Many commercial landlords in Memphis have been telling this to their small-business tenants struggling during the pandemic:
Pay neither rent nor triple net (tax, insurance and common-area maintenance expenses) for the next month or so, but gradually repay that amount with zero interest, amortized over the next year or across the months left on the lease term.
Some other landlords are charging tenants only the cost of taxes, insurance and common-area maintenance for, say, three months, but then add those three months to the end of the lease term, said Barry Maynard, a veteran commercial broker who last year joined Gill Properties as vice president of brokerage.
“A lot of tenants’ preferred way is to tack it on to the back of the lease,” Maynard said Monday, April 6.
If the business had, say, 57 months left on the lease, the term expands to 60 months.
“It’s great as long as the tenant stays. But if the tenant closes, the landlord eats the loss,” he said.
Another approach is for the tenant to pay nothing for three months, but then pay it all at the end of the three months. That could be problematic considering the business likely has had little, if any income over the three months, Maynard said.
Those are just a few ways commercial landlords and tenants have navigated the economic crunch caused by COVID-19.
Gill Properties owns the new TraVure multi-use development in Germantown, self-storage locations and five shopping centers. Among the strip centers is Kirby Gate at Kirby and Quince.
Midday Monday, only five of the 16 retail or office bays showed signs of life. Yellow caution tape was strung between the doors of a Goodwill location there. Several other closed businesses posted signs referring to Memphis Mayor Jim Strickland’s order that nonessential businesses close.
Landlord Ray Gill strongly opposes one possible landlord-tenant solution. It calls for a tenant – even one forced by government to close as a nonessential business – to unilaterally declare he or she will stop paying rent because the cash flow has stopped.
Gill referred to recently published comments made by a veteran real estate manager who told the Memphis Business Journal that an owner of a closed business should be in constant communication with the landlord, but stop paying rent if terms cannot be worked out, even if the business has money in the bank.
“It was premature and bad advice,” Gill said of the comments he read.
Premature, Gill said, because landlords have loan payments they must make to their own lenders. As of Monday, Gill’s banks had yet to tell him what concessions, if any, they will make, he said, adding the banks planned to wait to learn more about government aid and how it all “would play out.”
“It’s never good to publicly tell companies to not do what they are contractually obligated to do,” Gill said of the advice not to pay rent. “Each situation is different.”
Gill Properties decided to cut the rent in half for its tenants over the next two months, but add the difference to later months with no interest or penalties.
“I waited to make the decision until I saw what the CARES Act will do,” he said of the $2 trillion government aid to ease the economic damage of COVID-19. “The CARES Act influenced me because of the huge largess of the federal government to keep the economy going.”
Gill Properties has offered to help its tenants fill out their forms applying for federal aid such as the $349 billion Paycheck Protection Program, which can provide money to cover payroll for two months and also help with rent, utilities and other expenses.
Teamwork among tenants, landlords and banks is critical during the pandemic-caused economic emergency, said Danny Buring. He’s managing partner of The Shopping Center Group, which provides brokerage services in commercial real estate.
“The landlord needs to know they are in partnership with the tenant for the tenant to be successful,” Buring said. “And the lender needs to think of themselves as a partner with the developer/landlord.
“If those two things are not congruous, then you are going to have a problem getting through this. It’s not responsible for a landlord to say ‘It’s not my problem.’ And it’s not responsible for the lender to say that either.”
It’s also reasonable for tenants who receive aid from the federal government to use part of the money to pay landlords, Buring said.
For leases for which The Shopping Center Group has been involved, Buring said, “we are asking the landlord to ask the tenant to pay their share of operating expenses (taxes, insurance and common area maintenance). It’s not a profit center. The landlord still has to operate the shopping center, still has to pay taxes.”
Landlords and tenants are navigating the economic crisis in many ways, Maynard said. But any tenant seeking relief should be expected to also apply for federal aid such as the forgivable loans of the Paycheck Protection Program, he said.
“If you haven’t done that, you haven’t made a good-faith effort,” he said.