AS COVID-19 FORCES BUSINESS CLOSURES, SIOR TENANT ADVISORY STEPS UP
As the Coronavirus continues to wreak havoc on the world’s population and the global economy, the commercial real estate industry faces its most daunting challenges since the Great Recession. One of the most pressing issues for CRE professionals is the ripple effect occurring as companies leasing commercial space can no longer pay their rent. Not only will landlords be unable to meet mortgage obligations, but repercussions will be felt throughout the entire real estate financial structure.
With the announcement by the Trump administration that the voluntary national shutdown would be extended until April 30 to slow the spread of the virus, restaurants, non-essential retail, and many other industries already crippled by the pandemic are unable to generate income to pay employees or rent. Although the need for rent relief solutions vary by tenant, the prevailing wisdom from the SIOR brokerage community is to encourage tenants to seek rent abatements for 90 days, with payback distributed throughout the length of the lease.
“At our firm we are actively negotiating resolutions to lease and purchase issues as a result of the coronavirus, as well as preparing for loan modifications or workouts, which will be the next phase for our clients,” says Louis Archambault, SIOR, partner and commercial real estate attorney for the Miami office of Saul Ewing Arnstein & Lehr, LLP. “These are on a case-by-case basis, but the easiest negotiation is to abate rent for 2-3 months and add it on to the end of the term for a lease, or to extend a closing date 60-90 days for a purchase.”
Saul Ewing is adhering to the guidance provided by David Zimmer, SIOR, and his partners, who are extending the same to their tenants. Zimmer is principal of Newmark Grubb Zimmer in Kansas City, Mo., a brokerage firm that operates ten million square feet of industrial and office buildings as well as a retail center. Qualified tenants—not in default or with past due accounts—will be offered abatement on base rent for the months of April, May and June, and beginning July 1 can repay the rent—interest free—over the remaining term of their lease. Tenants also have the option to extend their lease for 12 months, with the abatement spread out over the amended lease. For Zimmer, it’s not only the right thing to do, it also makes good business sense.
“Whether the tenant repays [the abatement] over the remaining term of the lease or takes advantage of extending the term, it provides us with a benefit, because it affords us longer occupancy in our buildings without having to go to the market, renegotiate a lease, or face a vacancy,” says Zimmer. “I’m all about cash flow, about keeping my buildings occupied—not facing a vacancy, and having to retrofit a building and spend money on tenant improvements. As long as your building stays occupied, you avoid those expenditures.”
To read the full SIOR Thought Leadership piece, click here.