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Commercial Real Estate
Business Observer Friday, Apr. 3, 2020 8 months ago

Landlords, tenants seek middle ground in complicated situation

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Tenants, landlords and lenders are scrambling to evaluate -- and possibly renegotiate -- lease and mortgage commitments amid Covid-19 outbreak
by: Kevin McQuaid Commercial Real Estate Editor

EYE: Pandemic response

As landlords, their tenants and lenders alike along across the region face an uncertain future replete with barren storefronts, incomplete build outs and looming mortgage payments, experts advise patience, careful consideration of relationships and, above all, communication.

Another important part of the response: avoid panicking. 

“Everyone that I speak to in Tampa Bay and beyond is trying to work through things right now,” says Robert Stern,  co-director of the real estate lending practice group at Trenam Law in Tampa. “No one is being too aggressive at the moment, from what I can see, which is probably a good approach. At this juncture, people are talking and trying to figure out a good course of action.”

With the coronavirus pandemic in the U.S. entering its fourth week impacting businesses, many struggling tenants are scouring leases looking for escape clauses and pouring through documents pertaining to their business interruption insurance.

Landlords, meanwhile, are reviewing lease commitments and contemplating exercising “force majeure” – unforeseeable circumstances or “acts of God” – clauses pertaining to tenant improvements and other obligations to trim expenses and immediate cash expenditures. Others have approached lenders to outline “performance disruptions” that may delay mortgage payments or other obligations. 

One company — national restaurant chain The Cheesecake Factory — has taken a more direct approach: the publicly traded firm, with four locations in the region and 17 in Florida, sent a letter to its landlord March 27 indicating it doesn’t plan to pay rent on its leases in April. 

But mostly, each party to the real estate transaction appear to be attempting to formulate mutually agreeable resolutions to the crisis imposed by Covid-19 and are documenting the results.

“It’s almost always positive when tenants and landlords talk,” says John Harshman, president of Harshman & Co. Inc., a Sarasota commercial real estate brokerage firm. “Landlords are in, or should be in, the business of giving good service to their tenants. In some cases, that may involve a forgiveness or an abatement of rent, because a tenant could, if pushed, declare bankruptcy and then the landlord would be out. That would be worse position than not receiving a rent check or two.”

Noah Shaffer, senior director of asset management for Tampa-based Confidant Asset Management, agrees.

“Some commercial landlords are handicapped in times like this because they have mortgage covenants that govern what they can and can’t do, but for the most part, they don’t want to lose a tenant if they can help it because re-leasing a space takes time. At the end of the day, it’s much more expensive to try and replace a tenant than to give away a month or two of rent.”

Stay calm 

Empathy can be an asset for landlords, too, in this situation. Grocery giant Publix, for one, is offering rent relief to businesses operating in Publix-owned shopping centers that have closed due to the coronavirus pandemic, according to a statement. The relief package includes waiving rent for two months, as well as waiving payments for common area maintenance fees and taxes, regardless of the tenant’s access to other relief or assistance.

“As a company that started as a small business 90 years ago, Publix wants to help businesses renting from us survive the economic impact of these unexpected closures,” spokeswoman Maria Brous says in the statement. 

In cases where tenants have appealed for leniency, Shaffer says he knows of a few client landlords in the Tampa Bay area and elsewhere who are offering rent abatements on leases in exchange for lease extensions or additional guarantees from tenants. “In a lot of cases, these situations can actually benefit the landlord long term,” Shaffer says.

Stern, meanwhile, says he’s spoken to landlord clients who’ve negotiated with tenants to use their security deposits toward monthly rent payments rather than declaring defaults. “What we’ve got throughout the system right now is a liquidity problem, from the tenant to the landlord to the lenders,” Stern says. “It’s a freeze in the system right now, and it’s a problem for everybody.”

Also, in another move, some tenants and landlords alike are turning to “force majeure” – a French term that loosely translates into “beyond one’s control” – clauses in leases to excuse performance, payments or obligations.

But Shaffer says “acts of God” strategies can be “hit or miss” – especially if they wind up as a defense in court. For landlords appealing to lenders, the clause often is limited to building property damage.

Some others have looked into business interruption insurance to mitigate losses, experts say, but there again, its effectiveness is often limited. “It can be a long, drawn-out process, and a lot of tenants and landlords we’re hearing from, quite naturally, say they need relief or help right now,” Shaffer says.

Lenders, too, are being cautious when it comes to declaring borrowers in default of their loans, especially as many court systems are shuttered because of the virus. Few appear eager to underwrite new loans, however, and are examining existing loan documents to determine whether in-place cash flows can adequately cover debt service.

“We are seeing early signs of a wholesale shutdown of the commercial lending markets,” consulting firm RCLCO Real Estate Advisors notes in a recent report, Cycle Planning in the Era of Covid-19. “Prior commitments are still being honored," the report states, "but new loans are effectively not available to all but a few preferred customers.”

Without question, some commercial real estate sectors along the Gulf Coast and beyond are being hit harder than others by the pandemic.

Hotels in tourist-rich Florida, for instance, have seen a dramatic drop-off in business and some are being forced to close temporarily in the face of lost bookings. The American Hotel & Motel Association, the industry’s leading trade group, contends the coronavirus crisis will shave occupancy by 30% this year, and result in greater losses than the “September 11 terrorist attacks and the Greater Recession combined,” RCLCO states.

Retail, too, has been greatly impacted, as closures have clipped sales and led to technical lease defaults, in some cases.

Perhaps the most notable example of how the Covid-19 crisis has impacted retail came when Simon Property Group, the buyer of Mall at University Town Center- and International Plaza-owner Taubman Centers Inc., elected to shutter all of its more than 200 regional malls in the U.S.

What's next?

Beyond leases and commercial mortgages, commercial real estate business, like in many other sectors, has slowed dramatically. Anecdotally, at least, office deals also are being pulled back, as wary investors question whether teleworking tenants will fulfill lease deals or whether new commitments can be had in the current environment. Even industrial properties, long the darling of investors with the advent of ecommerce, are being questioned as products from overseas languish in ports.

One key there, like in other parts of the business response to the coronavirus pandemic, is to not panic. 

“Obviously, if the present situation regarding the virus continues for a few months it could be a significant problem for all real estate parties concerned,” he says. “But people also need to keep in mind that the U.S. economy prior to coronavirus wasn’t edging toward a bubble, there were no excesses at work. This is a health care issue, an external issue affecting things today. All other recessions going back to before World War II were caused rather by some problem within the U.S. system. As such, I see this as a relatively short-lived issue for the economy.”

 

 

 

 

 

 

 

 

 

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