Updates on Rent Relief/Deferment

Legal

Monday April 6, 2020; 3:15pm-4:15pm

Updates on Rent Relief/Deferment

Panelists: Rocco Fiorentino / Ty Brewster / Rob Cambruzzi

Webinar Summary –

This webinar, featuring returning panelists, outlined changes and updates in negotiating between tenants and landlords given Covid-19-related business uncertainty and slowdowns. The panelists detailed the challenges being faced by both tenants, and landlords, and provided a step-by-step for action by tenants, and guidance on how and what to communicate to landlords. The panelists also discussed the opportunities on the other side of the pandemic crisis.

Key Bullets –

  • Landlords continue to look to/for long-term leases in place from reliable tenants
  • Existing tenants are valuable, and negotiations are possible, if not now, then soon
  • Ask yourself what is “reasonable” before beginning negotiations; be prepared to leverage your position
  • Make sure you understand your lease, and equip yourself with knowledge before communicating early, in writing, and reasonably with your landlord
  • Use this time to prepare to capitalize on opportunities given new market realities after the crisis has passed

Full Bullets –

  • Panelists are Franchise Real Estate specialists; represent tenants
  • The world has changed – Landlords are now facing the following challenges:
    • Tenants downsizing, seeking rental relief
    • Access to capital / cash constraints
    • Commercial real estate values / limited buyers for assets
    • Downward pressure on Rent / rising vacancy rates
    • Debt service / looming maturity dates
    • Potential negative PR and reputational issues
  • More than anything, Landlords need long-term leases in place from reliable tenants
  • 75% of landlords have been open to tenant relief of deferment. 25% have been firm about not accepting requests
  • Existing tenants are valuable – the cost and risk of replacing tenants is significant
    • Renewal vs. New tenant à value for landlord is in renewals, rather than offering space to new tenants. It is in the interest of the landlord to stay active and in their location
  • State mandates – each state has ordinances in place to help businesses
    • NY – evictions suspended for 90 days
    • CA – no evictions through May 31
    • Municipalities with their own ordinances – pay close attention to these
  • What should I ask for? à “What’s reasonable” and ask for what you need; it’s more important the way you ask, rather than what you ask for
    • 1) 3 months of deferred rent – ideally this is the time horizon
    • 2) 2 months of deferred rent
    • 3) April deferment
    • 4) Payment holiday for 90 days
    • 5) Short term & Long term options
  • Insurance companies they’re working with are denying claims
  • Landlord responses:
    • Landlord response: We’re making no concessions at this time. Tenant response: rent is due now
    • Landlord response: Please provide us an enormous list of documents for consideration. Tenant response:  I am unable to provide in the required time
    • Landlord response: Your store is open and operating, why do you need relief? Tenant response: My sales are down by XX% - push landlords to maintain you as a long term tenant given the circumstances
    • Landlord response: There are government programs for you, have you checked on PPP & EIDL? Tenant response: I have applied and the funds are not available for weeks / months
    • Landlord response: Have you checked for business interruption insurance? Tenant response: No insurance carrier is accepting this given the pandemic circumstances
  • Communicate early
  • Communicate in writing
  • Communicate reasonably
    • Your landlord is a long-term partner that you will need to work with in the future
    • Ability to be genuine in what you need and are asking for, and understand the perspective of the landlord
    • Possibility of using security deposit – remember that this is your money, and you’ll be using for a different purpose than for what it was assigned for
  • Summary checklist:
    • Find, read, and consult to make sure you understand your lease
    • Explore and fully vet all of your options
    • Design a thoughtful and proactive strategy
    • Keep your financials and projections updated and in order
    • Understand your leverage and how to maximize it
    • Put all requests in writing and don’t act impulsively
    • Don’t close the door – stay away from phrases like “if I can’t get this, I’ll go out of business” – be clear to make sure there is opportunity to stay open and work through the crisis

  • Market Overview
    • 25% or more of new locations are on hold
    • New starts down by about 50%
    • Geographic regions affected differently
    • Landlords are not giving great deals yet, but it will change soon – they are busy putting out fires & April will start seeing impact; keep negotiations open
    • Looking to technology for site tours (like Matterport) or video recording to keep site searches alive
    • 90-120 days to secure a site; 3+ months to construct = time is on our side if you’re early in the process negotiating with landlords
    • New inventory & new market reach capabilities (moving from B to an A-grade center)
      • Market shifts mean looking into spaces where you couldn’t look before
    • Conversions – coming soon…
      • Independent locations that weren’t as strong as franchises opens the opportunity for conversions
  • What to be thinking about?
    • Zees à ways to protect yourself in new deals:
      • Extend delivery dates
      • Rent commencement dates tied to permits or ability to open
      • Pull forward T.I. or get installments
      • Permit language
      • AIA Agreements tied to TI & permitting for payment schedules
      • Ensure General Condition charges or Mobilization Charges are spelled out properly
    • Zors à 
      • Extend development schedules
      • Continue soft openigs – use space for training or 1:1 sessions/carry out/video studio – be ready to go when things turn around
      • Look to use closed locations equipment to reduce costs for growing franchisees
      • Use 3rd parties if you don’t have inside support
  • Capitalize on Opportunities
    • Fix old mistakes
      • Relocate / upgrade
      • Prime spots or areas outside of reach might be available
      • Upfit/brand image improvements
    • Conversions
      • Reduced costs/distressed prices
      • Landlords want to minimize gap on market
      • Reduce time to open 2-3 months minimum
    • Less competition
      • Less growth = sweetheart deals
      • G.C. cost will come down and more labors hitting the market
      • Independents will be less likely to survive

 

Landlords and tenants have a different perception of what PPP is, and neither side fully knows. It will still be 6-8 weeks before you get any loan funds. This shouldn’t hinder your ability to negotiate with the landlord. But no landlord is able to tell a tenant a different perspective on PPP.

Look at lease in terms of language that provides tenant with an out if in fact the landlord does not deliver – there may be opportunity, because it’s difficult to say when the county/municipality will be able to inspect and give you a C.O.

Should you hire someone to negotiate for you? It’s a reasonable choice: you need to get what you need from your landlord. Do what you need to do to achieve that goal. Both tenant and landlord are looking to be as prudent and efficient as possible – so determine if hiring that person will be to your benefit (i.e. do you want an expensive fight?)

Getting out of a lease is not as easy as negotiating through it reasonably

Supply and demand will set the market