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BUSINESS OBSERVER | APRIL 3, 2020 - APRIL 9, 2020
BusinessObserverFL.com
infocus | pandemic response |
BY KEVIN MCQUAID | COMMERCIAL REAL ESTATE EDITOR
Landlords, tenants seek middle ground in complicated situation A
s landlords, their tenants and lenders alike across the region face an uncertain future replete with barren storefronts, incomplete build-outs and looming mortgage payments, experts advise patience, careful consideration of relationships and, above all, communication. Another important part of the response: Avoid panicking. “Everyone that I speak to in Tampa Bay and beyond is trying to work through things right now,” says Robert Stern, co-director of the real estate lending practice group at Trenam Law in Tampa. “No one is being too aggressive at the moment, from what I can see, which is probably a good approach. At this juncture, people are talking and trying to figure out a good course of action.” With the coronavirus pandemic in the U.S. entering its fourth week impacting businesses, many struggling tenants are scouring leases looking for escape clauses and pouring through documents pertaining to their business interruption insurance. Landlords, meanwhile, are reviewing lease commitments and contemplating exercising “force majeure” — unforeseeable circumstances or “acts of God” — clauses pertaining to tenant improvements and other obligations to trim expenses and immediate cash expenditures. Others have approached lenders to outline “performance disruptions” t hat might delay mortgage payments or other obligations. One company — national restaurant chain The Cheesecake Factory — has taken a more direct approach: The publicly traded firm, with four locations in the region and 17 in Florida, sent a letter to its landlord March 27 indicating it doesn’t plan to pay rent on its leases in April. But mostly, each party to the real estate transaction appears to be attempting to formulate mutually agreeable resolutions to the crisis imposed by COVID-19 and are documenting the results. “It’s almost always positive when tenants and landlords talk,” says John Harshman, president of Harshman & Co. Inc., a Sarasota commercial rea l estate brokerage firm. “Landlords are in, or should be in, the business of giving good ser v ice to their tenants. In some cases, that may involve a forgiveness or an abatement of rent because a tenant could, if pushed, declare bankruptcy, and then the landlord would be out. That would be worse position than not receiving a rent check or two.” Noah Shaffer, senior director of asset management for Tampa-based Confidant Asset Management, agrees. “Some commercial landlords are handicapped in times like
Tenants, landlords and lenders are scrambling to evaluate — and possibly renegotiate — lease commitments amid the COVID-19 outbreak.
MARK WEMPLE
With store closures all over Florida, like here in downtown St. Pete (taken March 27) landlords and tenants will be in active negotiations for months. this because they have mortgage covenants that govern what they can and can’t do, but for the most part, they don’t want to lose a tenant if they can help it because releasing a space takes time. At the end of the day, it’s much more expensive to try and replace a tenant than to give away a month or two of rent.” Empathy can be an asset for landlords, too, in this situation. Grocery giant Publix, for one, is offering rent relief to businesses operating in Publix-owned shopping centers that have closed due to the coronav irus pandemic, according to a statement. The relief package includes waiving rent for two months, as well as waiving payments for common area maintenance fees and taxes, regardless of the tenant’s access to other relief or assistance. “As a company that started as a small business 90 years ago, Publix wants to help businesses renting from us survive the economic impact of these unexpected closures,” spokes-
woman Maria Brous says in the statement. In cases where tenants have appealed for leniency, Shaffer says he knows of a few client landlords in the Tampa Bay area and elsewhere who are offering rent abatements on leases in exchange for lease extensions or additional guarantees from tenants. “In a lot of cases, these situations can actually benefit the landlord long term,” Shaffer says. Stern, meanwhile, says he’s spoken to landlord clients who have negotiated with tenants to use their security deposits toward monthly rent payments rather than declaring defaults. “What we’ve got throughout the system right now is a liquidity problem, from the tenant to the landlord to the lenders,” Stern says. “It’s a freeze in the system right now, and it’s a problem for everybody.” Beyond leases and commercial mortgages, commercial real estate business, like in many other sectors, has slowed dramatically. Anecdotally, at least, office deals also are being
At the end of the day, it’s much more expensive to try and replace a tenant than to give away a month or two of rent.” Noah Shaffer | Confidant Asset Management pulled back, as wary investors question whether teleworking tenants will fulfill lease deals or whether new commitments can be had in the current environment. Even industrial properties, long the darling of investors with the advent of e-commerce, are being questioned as products from overseas languish in ports. One key there, like in other parts of the business response to the coronavirus pandemic,
is not to panic. “Obviously, if the present situation regarding the virus continues for a few months, it could be a significant problem for all real estate parties concerned,” he says. “But people also need to keep in mind that the U.S. economy prior to coronavirus wasn’t edging toward a bubble; there were no excesses at work. This is a health care issue, an external issue affecting things today. All other recessions going back to before World War II were caused rather by some problem within the U.S. system. As such, I see this as a relatively short-lived issue for the economy.”
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