Bulletin: Your Tenants and Your Rent Roll Are Going Under. What Can You Do?

March 27, 2020

If you have not started receiving the calls, you probably will shortly. We want to assure you that we are working to be up-to-date on all the legal ramifications of this unprecedented, and rapidly evolving situation. We begin by offering some thoughts on how you might approach the situation when you get the call or email, or position you to be proactive with tenants which you anticipate may be likely candidates for failure. At this point, all ideas are good ideas and we are offering some from our vantage point, representing landlords of all property types.

Your debt service coverage ratios contemplate a substantially leased up property. There probably will be some benefit in keeping those rent rolls in place, even with some concessions impacting the current rental rates. Courts in many jurisdictions are closed or operating on limited so a threat of default and commencement of eviction may not carry much weight right now. You may be able to serve a notice to quit and possibly even file a complaint, but may not be heard in court until the courts reopen. Replacement tenants are likely few and far between. We are in uncharted territory so the best you can do is wade into it and work your way through it. As you start wading, consider your bottom line debt service and net operating expense obligations and utilize that as a bottom line in your negotiations. Below that, you are reaching into your pocket. In a soon to be released bulletin, we will discuss techniques to use in approaching your lenders to obtain some relief as your rent roll diminishes. This memo, however, will focus on dealing with your tenants.

Your best short term solution may be a combination of working with your tenants to help them find money to keep afloat while considering, as needed, some type of rental concessions. 

Help the Tenant Find Money

Commercial Projects: Federal and State governments are rolling out programs as quickly as we can type and we are all monitoring federal and state sites to keep abreast. We can assist you in navigating this research. As noted above, your best bet right now may be to try to be proactive and save your tenants using your own professional expertise to do so (without making any representations and probably just steering them in the right direction). 

Some programs for you to consider (we lifted this from the State’s website): 

National Programs 

  1. $2 Trillion Stimulus Package (pending in congress): more will follow on this package but there are going to be many programs and benefits that can help your tenants and you. Expected highlights include:
    1. $349 billion in loans to small businesses (capped at 500 workers, generally), with amounts spent on payroll, rent or utilities converting into grants that don’t have to be repaid.
    2. Immediate deductions for businesses using today’s losses against past profits to claim current refunds.
    3. Retailers allowed to deduct TI in first year and potentiallyreverse consequences of 2017 tax law provision that required TI to be expensed over 39 years and. It appears that tenants will be able to recapture the savings they would have achieved going back to 2017 if the one year expensing provision had gone into effect then instead of the 39 year requirement. 
    4. OCC permitted to allow banks (smaller banks/regional banks) ability to make bigger loans that otherwise would trip up size / balance sheet restrictions. This may create refi opportunities that didn’t exist before with aggressive regional and local bank lenders who were previously constrained by loan size limits.  

2. Tax Filing Extensions: As you have probably heard,  both federally and in NC and CT, deadlines for filing taxes and payments associated with certain state business tax returns have been extended. Details for CT are on DRS’s website and a FAQ for NC is here.  

3. Business Interruption and Rent Loss Insurance: A business interruption and rent loss insurance policy should list or describe the types of events it covers. Events that are not described in the policy are typically not covered. It is important to review the policy exclusions, coverage limits, and applicable deductibles with your agent, broker or insurer. This would appear to be an invitation for litigation but is clearly a strategy to consider. You will need to pull out your policies and review them. Talk with your insurance advisor. Ditto for the tenant’s policies. 

4. Broad-Based Budget Considerations: Many creditors are already advising their borrowers that the creditor may have programs to assist. Each tenant should be looking at their payables and begin exploring deferrals and the like. In addition, each tenant should be talking to their lenders to restructure their debt. 

