by Steve Lamb
Commercial property owners and managers are finding themselves between tenants with little to no funds and banks demanding payment on their loans, while many business owners are caught between their lease payments and the survival of their businesses.
In the past, this kind of challenge for landlords and tenants was something that might happen once a year and was easily addressed either with an extension or a new tenant. And for business owners, there were loans to bridge small gaps in cash flow. But in the age of COVID-19, what was the exception is now the norm. And what was potentially a short-term problem in April, is now looking like an ongoing problem through June and potentially into the summer. The current economic strain is not like anything any of us have experienced or planned for. And it is putting business owners and landlords in a unique position where they have an opportunity to work together for the betterment of both.
As a business owner, preparing and discussing a plan with your landlord or property manager can assist you in protecting your business and theirs. Reviewing your current situation and developing a plan tailored to your speciï¬c situation can make a huge difference in how you survive now and into the future. Here are some steps you can take:
Have you applied for an SBA EIDL and/or PPP loan? These loans are meant to protect you in the short term so you can recover quickly. And protecting your cash reserves is the key to success. In preparation, you may want to review your historical financials compared to your current financials and see what the impact is on your gross revenues and your net profits. Lastly, look to see what months you were most profitable.
Review your lease and create a plan. The lease review should include and list pass-through expenses with amounts, and the date of the next increase. You should know when the current term ends and whether there are renewal options and terms. Find out if your lease excuses either partyâ€™s performance when outside circumstances cause the business to close. You should understand what actions would cause a default and who else would be liable in the event of a default. Know the amount of the security deposit. And make sure you understand what insurance coverages you carry and whether they will cover losses.
Remember, this is not just happening to you alone. Many properties and business owners are in this situation and your futures depend on how well you work together. An empty storefront is a tragedy for a business, but it also means no current lease payments, increased insurance rates, basic maintenance expenses increase, and a space that is likely to remain empty for months. Landlords/property managers like business owners have their own list of monthly liabilities. Thus, the ideal way to deal with the situation would be with a plan that is beneficial for both sides. Here are some actions to right away:
1. Take care of yourself first: Once you understand your financial position you can begin to work on a plan. To do this, start by talking with your lender(s) â€“ Some local Banks carrying loans for commercial property have already negotiated a deferral of current monthly loan payments to be added to the end of the loan. In other words, if the deferral was for two months. The loan was extended for an additional two months. Another option is negotiating a loan modification.
2. Make contact: As a landlord or property manager, contact your tenants to see how they are doing in the current turmoil. You will find that some businesses are shuttered, some are operating on a limited basis but not breaking even, others are operating at pre-COVID levels of productivity and cash flow because they have been classified as essential services. Take a look at each lease and rental agreement. Take a look at where the lease is, with regard to terms, and options. In addition, list any additional operations such as property management.
3. Negotiate a solution together: As with all negotiations, each side should benefit from the results of the negotiation. The most common solution is for the tenant to receive either a reduction or deferral in their monthly lease or rent obligation. Any modification to the existing lease (temporary lease/rent reduction, deferral of payments, etc.) needs to be in writing and signed by both parties and added to the existing lease/rent agreement in the form of an addendum. Confer with your attorney to ensure the language of your draft addendum or side-letter complies with current law, including any emergency COVID-19 orders issued from the state Legislature and or Executive Order.
All of these actions will require hard choices to be made. But this is a unique period in our lives that requires unique solutions and cooperation to ensure a positive outcome in the long term. Some final thoughts to consider:
Make sure you and your tenant have taken advantage of any emergency loan programs, such as the SBAâ€™s Economic Injury Disaster Loan (EIDL), Paycheck Protection Program (PPP), and the California Disaster Relief Loan Guarantee Program. Are there federal, state, or local restrictions on commercial evictions? If you own a franchise, what programs have your franchisor created to assist you?
Tenant standingâ€”How long have you been a tenant? If you have been a good tenant, always current and have a good relationship with your landlord/property manager, request your security deposit be applied to any delinquent rent/lease payments. Could you ask for a covenant that would allow you to sublet if you do not already have this in your current lease agreement?
Consider allowing the use of security deposits to cover any current shortage of lease or rent payment. This would include an addendum or signed side-letter for the recovery of the security deposit as an add-on to future lease payments.
Extend the term of the existing lease to include the deferral period or consider adding a lease extension option, and consider adding interest until this reduction or deferral is paid back.
Consider a short-term lease that includes the current period through the pay-back of all deferred or reduced rent payments.
Thursday, May 21 10:00 – 11:00 AM
Need more assistance? Talk to your West Business Development Center Advisor to discuss these and any other issues you are currently facing. Not a client? Itâ€™s easy to register and all of our advising is free to you. To learn more about actions your can take to help your business during the age of Corona watch our videos or view our webinar archive
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