The Covid-19 pandemic has prompted rent concession requests from many tenants who deal with the general public on a regular basis, particularly retailers. Landlords have been grappling with how to respond to tenants and also keep their commitments to lenders. Over the past weeks I have been speaking with my Landlord clients about how they are working with their tenants.
All the Landlords I spoke with are sympathetic to the needs of tenants whose businesses have been impacted by the pandemic. They need to determine which tenants have a legitimate need for rent relief, and which tenants are trying to take advantage of the situation. Many national retail tenants have announced they will not pay rent for April, regardless as to whether their businesses have been impacted or they have the resources to pay the rent.
There is a serious concern in the industry as to the potential cascading effect of tenants not paying rent, resulting in the Landlord being unable to make their mortgage payments, resulting in financial instability on the part of lenders.
Here is what I have been hearing from Landlords about how they are handling rent concession requests:
- They first have to determine the need by obtaining financial statements and sales reports from the tenant. What does the tenant actually need to continue in business, and does the tenant have a likelihood of surviving the crisis?
- Landlords also want to determine the availability of government assistance programs that are available to the tenant, such as the Paycheck Protection Act or the SBA EIDL program. Has the tenant applied for all the assistance available to them before coming to the Landlord for assistance?
- After going through these steps, most Landlords prefer to negotiate concessions one month at a time due to the rapidly evolving nature of the crisis
- The trend for rent concessions seems to be towards rent deferment rather than abatement. Common terms are deferment of rent for one to two months, with repayment in 2021 over 12 months. It is common for the tenant to continue to pay operating expenses if they are on a NNN lease
- Landlords are often requiring lease extensions or removal of tenant friendly lease provisions in exchange for any rent concessions
- Confidentiality for any concessions is crucial – the Landlords I spoke with do not want their tenants talking amongst themselves about the concessions they obtained. The confidentiality clause we have adopted for use at Investors Realty revokes any rent concessions granted if the tenant breaks the confidentiality provision.
At the same time as tenants are requesting rent relief, impacted Landlords are looking to their lenders for mortgage relief. Responses I have heard vary according to the type of lender:
- Local banks have been by far the most responsive. Immediately after the crisis hit local lenders were able to respond on a case by case basis. Most of the modifications I have heard of have been for borrowers to make interest only payments for a few months.
- The response from life insurance companies has varied amongst lenders and borrowers. At the beginning of the pandemic, life companies were inundated with requests and needed time to formulate their response. That has happened and life companies are now in a position to respond. My understanding is that they are much more flexible with borrowers who have been making regular payments on the note for some time.
- Commercial Mortgage-Backed Securities (CMBS) borrowers are in a difficult position, as they need to work with a special servicer to modify their loan terms. The special servicer has strict guidelines they have to adhere to and very little ability to modify the loan.
On a recent webinar, the head of one of the largest servicers stated that they were making efforts to be more flexible with loan modifications. I am hearing that borrowers are able to obtain short term relief again on a case by case basis. Having an advocate of some kind with a previous relationship with the special servicer seems to be part of the key to getting relief with these loans.
The best phrase I have heard in conversations with Landlords is “shared sacrifice”. Landlords want their tenants to be able to survive the crisis and continue in business, but are not in a position to waive rent and still meet their responsibilities to lenders and maintain the property. Hopefully business conditions will soon return to normal, if not we will revisit this topic with any updates.