Business Continuity Amid the COVID-19 Crisis

Jahn Brodwin, senior managing director, FTI Consulting. Image courtesy of FTI Consulting

Smaller and emerging real estate companies face the challenge of meeting multiple, often conflicting goals in the midst of the coronavirus pandemic: Maintaining properties, paying salaries and meeting other financial obligations, all while maintaining a market presence. Some assistance is available from government and private sources. But  smaller real estate companies can take a variety of actions to help weather the crisis.

Short-Term Opportunities

Communicate with tenants. Today’s situation presents a prime opportunity to build or bolster rapport with customers.  Jahn Brodwin, senior managing director at FTI Consulting, suggests picking up the phone and calling your tenants to discuss their challenges and learn how you can help. “Look at your leasing plan and start thinking about what I can do now to improve what everything will look like a year from now or two years from now,” he advised.

If you have commercial tenants with leases expiring soon, you may want to consider proposing a deal: for example, forgiving the next three months of rent  in exchange for a significant adjustment to terms—perhaps a lease extension of  several years. This strategy is particularly beneficial if you have loans maturing in the next year.

Mark Lochiatto, partner, Goodwin Procter. Image courtesy of Goodwin Procter

Remember your lease terms. Mark Lochiatto, partner at Goodwin Procter LLP, recommends that landlords should continue with normal default notices. The step doesn’t have to be an aggressive one, but documenting unpaid rent is important to maintaining your rights as an owner. Byron Carlock, U.S. real estate practice leader at PwC, observed, “We have to respect the sanctity of our lease documents and our loan documents.”

Another point to keep in mind: If your tenant declares bankruptcy, you may never see the security deposit again, Lochiatto noted. If you think your tenant is facing this situation, use their security deposit for payment of rent. Any concession that you offer tenants should be based on the condition that the tenant is applying for aid from the government.

Evaluate your leases. If some of your lease provisions have been problematic (i.e. a tenant is entitled to parking spaces that you would like to use for another tenant, or a restriction prevents you from bringing in a particular tenant to a shopping center), you may be able to remedy that issue by offering the tenant reduced rent, free rent or other benefits, noted Lochiatto.

Byron Carlock, U.S. real estate practice leader, PwC. Image courtesy of PwC

Communicate with lenders. They will do everything in their power to help you. Carlock has seen instances where “the small landlords who have tenants that can’t pay, they can go and talk to their lenders, who I’m watching, very generously, give 90-day forbearance just for asking.” Those owners can then make the delayed payments over a 12-month period add it at the back of the loan.

Brodwin agreed. “Lenders do not want your property back any more than you want to give it to them. They are in the business of lending money, not owning buildings.” Lenders, property owners and tenants alike must show flexibility. It’s also important to update lenders about which tenants have and haven’t kept up with their rent payments.

Familiarize yourself with government resources. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides tremendous support to small businesses. Brodwin has been recommending these programs to his clients and urges all qualified companies to take advantage of them. Key provisions include a paycheck protection program, forbearance of mortgage payments for federally backed loans and the option to delay payment of employer payroll taxes.

As of April 23, Congress was nearing a deal on an additional $310 million in funding that would provide additional support for small business. Although most landlords would be considered ineligible for this program (except for those who have restaurant or hotel tenants), it is still beneficial to encourage your tenants to apply. And condition any concessions you may offer on their application for these programs. 

Long-Term Views

Looking forward, a lot of distressed capital will likely become available. If you are a smaller, well-capitalized real estate company, this could be a good time to look at distressed sales. If you don’t yet sponsor a fund, consider doing so. Carlock is encouraged by the fact that multifamily was enjoying both strong demand and an undersupply of product coming into this crisis. If employment returns, he believes the outlook for the sector is still positive.

For the office sector, the future is more complicated. Re-entry into buildings will be a challenge. New safety measures may include a greater number of enclosed areas, temperature checks and antimicrobial surfaces. According to Carlock, there may be some re-thinking of urbanization issues. For example, underperforming suburban office markets may bounce back. Meanwhile, office owners should be proactive and start thinking about the changes that may be required to make their tenants feel safe about returning to work.