5. Help the Tenant Pivot or Repurpose its Space or Business in the Short-Term: Even if your tenants are unable to conduct their usual business and generate the cash-flow they typically would in normal times, with a little help and creativity, many businesses may still be able to squeeze out cash-flow such as the restaurants that are switching to take-out. If you own a shopping center, consider helping ‘construct’ (with temporary signage, etc.) take-out lanes to make to-go shopping easier and let your tenants know that you won’t enforce usual parking restrictions that make to-go shopping difficult. 

As noted above, it’s imperative for you to look at your tenant mix in the aggregate and take advantage of your unique perspective and vantage point as landlord to identify potential symmetries and opportunities between your various tenants and help broker and facilitate those opportunities. For example, you may have some tenants that are thriving (such as grocery stores) and that need additional space to meet their surge in demand.  A short term license or sublease from one tenant completely shut down by Covid 19 to another that is experiencing increased demand may be a win-win for all. 

State Programs

  1. SBA Disaster Relief Loans: In both North Carolina and Connecticut,  the U.S. Small Business administration may begin offering disaster-relief loans to small businesses and nonprofits. Companies in these states can now apply for loans of up to $2 million through a special page on the SBA website. SBA also has more valuable information for businesses. This is separate from the $2 trillion dollar stimulus package that Congress is about to pass. This is a very attractive program. At the moment, the SBA is anticipating that  processing time will  be about one month start to finish but as soon as they become overwhelmed, it will be longer. This is a full blown loan application and one has to sell the SBA on the viability of the business. For example, “we were doing great and now we are shut down”. That is the concept. We can provide you with some additional information or you can obtain it online. Your tenants should be filing for this assistance now before they run out of money. We are told the best time to go on-line and fill out the on-line application is early morning as it starts to “clog” later on in the day. We are also told that completing the application on line will permit a quicker review at the SBA end. These loans are also available to landlords. Unlike a typical SBA loan, the SBA is requiring direct application without the use of an intermediary but we are receiving word from lenders that they are offering to serve as a conduit as well.
  2. Property Tax Relief. Although we are currently unaware of any programs that have allowed property owners to defer or delay taxes, many industry leaders expect this to be coming in some form.  

NC Programs:

  1. Rapid Recovery Loans. Partnership of private, public and non-profits offering up to $50k in loans with six months of no interest and no payments, followed by 48 months of principal and interest payments at 5.5% interest. No prepayment penalties. See here
  2. See The Economic Development Partnership of North Carolina’s online business relief resources here for other programs and resources. 

CT Programs: 

  1. DECD’s COVID-19 Business Emergency Response Unit: The Connecticut Department of Economic and Community Development has created a COVID-19 Business Emergency Response Unit dedicated to assisting businesses navigate resources and develop new resources. A dedicated phone line  has been set up at 860-500-2333 to provide assistance to Connecticut’s small businesses for this purpose. Get the tenant to initiate this call now and report back to you. Maybe you can join them in the call if you have the time and capacity as most small businesses are not skilled at this type of situation. 
  2. Unemployment Assistance: Workers directly impacted by the coronavirus pandemic no longer must be actively searching for work to qualify for unemployment assistance. And employers who are furloughing workers can use the Department of Labor’s shared work program, which allows businesses to reduce working hours and have those wages supplemented with unemployment insurance. DOL has more information about these and other changes. An interesting solution is the work share program. An employer can reduce hours, pay less, and coordinate with DOL to provide unemployment insurance for the difference. 

The goal of the above is to free up more cash so that the tenant can pay rent to you! Maybe it will require a combination of freeing up cash and possibly working with the lease to provide some additional assistance for a time. The nationals will be working their way through this without guidance from you. They will just be demanding rent concessions. The “mom and pops” may just disappear in the dead of night and it is this unsophisticated tenant that you may be able to help by bringing your own sophistication to the table to guide them through what might otherwise seem like an overwhelming obstacle. Now may be the time to reach out to your tenants to see how they are doing, whether they are aware of these programs. And keep your eyes and ears open for all the new programs that will be rolling out over the next days and weeks. We will endeavor to update this information as we receive useful new data. 

