Can’t Pay Rent? Communication, Transparency Is Key
April 1 is a big mile marker in the COVID-19 pandemic—it’s the first time many business owners had to decide exactly what they were going to do about the rent bill. The No. 1 thing to do with your landlord is open the line of communication.
“Do not stick your head in the sand. Communicate with your landlord and your real estate advisor,” said Peter Block, executive vice president at the Chicago office of commercial real estate firm Colliers International. “Realize the chain here. The tenant, the restaurant has rent to pay, they’re getting less revenue from customers. He’s going to be challenged, then in turn, some people will have to be challenged and pay partial rent or no rent, then the landlord is affected and they may have a mortgage and then the bank’s affected. That’s the chain from the consumer all the way to the bank.”
While there’s a spirit of cooperation emerging in all this, and “everybody is going to make provisions to not put people in default,” what exactly those provisions look like remains to be seen. Block said there will likely be a lot of landlords pushing things down the road.
“I think it’s not that the obligation will be eliminated, but it will be extended and pushed back. That makes a lot more sense to help people get back on their feet,” said Block.
A lease of two years and six months, perhaps it becomes partial rent only and turns into a two year and nine months lease—depending how long the effects of the pandemic last.
Landlords and advisors are getting slammed right now by both their customers and their lenders and everyone is trying to figure it out, but smart landlords know that saving a location is in everybody’s best interest.
“Landlords are being inundated with requests to give some support at this time or give some assurances that they’re not going to threaten tenants with dire consequences if rents are missed or if this is exacerbated or this lasts longer than we think,” said Ty Brewster, an advisor at Keyser, a real estate advisory firm. “If we can save units, the franchisor, the franchisee, the landlord and the suppliers benefit, it takes a village here.”
To make the best case, however, operators should put together some key information. While many have probably made a call when it was clear they couldn’t make their April rent, knowing what they really need is key.
“I think it’s a little early to be calling and asking landlords what you want,” said Rocco Fiorentino, the franchise lead at Keyser. “I’m just not sure the asks today will be big enough. I would ask everyone to utilize their senior team to see what they can do. You have to be careful in what you’re asking for, I don’t think they’ll allow us to change our ask every week.”
Clearly, even the nicest, partner-minded landlords aren’t going to forgive rent without a good reason, so operators need to come to negotiations with information.
“When you’re asking your landlord or real estate agents to ask for you, we typically like to know all the considerations, not just what we’re asking the landlord,” said Fiorentino.
He said he’d lay out what the franchisor is doing on fee abatement or royalty concessions, and what vendors and suppliers are doing to give operators a break.
“When I ask a landlord for something, I like to share with them all the other people making considerations for them to still have a tenant. I think that goes a long way,” said Fiorentino. “I think anyone that is in the landlord seat doesn’t want to be the one making this crisis, they like to be included and see that they’re part of a group making this work.”
He said business performance metrics are very useful, too, and can be a leverage point for more breathing room if things are especially bad. Comparing this COVID-19 era to the first quarter of 2019 can be illuminating, though it might be different for different operating models.
“That’s important if you need to use that as a leverage tool. If you’re only down 20 percent with memberships in the fitness space, you may not want to bring that up. If you’re in the restaurant business and you’re down 90 percent, you should show that you can’t squeeze any blood from a stone,” said Fiorentino. “Every location will have different struggles, so know those numbers when you go to the landlord and speak specifically about what you’re asking for so it’s not a generic request, it’s a specific request.”
Restaurants, for example, that get a lot of sporting event traffic probably saw an even worse first quarter than others, and it’s something operators should highlight. If the concept doesn’t have a strong delivery or takeout program, it will be hurting and it’s something to note.
Finally, have a date and a timeline in mind. Landlords need that to plan their own negotiations with banks and fit whatever rent or fees are coming in with their budget for common area maintenance, taxes and their own payroll.
Above all, Fiorentino, Brewster and Block said to have this information at the ready. The more they have to come back for documentation, proof or missing numbers, the longer a new contract will take.