advice from the CRE brokerage community
This article originally appeared in the Denver Business Journal | May 1, 2020
As the coronavirus continues to wreak havoc on the world’s population and the global economy, the commercial real estate industry faces its greatest challenge since the Great Recession. One of the most pressing issues for CRE professionals is the ripple effect being felt as businesses leasing commercial space are often unable to pay their rent. Not only will some landlords be unable to meet mortgage obligations, but repercussions will be felt throughout the entire real estate financial structure.
Although the need for rent relief solutions vary by tenant, the members of the Society of Industrial and Office Realtors (SIOR) brokerage community are encouraging 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, an SIOR member and partner and commercial real estate attorney for the Miami office of Saul Ewing Arnstein & Lehr, LLP.
Why landlords want to negotiate with tenants
David Zimmer, an SIOR member, and his partners are working closely with their tenants. Zimmer is principal of Newmark Grubb Zimmer in Kansas City, MO, a brokerage firm that manages 10 million square feet of industrial and office buildings as well as a retail center. Qualified tenants have been 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.
Zimmer says, it’s the right thing to do, and it makes good business sense.
“Whether the tenant repays over the remaining term of the lease or extends 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.”
“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.”
Because Zimmer carries little debt on his properties, he is in a “fortunate” position with regards to his ability to offer rent abatements, unlike many of his counterparts that are more heavily leveraged. However, there are still lender obligations, taxes, insurance premiums, common area maintenance (CAM) charges, utilities and vendors that still need to be paid. “So even if I abate rent for tenants, I still have financial obligations that I need to meet.”
With financial responsibilities in mind, Zimmer is evaluating some lease modification requests with a degree of skepticism. While his local retail and small business tenants are struggling to remain afloat, there are some more resilient professional services businesses he feels are seeking to “game the system,” given the extraordinary circumstances.
His skepticism is well-founded, as some tenants, particularly national chains, have opted to withhold or reduce rental payments. National restaurant chain Cheesecake Factory, sandwich maker Subway and retailer Mattress Firm all announced early that they would suspend or reduce payments to property owners.
However, tenants may have difficulty getting out from under their obligations, according to Archambault, particularly those seeking to curtail paying rent through force majeure. “The force majeure provisions, for the most part, are more about landlord protection than the tenant’s ability to pay rent,” he opines. “When the issues related to the pandemic inevitably hit the courts, our current expectation is the courts will hold that if a contract or statute does not specifically provide an issue is covered by the language of the respective contract or statute, the court will not broaden the language provided.”
Mark Duclos, president of Sentry Commercial in Hartford and SIOR president, says his clients – tenants, landlords, lenders – understand that they’re all part of the same food chain, and if one link is broken, it’s going to affect the entirety of the chain. “So landlords understand that if they absolutely crush the tenant, then they lose the tenant and the ability to pay their mortgage,” says Duclos. “We also understand that this is a short-term crisis. It may seem long-term now, but we’re hoping that by say, late summer, this all clears out. And the response of the landlords and lenders can greatly reduce the effects of the pandemic while maximizing and accelerating the recovery.”