I have always told my team at Progressive Real Estate Partners that the difference between a retail lease and investment sale transaction is like getting married vs. divorced. In a sale transaction, the parties usually never hear from each other again. By contrast with a lease transaction the parties will likely co-exist for many years to come.
There are a lot of troubled “marriages” these days largely due to the fallout from the pandemic. As someone who seems to be spending a lot of time counseling either “spouse” or in some cases both, I want to share these ideas and observations that might help your landlord and tenant relationship.
- Open Does Not Necessarily Mean Profitable: I’ve recently heard many landlord’s say, “the business is open so they should pay full rent.” It’s clear after speaking with numerous tenants that just because their business is open it doesn’t necessarily mean that it’s profitable. In fact, given the current retail dynamic I’d venture that a large number of tenants will take quite a while to return to a similar level of profitability pre-pandemic. Being understanding is key to a successful marriage and profitability is something important to consider when evaluating a tenant request for deferral or abatement.
- Sales May Be Down but Profits Might Not Be: The corollary to #1 above is that sales may be down, BUT their expenses may also be down. Some drive thru restaurants or other businesses are operating with less staff and therefore the “drive thru only” operation might actually be equal to or more profitable. I wish the corporate tenants would be more forthcoming with this information. We all know for a marriage to succeed both sides need to be open and transparent.
- Landlords Should Treat Many Tenants as Start-Ups: When evaluating requests for rent abatement vs. deferral, recognize that for many businesses it is almost like being a start-up again. And, like a start-up, their capital may be limited and sales potential unknown. Similar to a new spouse learning the rules of a happy marriage, these businesses are going to be testing ideas, looking for ways to boost sales, and trying to get profitable again before their funds run-out. Landlords will likely need to find room to compromise and cut tenants some slack until the world improves.
- How About a Policy of Earned Abatement: I agree that abating rent right now does not do much for either spouse. But, deferring today’s rent to later in 2020 or 2021 is likely setting a tenant up for failure. If you have ever been on a challenging hike and you see what you think is the peak and then you get there only to realize it keeps going up, you have a choice to either quit or persevere. But, if at that point, someone offered to carry your backpack the rest of the journey, it sure makes pushing forward easier. I’d recommend that most deferral arrangements include “earned abatement” which incentivizes the business to keep pushing forward. For example, if you agree to defer May and June’s rent, you could condition that on the tenant paying their rent on time for the balance of 2020. Assuming the tenant fulfills that requirement, you could then forgive May’s rent as of January 1st and spread June’s rent out over 12 months.
- Be Wary of Bad Partners: No matter how good your intentions, you may just be married to a bad partner. Without naming names (per those pesky patient confidentiality clauses), I have heard from numerous corporate tenant real estate managers that they are getting pressured from senior management to take advantage of this situation to obtain savings REGARDLESS of their ability to pay the rent. This approach is diametrically wrong and if this happens, landlords need to gather as much information as possible and look after themselves. Ideally you could part ways, but there are likely “kids” (i.e. loans, co-tenancy provisions, the need for income) so get the best possible advice and recognize that there is just not going to be any love in this relationship.
- Landlords Are Really Lenders: Lenders give you a certain amount of money and charge you a fixed amount. They get none of the upside, but they could experience the downside. Sound familiar? Put another way no tenant has ever voluntarily sent their landlord a larger check (just like no borrower has ever sent their lender a higher interest payment) when a location does particularly well. But many tenants have come running for help when business got bad. Landlords recognizing their position as “lender” can help them when evaluating the risk vs. reward of their negotiations.
- Tenants Benefit By Making Reasonable Requests: If a tenant really needs help from their landlord, they should provide specific information about their sales and profits (including a summary of costs that have gone up or down as a result of the pandemic) and why a deferral/abatement is important to the relationship. Like a start-up, they should also share what actions they plan to take to be successful in the long term. Furthermore, in return for rent relief tenants should also be open to negotiating a mutually beneficial arrangement including possibly giving up options at fixed rent, or agreeing to a longer lease term, or offering to pay percentage rent for a period of time or something similar.
These times of uncertainty are truly challenging the landlord/tenant dynamic. If you are on one side of this marriage and all you are trying to do is take advantage of the other side, it will likely not work out well for either and could result in a messy divorce.
Instead, this is a time for listening and figuring out each other’s needs and priorities. As someone who has spent considerable time offering counsel to improve several landlord and tenant relationships AND who has been happily married for almost 30 years, hopefully this advice and these observations will be beneficial to you.