Apartment Projects

If your tenants are going under, you need to address it. They will just stop paying rent. The courts are not available to evict, and we would not be surprised if the courts will be hesitant to throw anyone out under these circumstances, at least not quickly. Worse yet, the federal or state government may provide relief from rent obligations for residential tenants. You have limited alternatives in the current crisis: Seek concessions from your lender, offer concessions to your tenants or perhaps help your tenants secure income. Concessions from your lender will be the subject of a subsequent bulletin. Rent concession techniques are discussed below. Helping the tenant find money may in fact be a prudent act right now. As soon as the new legislations is passed, it will likely include substantial benefits for the unemployed and understanding the gateways to those programs will be critical for those seeking help. The State of Connecticut is already rolling out programs. One strategy might be to have someone on your staff train up on the various programs available to tenants  and let them help your tenants file their applications, etc. to get ahead of the curve before their rent money runs out. Another would be to provide your tenants with emails or pamphlets offering the same information. If viable for you, the idea of having someone on site, computer in hand, assisting renters in filing their applications (where on-line filing is permitted) and otherwise answering their questions and directing them might be reassuring, create some goodwill and insure a stream of income sufficient to allow them pay their rent. If rent concessions are necessary, see commentary below. 

One out of the box possibility would be to consider incentivizing payment of rent by those who can pay it in exchange for concessions in the future. The retiree on a pension or doctor working overtime may be happy to pay more rent over the next several months in return for cheaper rent in the future when your tenants who can’t pay are able to pay again.  In times like these, it’s key to assess your tenants both individually and in the aggregate to achieve the most optimal outcome. 

Lease Modifications/Concessions:

If you cannot solve their problems by finding financial assistance for them, maybe you are willing to work with the tenant to bridge the gap right now. Maybe it is a combination of federal and state financial assistance and you being flexible. Assuming that emergency legislation does not restrict what you can enforce, demand or agree to, one might approach the tenant concession process as follows:

1. Review Your File

Pull the lease file out. What do you have to work with? Lease, guaranty, security deposit, duty to replenish security deposit, defaults to raise the heat? Consider a credit report and an asset search. Check the file for tenant complaints and other potential defenses and evaluate their viability. The threshold question is do they have sufficient asset strength to enforce the existing lease terms? The second question is, do they have defenses against enforcement? Consider eviction time (when evictions are available) and impact on your cash flow vs a workout with them and continued cash flow. Are they threatening bankruptcy?  We can help you analyze your legal position.

2. Do You Have Other Options

Do other tenants need to expand? Are other parties interested in the space? Do you really want to work with this tenant to try and make it happen? Can you show the property to prospective tenants right now or in the near future? Are you in a position to finance tenant improvements for a new tenant? Most likely the answer will be there is no other option, at least right now. 

3. Make the Tenant Do Its Homework; Help the Tenant be Creative

If the tenant is asking for concessions, you may want to demand current financial statements and cash projections from the tenant and any guarantors to see for yourself how bad it is. Was this a viable business before Covid-19 hit? Or were they just barely hanging on? Have the tenant explain to you how its business and business model is being impacted by Covid-19 and when they expect relief.  Are there opportunities, in the short term, for the tenant to pivot and adapt to the new Covid-19 reality to generate some cash-flow (such as take-out only business for restaurants, offering online gym classes to members for a fee which can be filmed out of their studio at your building, re-tooling production to produce medical equipment or other items in high demand right now?) and what kind of cash-flow can they generate even while restricted by Covid-19?  Are there other assets available to cover their obligations? Do the principals have assets and are they guarantors or will they agree to be guarantors? Let the tenant convince you that there are no other assets or sources of funding, and that the concessions it is asking for will save the day, that their business will rebound as soon as the shock of Covid-19 goes away or that there is a guarantor that can assure payment to in the long run. You must determine that there really are no other assets to cover their obligations, and that with your assistance they can in fact survive in the long run and short run.  

