Benjamin Pitts, Commercial Realtor, Herman Walldorf Commercial Real Estate
For the health and safety of our community in light of the COVID-19 pandemic, many businesses have limited operations or have shut down completely. Slowed or shut down businesses are experiencing serious cash flow issues, inhibiting their ability to pay rent and risking their existence. Cash flow issues for tenants quickly become cash flow issues for landlords. If tenants cannot pay rent, landlords cannot pay mortgages.
But working towards a manageable solution for both tenants and landlords is possible and will hopefully lead to a quicker recovery and rebound for both parties.
First, the relationship between tenant and landlord should be viewed as a partnership. The health and success of the tenant is critical to the landlord and vice versa. In the coming months, tenants may face a real threat of closing, and landlords may face a real threat of foreclosure. Both can be mitigated by landlords and tenants recognizing the need for cooperation. This partnership is fundamental to all other points and advice that follows.
Communicate now. Tenants, do not put off calling your landlord until you figure something out. Enlist their help in addressing any issues you might have now. Landlords, do not wait to hear from your tenants. Contact them now. Do not assume that they are failing nor that they are fine. And, continue to communicate throughout this period with a set check-in interval.
A rent relief plan can help tenants bridge the gap until receiving CARES Act funds if applicable or until social distancing is no longer required. Landlords can use rent relief to minimize tenant closures and resulting vacancies.
While both require agreement on amounts and timing, there are two fundamental elements to most rent relief plans: rent deferral and rent recapture.
In terms of rent deferral, this may be in whole or in part depending on the cash flow circumstances of the landlord and the tenant. Some landlords are deferring 100% of rent for a few months, or deferring a portion of rent for longer periods, like 50% for several months. An effective plan might also consider a reduction declining over time, for example, a three-phase plan deferring 100% of rent for the first phase, then 67% for the second and 33% for a third.
For rent recapture, most plans recapture rent either through increased payments for some defined period following deferral or through an extended lease term. For example, deferring 50% of rent for 6 months might mean increasing rent 125% for a year, or it might mean extending the lease term three or four months. Similarly, deferring 100% of the rent for three months might result in the same recapture options.
Landlords with multiple tenants may benefit from having a standard plan for all tenants, but a rigid standardized plan may not work for all. Tenants should do what they can to work within a landlord’s standardized framework. Likewise, landlords should do what they can to tailor standardized plans to meet the specific needs of tenants when necessary.
Neither tenants nor landlords want to have to negotiate every month until the pandemic is over. Develop a plan that will work beyond the end of social distancing protocols to a time when some normalcy has returned.
Finally, terms of rent relief should remain confidential between landlord and tenant, be consistent with the lease and put into writing.
As far as coronavirus is concerned, landlords and tenants are all in this together, and all going to experience financial stress. Both need to pay their employees, vendors and bankers just the same. Tenants pay with revenue from operations, and landlords pay with rent revenue from tenants. Working together can help both parties during this difficult time.
Please note tips above are not legal advice. Landlords and tenants should consult with their attorneys and let them know what they are trying to do and how.
Herman Walldorf Commercial Real Estate is one of Chattanooga’s oldest commercial real estate firms, offering innovative approaches for sales, leasing, and real estate consulting services to a range of businesses and professionals throughout the Chattanooga region for over 90 years.