NAVIGATING THROUGH THE MARKET FALLOUT OF COVID-19

We have made some interesting observations during the last several market downturns. In our current state of uncertainty, these observations may be helpful for commercial tenants to navigate through the unexpected changes we are all experiencing.

1) Some businesses find that whatever real estate they had before a crisis will not be the real estate they need after it.

2) Rates drop partly due to the long-term nature of leases (5 years +/-) so rate adjustments often lag the “real” economy by 12-18 months.

3) “Blend and extend” arrangements that reduce space or monthly rental, but increase the overall obligation with a longer term may be beneficial to both landlords and tenants.

4) If you need to sublet excess space, don’t wait until the market is flooded with competition. Do it early, price it right, and get it off the books.

5) If a firm needs to raise capital for operations, a “sale-leaseback” may be a great option if its real estate is owned.

6) Construction will be impacted by both labor and supply issues. Planned projects may need to hold over or do short term extensions to manage through expected delays.

The current situation brings up several specific points to consider:

1) Outside the pending stimulus proposals and SBA loan programs, some governments may stop commercial evictions.

2) Force Majeure (“Act of God”) clauses may provide grounds for some tenants to temporarily suspend rent obligations but many Force Majeure clauses are too generalized to cover this kind of unprecedented event. Typically, rent will only abate if there is a fire or other casualty like a storm that results in the physical space no longer being usable for a period of time.

3) Business Interruption Insurance, which is called for in many commercial leases, may cover losses and pay for rent. Some even have a Civil Authority clause that could apply to government-imposed closures like those we have seen recently. The only certain remedy is to have “rent interruption insurance”.

4) There has been some talk in the commercial real estate world for an agreed-upon moratorium. This could mean a 30-60-day freeze on rent and mortgage payments.

Luckily, if you are in a difficult situation and need to free up cash, there may be some hope to get rent relief. Likewise, if you are in a good situation, a few months from now could be an ideal time to renegotiate. let’s allow landlords to focus on those tenants who need immediate help first. Keep in mind that the fallout from this and the oil markets could result in a tenant’s market later this year.

Each case will be addressed on an individual basis because every tenant, landlord, and lender situation is different. Here are the primary potential solutions:

1) Renegotiate and extend the lease term in exchange for a lower rental rate, reduced square footage, or both.

2) Abate or reduce your monthly rental without an extension, but pay it back at a later date.

3) Sublease or assign a portion of your space to a new company, almost certainly at a loss.

4) Negotiate a buy-out equal to a percentage of the remaining rental obligation.

5) Default on your lease.

Best wishes to you, your families, and your business teams during this interesting time.

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