Patrick McGlinchey and Justin Gregory from SRSE Real Estate Partners offer up the following on real estate during COVID-19.
COVID-19 is disrupting all industries including commercial real estate and as one of our valued clients, we want to provide you with a full rundown on what we are currently seeing in the marketplace which you can hopefully use to your advantage. While it is entirely possible you’ve already taken steps yourself, we felt it important to wait a full week so we could assess the situation and provide some insight into what we are seeing in the market. As we’re sure your inboxes are full of COVID-19 emails, we’ll just jump right into what we think may be helpful for you:
Commercial Tenant Relief
Given the adverse commercial impacts brought about by mandatory shutdown orders and recommendations for social distancing, many retailers are seeking rent obligation relief from their commercial landlords. This is being done in various ways which we have compiled and explained below:
• Blend and Extend: This is an option if you are near the end of your term (approx. 2 years or less from expiration), were already planning on renewing at your current location, and feel comfortable about the long term future of your business amidst the outbreak. This is essentially an early renewal and (depending on renewal term length) can provide a rent abatement period such as you saw at the beginning of your primary term, a TI “refresher” credit, and potential base rent concessions in exchange for extending your primary term. If this sounds like a fit, we strongly advise you to call us as this is a complex negotiation.
• Rent Reduction/Abatement: A good place for most of our tenants to start the conversation with the landlord, this entails asking for a period of abated or reduced rent. Examples of asks we have seen include X months of base and additional rent abatement, X months of base rent abatement only, and X months of 50% (or what works for you) base rent abatement.
• Rent Reduction/Abatement + End of Term “Kicker”: This entails the same ask as the above, however with an offer to the landlord to add the abated rent to the end of the term. For example, two months of base and additional rent abatement now in exchange for extending your lease two extra months at the end of your term. This seems to be one of the more agreeable asks we’ve seen as it provides a reprieve now, while the landlord still receives the value associated with the full term of your lease.
• Rent Reduction/Abatement + Amortization: Again utilizing the same ask as the above two scenarios, however this entails paying the landlord back the abatement over a period of time as opposed to extending your term. Examples we’ve seen are X months of base and/or additional rent abatement, with the lost rental income being amortized over the remainder of the lease term or over a certain period of time (i.e. the next twelve months).
• Percentage Rent Only: While we have yet to see a landlord agree to this situation, many of our tenants are requesting the landlord collect percentage rent only for a period of time. If you are unfamiliar, percentage rent is a lease term in which you pay the landlord a percentage of your total (gross) sales. This involves accurate reporting of your total sales volume to the landlord. For example, your business grosses $100,000/month and you pay $10,000/month in rent, you may ask your landlord for a 10% percentage rent period.
Considerations
When engaging with your landlord on the above, it is important to know your landlord. A few examples of what we mean by this: Is your landlord a national Real Estate Investment Trust? If so, they prioritize long-term commitments and steady income streams and typically have significant funds set aside for leasing costs. Therefore, this landlord is more likely to react favorably to a Blend and Extend request and less likely to react favorably to a Percentage Rent Only request. Is your landlord a small, individual landlord with few holdings? If so, this is one of their major personal investments and they likely prioritize their overall return on the investment. Therefore, they are more likely to react favorably to a Rent Reduction/Abatement + End of Term “Kicker”/Amortization request and less likely to react favorably to a Blend and Extend request. Not sure what type of landlord you have and want us to research, want to jump on a call and brainstorm? We’re here to help and will happily do so!
Our Network is Your Network
Please remember we have built a vast network of professionals we have come to trust. Do you wish to discuss what commercial banks are doing for their clients with loans out with a qualified resource? Do you want to discuss the clauses within your lease agreement or have an amendment reviewed by a qualified CRE attorney? Are you a food and beverage business who is interested in discussing the implementation of online ordering and takeout services with a leading restaurant consultant? We have recommendations for all of these situations and more – please don’t hesitate to ask!
Looking Ahead to Opportunity
While the current situation is providing us with many hurdles and other negative aspects to deal with, there is currently great opportunity for those in a position to expand/invest now or in the immediate future:
· Several of our tenant clients who are proceeding forward with new locations have been met with some of the most favorable counters we’ve seen in recent times (major TI packages and rent abatement periods, slightly better rent concessions) given the lack of active tenants currently in the marketplace.
· Several of our owner/user buyer clients are seeing extremely positive lending terms (rates under 4%, no payments for the first year, etc.) as commercial lending has become tighter on investment platforms, causing banks to heavily push owner/user loans and in turn resulting in strong opportunity for these clients.
· Several of our investment buyer clients are seeing high cap rates/low prices in return for shortened due-diligence periods or strong EM up front as sellers seek buyers they can count on to close.
If there is something out there you want us to keep an eye on for you, please let us know!
We sincerely hope the above was helpful to you and should it elicit any follow up questions Justin and I are available via email and our cell-phones as we work remotely at the moment! Please feel free to circulate to whomever you see fit as the most helpful thing you can ever do for us is provide a referral! We hope you and yours are staying safe and healthy.
For further information, please contact:
Patrick McGlinchey
Vice President
SRS Real Estate Partners
D 303.390.5219 M 210.303.3149
1875 Lawrence Street, Suite 850 | Denver, CO 80202
Photo by Jason Leung on Unsplash