COVID-19 crisis pits CRE landlords, tenants
There’s always a certain level of tension between tenants and landlords.
It’s completely understandable. Tenants want cheaper rent because every dollar they don’t spend on the roof above their heads is another dollar of potential profit. Landlords want to maximize the value of their properties and every additional dollar in rent is a boost to their bottom lines.
Under normal circumstances, an equilibrium exists. Landlords can’t push rates too high or they risk forcing out good, longtime tenants. Renters want well maintained, high quality space, so they can’t demand rental rates that force landlords to cheap out on the amenities.
But what happens when an unexpected catastrophe rocks this landlord-tenant stability — along with the entirety of the global economy? Well, we’re finding out now.
“Emotions are running high for both landlords and tenants, and the key to a successful dialog will hinge on both parties being transparent; acting reasonably; and making requests based on necessity, not leverage,” said Lewis Miller, vice chairman of CBRE’s New York Consulting Group.
Requests from tenants typically involve either rent abatement — the forgiveness of all or a portion of rental payments for a period of time — or rent deferral — pushing off rent payments to a later date.
“By far the question I’ve been asked the most by clients over the past three weeks is: ‘Am I entitled to a rent abatement?’” Miller said.
Unsurprisingly, landlords are hesitant to allow tenants to go the abatement route and simply forgo payment.
“I think deferral is winning the day right now,” The Colorado Group managing broker Jason Kruse said during a recent web conference with real estate professionals. “I don’t see many landlords abating rent unless it’s very specific to retail or hospitality.”
The vast majority of leases do not guarantee access to rent abatement, even during times of economic or health crises. However, some leases include interruption of service or force majeure clauses that may provide the tenant a pathway for relief.
“The lease needs to be carefully analyzed because in many instances the language is very nuanced and a tenant’s right to abatement can hinge on just a few key words,” Miller said.
When approaching a landlord with an abatement or deferral request, Geoffrey Keys, president Keys Commercial Real Estate in Boulder, recommended that tenants prepare a written request with financial statements, develop a repayment plan and be open to signing a non-disclosure agreement.
Confidentiality agreements are quickly becoming an industry standard for mid-lease negotiations between landlords and tenants.
“None of these landlords or lenders want these deals being talked about on the street,” Keys said. “There’s a lot of information that’s being floated between the parties, so I think having an NDA or confidentiality agreement is pretty prudent in this environment.”
In most cases, it’s in a landlord’s best interest to consider relief programs for tenants.
“Rent is a tricky thing to deal with,” The Colorado Group broker Ashley Overton said. “Without tenants there is no real estate industry so we need to find a way to get our tenants through this period of time.’’
Still, landlords can’t simply grant every abatement or deferral request.
“In real estate, everybody’s got a boss,” Keys said.
In the case of landlords, that boss is typically a lender. Much like tenants are approaching the owners of their building with relief requests, landlords are going to their banks to negotiate for more favorable terms.
Some lenders are willing to play ball, Keys said. Others aren’t.
“Some [lenders] are just not doing any work-out deals, which isn’t very helpful,” he said. “… A lot of lenders are just deferring a decision, which is essentially the same thing as saying no.”
And even when lenders do make decisions, sometimes those decisions baffle the other parties to the deal.
“We were closing on a pretty sizable mortgage for a building that had been in the works for a few months. The lender called the day before closing and said, ‘We’re not going to close.’ No reason given,” Keys said.
This situation isn’t expected to become any less fraught in the near future.
“At the end of March, we thought that April was going to be the challenging month” before a rebound in May and early summer, Keys said. “We were wrong. The real challenge has yet to come. May is going to be a lot more difficult than April was in terms of getting these issues sorted out with rent collection and occupancy. If you extrapolate this forward, June doesn’t look very good either.”
“There’s kind of a sense of unity, strangely enough,” Keys said. “We all — on both the landlord and tenant side — realize we’re in this together.”