Business from small to large, across the country, and in every sector have felt pain and turmoil throughout the coronavirus pandemic. Of course, retail and hospitality tenants were most severely affected, but office and multifamily did not go untouched. NAIOP research found few industrial tenants sought relief. For many of the businesses that were more deeply affected, it was only through rent deferral programs, forbearances or empathetic landlords they’ve made it this far. But as we approach the sixth month of lockdowns and social distancing restrictions, as well as a return of new cases in some states, it could mean the end of the line for many.
With government restrictions in place across many states, foreclosures are not yet possible resulting in a few cases where tenants may simply refuse to pay rent. Building owners must develop strategies to respond to these tenants, while maintaining their own financial obligations. NAIOP, a commercial real estate research association, released on the best way to open the door for conversations between landlords and tenants.
“Practices that owners developed in the first months of the pandemic are likely to remain useful until the coronavirus and its economic effects have abated,” stated Shawn Moura, director of research at NAIOP and author of the report.
Working with Tenants Who Need Help
Tenants about to enter negotiations with building owners should prepare financial records that support their claims and can prove the need for assistance. In the same way, owners need to carefully evaluate tenant financial health before offering accommodations.
Jonathan Kingsley, executive managing director of Office and Industrial Services at Colliers International was quoted in the NAIOP report saying “his team fielded relief requests from 47 office and industrial tenants from a range of industries in South Florida by the seventh week of quarantine, but roughly half of these dropped their requests when it became clear that owners required their financials, proof they had applied for PPP loans, and a detailed description of how the outbreak was affecting their businesses.”
Those that demonstrated a real need for help and proof of their willingness to repay when possible were able to move forward in negotiations. According to the report, rent deferral arrangement are more common than rent abatement in exchange for a lease extension, which was noted as a less appealing option to tenants. The report recommends owners document deferments in a lease modification or forbearance agreement, including a clause to make deferred rent and associated costs payable upon default.
“There is an advantage in proactively reaching out to tenants to let them know assistance is available,” the report stated. Brandon Bergman, president at 2000 Development said in the report that his firm developed a 15-point approach to working with tenants in response to COVID-19, centered on open communication and teamwork between tenant, landlord and lender.
Landlords also need to consider their lenders before offering tenants relief, as it may require mortgage deferrals or abatement.
“If owners need assistance from a lender, they should also be ready to review a loan’s covenants and other terms and seek flexibility where appropriate. For example, if meeting a loan’s minimum debt service coverage ratio requires that a borrower pay down a loan out of their own pocket, they should ask their lender to forgive any prepayment penalty that might apply,” according to the report.