Landlords all over the state were bracing for a tsunami of late-paying tenants, as so many businesses were essentially locked out of their spaces.
Well, we have reached our first milestone in terms of rent collection under the stay-at-home order issued by Governor Newsom on March 19th.
Understandably, many business owners were unsure over their obligation to pay rent under that circumstance. The fact is that even though the governor’s order prohibits evictions for failure to pay rent (for 90 days), tenants’ ongoing obligation to pay rent is specifically affirmed. That fact may be moot for the moment, as the courts are closed, which means landlords and tenants are left to themselves to work through the problem.
That may be a bit of good news, actually. This is a time for both sides of a lease agreement to acknowledge their need for one another. After all, your property is valued by capitalizing the NOI your tenants generate. So, under such unusual circumstances, it does make sense to approach near term rent obligations with an open mind. Some tenants are being especially hard hit and have seen their revenue fall to zero overnight, while others are working around the clock to meet surging demand for their products or services.
With that in mind, we recommend that you establish guidelines and protocols to ascertain genuine need for rent relief, balanced against your own needs in terms of your ability to properly manage your property and service debt. Let’s face it, there’s a good chance some of your tenants are really hurting. That said, there are others who may take a more opportunistic tack and ask for relief even if they have no demonstrable need. Making that distinction is fundamental to minimizing the impact of this crisis on your bottom line.
Those landlords who can balance their efforts at due diligence with understanding and compassion, will fare best going forward.
From the diligence perspective, we recommend that you demand the following from any tenant requesting assistance:
- Most recent year’s complete financial statements, including year-to-date operating statement
- Letter explaining with specificity the financial impact of the Covid-19 crisis on current operations
- Proof that the business owner has already applied for financial assistance through government programs currently on offer, including the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan program (EIDL)
If you decide to lend assistance, there a number of ways to approach the situation.
Since the obligation to pay rent remains in place, we recommend that your discussion center on rent deferral rather than rent abatement. Let the degree to which your tenant’s business has been impacted be your guide to customizing package that works the business owner, but also for you depending on your own unique circumstances.
Here are some options for you to consider:
- Defer full base rent for a short time
- Defer a portion of base rent for a longer period (good for owners with substantial debt service)
- Have tenant continue to pay their designated share of monthly operating expenses. Defer base rent only.
- Amortize the deferred amount over a specific period (1 year), or over the balance of the lease term
- Consider trading rent relief for extending the term of the lease
- If the tenant is otherwise in good standing, consider crediting rent against out-sized security deposits you may be holding
Whatever you do decide, make sure your decision is informed by a clear understanding of the situation. Help those in true need and be firm with those who are not. We have heard from several
landlords who have told that once they ask for proof of need and supporting documentation that requests for assistance are withdrawn.
Bottom line: the situation on the ground is changing literally by the hour. Government assistance to your tenants is on the way, but has rolled out slower than anticipated. Your situation may also be uncertain. If you have debt on your property, talk to your lender about the possibility of a temporary forbearance. Every lender makes their own rules, but knowing your options relative to your monthly debt service just might come in handy as you negotiate relief for your tenants.
We will do our best to keep you informed and deliver fresh ideas that may help you manage this crisis. If you have any questions, just give us a call. We are here to help.