We MUST Save Tenants!

Image Attribution: www.quickevic.com

Commercial real estate is a complicated web of owners, occupants, lenders, and buildings. Owners - owner occupants or investors - are either residents of their commercial real estate or reliant upon the income it produces. Occupants or tenants - who operate businesses - pay rent - either to themselves or to a landlord. Lenders make loans - ordinate debt - based upon the sum occupants pay. So you can see - at the baseline of all commercial real estate - someone MUST pay rent. If not, the entire structure comes cascading down.

During this pandemic - unprecedented in so many ways - government has shuttered businesses such as restaurants, bars, and meeting venues. Many more companies have adopted a remote work force - office suites are dark. Those few “essential” operations keep chugging along - albeit at a reduced labor force. When commerce can’t occur, cash dries up - money used to pay employees, rent, debt service, purchase raw materials, etc. evaporates.

Many owners of commercial real estate - such as the Irvine Company - have pre-empted the spate of rent defaults by offering their retail tenants a deferral of their payments for 90 days. The deferral is then repaid over the following year. Bravo!

If your enterprise is facing similar pressure - below is a simple set of talking points you can use to have a conversation with the owner of your commercial real estate.

Please keep in mind this approach will vary depending upon the sophistication of your landlord, your relationship, and the specific impact that COVID-19 has had upon your operations. It’s important to be very transparent with your owner these days in the hardship that your company is experiencing.

Number one. Your tenancy is vital to our economy and specifically to your landlord’s building - as your rent pays his mortgage and creates the building’s value. 

Number two. To replace your tenancy is is extremely costly. In good times this means approximately 10 to 15% of the entire consideration of the lease. In uncertain times this could be up to 30% of the total consideration of the lease. A good tenant is not someone you want to lose and it’s in everyone’s best interest to keep the tenancy viable. 

Number three. Request rent relief in the amount of $_______________ as a furtherance of your viability.

I’m confident once we navigate this patch of uncertainty - our economy will return to its previous trajectory - at least that is my hope. Tenants, please stay safe and healthy out there! Our future relies upon you.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.