotiate with tenants to provide short-term rental relief. Some of the most common rent relief structures we have seen are:
- Rent deferral: Rent payments, or a portion of those payments, are postponed for a period of time. Once the deferral period is over, landlords are employing a “blend and extend” repayment structure whereby the deferred rents are paid back by extending the term of the lease by a corresponding number of months and/or spreading repayment of deferred rent over a period of several months of the remaining term in addition to regular monthly rent payments. Some landlords are requiring tenants to exercise their renewal options early as part of an agreement on rent deferral.
- Rent abatement/reduction: While less common than rent deferral, some landlords are suspending or reducing rents for a period of time or, in the case of reduction, even the remainder of lease term.
- Security deposits: Some landlords are allowing tenants to tap into security deposits to cover rent, requiring a tenant to replenish their deposit down the road or, in the case of a longstanding tenant, treating it as a burn off.
Real estate owners/landlords negotiating short-term relief with their tenants need to consider a multitude of factors, including:
- Making sure that they have adequately vetted the ongoing viability of the tenant and structured the relief in such a way that they are not facing “rent relief 2.0” three or six months later (or worse, belly-up tenants).
- Making sure their tenants are asking for relief as a last resort, rather than a first by ensuring tenants are availing themselves of any federal, state, or local financial assistance available to them.
- Most importantly, making sure their lender is involved in the discussion and, ultimately, consents to the terms of the relief negotiated.
These considerations highlight the need for commercial real estate owners to carefully consider the ramifications of any short-term relief they negotiate with their tenants and the importance of seeking the counsel of experienced and trusted legal advisors to ensure they move forward in the best way possible to protect their long-term interests as we all move past the COVID-19 crisis.