4. Just Say No

If the tenant is financially strong and you have a strong lease that you can enforce now or when the justice system is available to you, or you have other viable options for the space, the tenant is probably out of luck as there may be no incentive to a landlord with an equal or better alternative to assist the tenant, other than the hassle of litigation and then putting new tenants in. 

5. Agree to Rent Reduction

A simple lease modification reducing the rent, reducing the space, drawing down the security deposit, reducing the term, etc. This is a simple, permanent fix. Consider limiting it to the named tenant. Consider other lease enhancements in exchange for this concession. Consider asking for a guaranty from the principals.  

6. Change the Term

Reduce the rent but extend the term or agree to reduce the term and start looking for new tenants. 

7. Reduce Rent Now, Increase Rent Later

Reduce the rent now in exchange for an increased rent later. Tack interest on, unless emergency laws end up disallowing interest or given the low interest rates it’s just not worth it. 

8. Incentivize Tenants Who Can Pay to Pay

If there are tenants who are thriving, like grocery stores, then again, thinking outside of the box, consider asking them to pay more (perhaps with introduction of a percentage rent component) in the short term, in exchange for reduced rent later at a level that would make their “loan” to you (in the form of increased rent) attractive to them. If possible, this will mitigate the loss of current rent from those who currently can’t pay. Also, perhaps more salient to residential properties, there is the risk that governments may incentivize those who can pay to not pay such as public officials who call for all renters to stop paying rent. To combat this, consider offering a ‘bonus’ to those who can and do pay. For example, offer to return and waive deposits for tenants who pay rent on time and in full for the next four months. 

9. Abate Some Portion of the Rent for a Stated Period

Allow the differential between the reduced rent and the stated rent to accrue for a period of time and make it due and payable on a date certain. Extract a personal guaranty and other collateral for the accrued and unpaid rent. As noted above, maybe you can tack on interest to mitigate the time value of money. Consider financial reporting covenants and trigger a recapture or abatement termination if the business improves or some other relevant event occurs. Consider adding a right to take-back the space following notice.

10. Rewrite the Lease

Rental concessions in exchange for a tighter lease. Take back all those lease concessions you made when you really wanted them and they had other choices. Financial reporting; guaranties; security deposit; elimination of termination, expansion, contraction, renewal options. Go back to that first draft of the lease you liked so much and see what you gave up. 

11. Collateralize or Improve the Credit Behind the Lease

Demand a full or limited guaranty if none is in place. Eliminate the cap or concessions you made in the old guaranty. Consider credit enhancements such as a larger deposit either in cash or by letter of credit (perhaps built up over time or burning down over time). 

12. Equity Kicker

If the business stabilizes because of your assistance, perhaps you should share in the profits up to some amount for some period of time. 

13. Reduced Rate Sublet or Assignment

Encourage the tenant to assign the lease or sublet a portion of the space at a reduced rate thus allowing the tenant to pick up only a portion of the rent while the sublessee or assignee picks up the rest. 

14. Consider a Stipulated Judgment

For the moment, this is not really viable because the courts are closed. If that situation changes, consider putting the lease into eviction, then settle on terms and incorporate those terms into a judgment of eviction which is stayed and ultimately dismissed if they live up to their bargain. This will permit a quick resolution if they default again shortly after the deal is cut.  

15. Your Lender

Don’t forget your lender and the covenants in your loan documents prohibiting lease modifications and terminations without lender approval. It is hard to imagine a lender defaulting you for doing whatever you can to save your rent roll but you need to be conscious of your loan documents. 

These are trying times right now filled with uncertainty. Our firm is available to assist you as you work your way through these issues with your tenants. 

This article is for general interest and education only and does not constitute legal advice. The reader is encouraged to seek legal counsel before utilizing any suggestions contained in this article.