Addressing Requests for Rent Relief: Six Strategies for Commercial Real Estate Investors

As nearly all municipalities have issued stay at home orders and only “essential businesses” remain open, many businesses have suffered a significant drop in sales. As a result, landlords are receiving numerous requests from commercial tenants for rent relief in the form of rent deferrals, rent abatements and other forbearances. Some tenants are reluctant to state their case for relief, while others are demonstrating their hardship by sharing sales figures over the past three months and comparing them to prior years. When landlords weigh the legal costs from a lease dispute and damage to tenant relations or the time and money involved in re-letting a vacated suite they can find reason enough to work with their tenants.

Based on our conversations with tenants, landlords and real estate investors, the following six planning strategies can help commercial real estate investors more successfully navigate rent relief requests during this difficult period.

1. Leverage your network

In this environment, deep relationships in the industry matter more than ever. Commercial real estate is an opaque market, and investors need relationships with market participants (brokers, appraisers, contractors) in order to have insight on what is happening live on the ground. It is also important for landlords to have good working relationships with their lenders, as certain lenders can be easier to work with and more nimble than others during challenging times.

2. Proactively assess three key areas that impact your property’s financials

Check-in with your tenants proactively, and develop a consistent process for considering and granting rent relief requests. Double-check loan covenants to ensure that any proposed lease modifications do not require lender consent. How does the current financing compare to market terms? Would a refinance be prudent in this interest rate environment? Review your insurance policies for rent loss coverage. Depending on the outcome that you reach with your tenants, re-forecast your property cash flows accordingly and identify ways to improve property financials and tap into capital reserves if necessary.

3. Understand your tenant’s business

Landlords also need to make sure they understand the tenant’s overall business to determine whether there has been a true impact from COVID-19 that affects the tenant’s ability to pay rent. Property owners are essential partners in a tenant’s business operations. Not only do they rent space, they often serve as an essential source of capital for the business. How does the building support a company’s operations; does it provide access to a customer base; is it a mission-critical facility or a brand-enhancing environment? Learning these facts will also help you understand the post-COVID-19 viability of any impacted businesses.

4. Evaluate your negotiating options

Landlords need to evaluate all their options for a rent relief request: deferral, partial abatement, abatement or no rent relief. Keep in mind how these options impact the landlord’s ability to meet its obligations to maintain the property, pay debt service as well as the expectations of equity investors. Consider not only local market and tenant factors affecting lease negotiations, but also temporary government regulations (e.g., eviction moratoriums) and new requirements imposed on property owners.

5. Consider restructuring your lease terms

Rent relief negotiations are an opportunity to consider modifying other portions of the lease. Forbearance can apply to many other tenant obligations, such as operating hours, completion of improvements and maintenance responsibilities. Similarly, it may be a good opportunity to adjust certain landlord obligations in exchange for conceding to a tenant request.

6. Prepare for the Consequences of Tenant Default

If you deny a rent relief request you need to fully consider the potential consequences of a tenant default. How does the current rent compare to market rent? Is the condition of the property competitive within the market, or do improvements need to be made? How much would re-tenanting costs be, including commissions, tenant improvements, capital improvements and expected downtime? In some markets, a tenant default, which (eventually) results in a vacancy, could be an opportunity to improve a property’s rents to higher market rates with a new tenant.

Most tenants are seeking one to three months of rent relief, but the recovery may take longer. Only time will tell whether the near-term concessions that landlords are making for tenants will have their intended effect of prolonging a tenant’s occupancy long enough to make it through the pandemic. As politicians debate reopening the economy, real estate investors wait for clarity on how these immediate decisions will impact their properties over the long term.

Real estate properties can be among your most valuable investments, but managing them is complex and time-consuming – particularly amid a period of unprecedented uncertainty. To understand how Northern Trust can help you during this difficult period and beyond, learn more about our real estate services.

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.