Millions of retailers and other businesses around the world are just trying to keep their heads above water due to the downturn of sales in light of the current pandemic. For many of these, because they are closed down until the situation is considered under control, rent is an expense that is seemingly unnecessary. Managing the cost of rent may even be the difference between surviving the crisis or not.
Thanks to the CARES Act, many retailers have been able to apply for forgivable loans as long as the funds they receive are used to pay for certain expenses. However, the government requires that businesses use 60 percent of the funds for their payroll leaving a mere 40 percent available for operating expenses. What does that mean? There simply isn’t enough money left over after paying other expenses to cover the cost of the rent as well.
Who Is and Isn’t Paying Rent
Many commercial leases include negative covenants which prevent a tenant from closing down, or going dark, for an extended period of time. However, due to the pandemic, that is exactly what is happening all over the world. Tenants are also required to comply with all government laws, which includes any government restrictions such as stay-at-home orders.
A force majeure clause is also often included in commercial leases which protects both parties from some obligations that are a result of situations that are out of their control such as strikes, wars, and, in this case, pandemics.
As COVID-19 makes its mark all over the world, retail tenants are being forced to seek exceptions for their rent, while their landlords are trying to keep on top of their own cashflow. Landlords often need the consent of a third-party before they can enter into concession agreements for rent.
Datex Property Solutions recently released data that showed that only 53 percent of nationwide tenants paid their rent costs for the month of April compared to 87 percent in March. Retail tenants without a national footprint have struggled even more. Some 81 percent of those tenants had paid their rent in March, but only 47 percent had paid in April.
How big of a burden rent can be on a retailer depends on the cost structure of each specific retailer. For some retailers it can be upwards of 10 to 11 percent of their sales, but for bigger department stores it may be as little as 1.5 percent.
The dilemma that most retailers and landlords is facing is that if the landlord doesn’t collect their rent, they can’t pay their mortgage. Then the bank that the landlord works with takes a financial hit, followed by investors. What starts out as one issue quickly leads to a much bigger crisis.
Retail and Renter Protections
While the CARES Act doesn’t offer specific protections for commercial renters the way it does for residential renters, some states and cities have extended protection. New York, for example, has offered protection for both commercial and residential tenants until August 20th. The state has also banned missed payment and late fees.
There are nine states where renters are not offered any protection by statewide eviction moratoriums, but even if they are protected for a period of time, what happens when that moratorium ends?
Ultimately, the stay orders are nothing more than stopgap measures, which means that it is likely that we will see a mass filing of evictions. However, many landlords know that finding a new tenant in the middle of a pandemic isn’t going to be easy. They know they are better off trying to keep their tenants in hopes that tides will turn sooner than later.
This is why many landlords are considering other options besides going to court such as rent abatements, rent deductions, or even rent deferrals. These creative solutions may vary by renter, but with these options it is likely the best way to allow the tenant to continue to generate cash flow to produce at least a partial rent payment that will benefit the landlord.
Working with Your Landlord
If your business is in survival mode, most experts recommend trying to work with your landlord rather than just stop making payments. Try to understand their point of view and realize that there are a variety of types of investors when it comes to business spaces. When considering negotiations with your landlord consider these points:
- Think Long-Term – While there may be options that will help you today, you still need to take into consideration how it could impact you long-term. Is it a good option to extend the terms of your lease? Will reducing your costs impact your working capital or credit? Be sure that you know how your negotiations will impact your business both now and in the future.
- Share the Rewards and Risks – Consider offering your landlord some type of financial incentive if they allow you to waive or delay your current obligations. This could include an profit-sharing arrangement or interest on deferred rent.
- Be an Entrepreneur – Think like someone just starting their business, even if you have been established a while. Startups are often cash poor but have a lot of potential for future revenue. This arrangement may include paying your landlord in equity, a share of ownership assets, or even intellectual property rights.
- Know Your Game – Landlords are often forced to follow lease agreements down to the letter due to other contractual obligations. If this applies to your landlord, you may not be able to stop legal proceedings. However, many courthouses are closed, so enforcing legal proceedings may not be easy. This means that the value of the “best alternative to negotiated agreement” has been reduced for the landlord. Speak to an attorney about how this can work to your advantage and how you may be able to consider alternatives to a legal proceeding in this situation.
Regardless of whether your landlord can or cannot work with you, talk to them about any difficulties that you are facing. Negotiations and open communication will help establish the risk and reward that both parties are facing.