Many retail and restaurant landlords are in a tight spot right now. A lot of their tenants are coming to them asking for rent reductions. And, while the landlords would like to help, Noah Shaffer, senior director of asset management for Confidant Asset Management, says that might not always be possible.
“The reality is the landlord might have a loan in place that has covenants that prevent them from lowering the rent because there are income and debt service coverage ratios in place,” Shaffer says.
Landlords in those situations do have options, including going back to their lender to negotiate. “It’s forcing landlords to be creative,” Shaffer says. “The average landlord just isn’t prepared to do that on their own and figure out effective solutions for every party by themselves because they just haven’t seen this situation enough.” To prevent these sorts of discussions, Shaffer says that tenants should have loss of income insurance in place.
“When the landlord’s hands are tied, they should ask their tenants to talk to their insurance provider about business loss income and insurance coverage,” Shaffer says. “Maybe it isn’t mandated by their lease, but they should have it anyway.” If insurance isn’t an option, Shaffer urges landlords to look at their tenant’s financial statements and ensure they’re desperate straits.
“Get an understanding of where they stand financially, both personally and at the business level,” Shaffer says. “If you think that you really might lose them, it’s time to get creative. Bring somebody in who can deal with this and work with the lenders, tenant and landlord without getting emotional.”
Shaffer says landlords can ask for additional concessions, such as lease extensions and other guarantees.
“These are things that help the landlord become more informed, but also allow the tenant to get the relief that they need,” Shaffer says. “It has got to be a mutually beneficial solution for everybody.”
If a landlord can recapture the income further down the road and get further insight into the financials of the tenant, it probably makes sense to be flexible if they’re in the financial position to do so.
“With insight into the tenant’s financial position, you can be prepared for this happening again in some manner or fashion,” Shaffer says. “This is an opportunity for the landlord to get some additional insight into the tenant’s operations.”
That can beat the other option, which is watching the tenant fold and having no replacement ready.
“You could be without income for six months, and then you have to pay leasing commissions, service all of the expenses at the property, and potentially pay some tenant improvement allowances as well,” Shaffer says. “For most people it’s going to be more expensive for you to lose them instead of finding something that can work for everybody in the long-term. Just make sure that you’re not tripping any [bank] covenants and have an attorney look over that lease and loan documents very carefully.”