April 1 marks the first time businesses will have to pay their rent since the coronavirus crisis shut down large portions of the economy across Northern Colorado and the Boulder Valley, forcing tenants and their landlords to seek creative solutions that allow both parties to remain viable.
Solutions aren’t one-size-fits-all, Colorado Group Inc. managing broker Jason Kruse said, but there are some common approaches emerging.
Some landlords, particularly those who own hard-hit restaurant or retail properties, are offering rent deferral options, often in an initial 3-month increment, he said. Tenants would cease base rent payments for three months, and those payments would be tacked on to the end of the current lease term.
Other property owners, according to NAI Affinity CEO Ryan Schaefer, are offering a “cash-flow neutral approach” that allows tenants to apply their security deposit to the current month’s rent. Landlords “still have security under the leases so tenants can’t just trash the place and not be liable for it.”
In some cases, particularly for long-term tenants with an established history of success, lease “terms can get renegotiated and extended,” Casey said. “It would be a new structure that gives tenants a break over the next few months and then normalizes over time. If you’re a good tenant, landlords want to extend the term; they don’t want to lose you.”
In addition to the relief provided by landlords, “we’re seeing lenders for restaurants to offer 90 days of interest-only payments, and we’re seeing franchisors reduce or eliminate franchise fees,” Schaefer said. “There seems to be a lot of broad-based support and that’s really encouraging.”
In addition to retail and hospitality operators, oil and gas companies are struggling mightily in this current economy.
“We’re seeing a lot of layoffs in this industry, and companies that don’t own their own facilities are definitely looking for relief from their landlords, similar to what we are seeing in retail,” Schaefer said.
Not all industries look so gloomy.
“We haven’t seen a lot of disruption in office spaces yet,” Schaefer said, but this is an area for commercial real estate professionals to keep an eye on.
“This pandemic is going to cause the per capita demand for office space to decline going forward” as working from home becomes a more viable option for companies and employees, he said.
Certain industrial tenants such as product distributors are not likely to require any breaks from landlords.
“Last mile distribution is doing just fine,” Schaefer said in reference to firms such as Amazon Inc. (Nasdaq: AMZN), which recently leased a distribution center space in Loveland. “All of us are continuing to order products online and this [stay-at-home period] is going to accelerate that trend.”
Landlords are facing similar pressures as their tenants and some are also seeking relief from lenders.
“Everyone thinks landlords can just stop receiving rent payments — well, they can’t,” Kruse said. “Taxes don’t stop, insurance doesn’t stop, maintenance costs don’t stop.”
In certain cases, banks are offering certain fee waivers, payment deferrals.
“There are a lot of people who are really hurting right now … and they need us now more than they ever have,” Elevations Credit Union CEO Gerry Agnes told BizWest in an interview this month.
Schaefer said landlords are “seeing a lot of flexibility among regional banks” and less flexibility from Wall Street commercial mortgage-backed securities funds and large institutional lenders.
“Those CMBS funds are really just run by a servicer and the lender is really the bondholders and purchasers of that security,” he said. “So that type of set-up doesn’t lend itself very well to flexibility. The servicer can’t make a lot of modifications to loans without getting approval from bondholders or the CMBS owners.”
Times of crisis can put additional strain on what is often already a contentious dynamic between landlords and tenants.
“There are cases where landlords are proactively stepping up and coming up with solutions to help tenants,” Casey said. “But on the other extreme, I’ve heard of a case where a landlord told a tenant, ‘The [the COVID-19 outbreak] is a hoax and we’re not going to do anything for you.’”
Rather than exacerbate tensions, both parties ought to look for ways to use this experience to work for the common good, he said.
“If we work together, there is the possibility for all of us to come out of this as whole as possible.”