Creative Solutions For Landlords And Tenants. Lessons From The Corona Virus COVID-19

Coronavirus is affecting everything in its path. As commercial real estate brokers and property managers, we are receiving calls from tenants wanting to stop paying rent. At the same time, we are receiving calls from Landlords saying that tenants have the responsibility to keep paying.

All of us in commercial real estate have faced confrontations in the past between Landlord and existing Tenants. However, the onslaught of the Coronavirus has given us all pause for thought. Never before have we been hit with so many competing demands at the same time. How do we find the balance?

A tenant that is a fitness studio or a restaurant has been forced to close down during the crisis. The business owner feels a responsibility to pay their employees and they have to pay rent, loan interest, and other expenses. Yet they have no revenue coming in. They did nothing wrong that would have caused them to be in this predicament. Their employees look at it the same way. They did nothing wrong and feel that the business owner should still pay them even though they have been sent home from work. Of course, the rental equipment providers to the business have the same thoughts. The equipment that the business rents are still on the premises of the business and the business should pay the monthly rental fee. After all, the equipment rental company has done nothing wrong.

Lunch Time Photos in Downtown Tampa – Two of Tampa’s busiest streets – the streets are empty

Some tenants have taken the view that the default course of action is to stop paying rent. Landlords, after all,  are wealthy and if the Landlords want them to remain on as tenants the Landlords should help them. The problem is that Landlords are in business just like everyone else. They have expenses and they have mortgages. Landlords did not cause the crisis either

The only thing that everyone can agree upon is the opinion they each have that they themselves did not cause the crisis and therefore should not bear the burden

We can only address the situation if we take the position that landlords and tenants are both parts of the same food chain. Neither can survive without the other and everybody has to participate to keep one another alive.  It will be painful for everyone. Tenants take the first hit. Workers may not get his full pay, the service providers will not get all their fees and the owners will cut their own salaries. Eventually,  Landlords will have to accept some portion of the rent burden. However, it should not be that tenants just sit back and hold out their hands to their Landlord. Tenants should take immediate steps to avail themselves of State and Federal programs that provide relief.  If a tenant does request assistance from their Landlord, it seems only fair that they demonstrate to the Landlord that they have taken concrete steps to help themselves.  Some Landlords have already created forms that tenants must complete evidencing that the tenant has applied for help before coming to the Landlord. Many landlords will themselves be going to their lenders to ask for relief.

China has demonstrated that the only way to stop the crisis from snowballing is to be proactive and take bold action. Time is of the essence to find creative ways for tenants and landlords to work together. By being proactive and having discussions with Tenants, Landlords can mitigate some of the issues that will certainly arise.

Here are a few examples

1. Assuming this is a short term problem, allow the landlords to apply the tenant security deposit towards rent. Later, when the crisis has subsided the tenant can rebuild his security deposit by adding a few hundred dollars to each month rent check
2. The Base rent is reduced by 50% for ninety days. The tenant with a Net lease still pays CAM expenses. The unpaid 50% base rent is repaid to the landlord over the period of the remaining lease term ( I am not an attorney and you should always obtain legal advice when modifying a lease. However, if it helps you, here is one letter that I created that worked for both Landlord and Tenant Sample Letter)
3. Blend and extend. A variation of this is for there to be a reduction in rent paid for a period of time, with the lease to be extended commensurately
There is no “one situation fits all” solution. Tenants that are behind on the rent or habitual late payers may not have earned the forgiveness rights cited above. It could be argued that they were already traveling on the road to failure. Some Landlords that are heavily leveraged may not have the luxury to negotiate. Solutions will vary depending upon which state you are in. Much of the focus in the media has been on residential leases. California has already served notice that commercial landlords must give a 90 day grace period if requested, and commercial tenants cannot be evicted during that period. Florida is traditionally more conservative and I don’t expect Florida to take the same path. Many individual negotiations must take place to address specific situations, with parties applying creative band-aids to each circumstance

This is also an opportunity for Landlords to strengthen the lease quality of their tenants. It may be better for the Landlord to let the tenants that are of poor quality leave, rather than continue to be stuck in a lease with a poor quality tenant. Other tenants that want to negotiate rent concessions can be given new leases. Perhaps the rates will be better or other terms will be improved to the good of the Landlord. Another idea is to require tenants in the new lease take out some kind of insurance that will protect the tenant and the landlord from future business interruption

I remember in New York when there was a transportation crisis in the 1980s. This sparked a fundamental change in behavior. People started walking. Prior to the Transit strike, women would rather be caught dead than be seen without their high heeled shoes. During the strike, women began to wear sneakers with their skirts and dresses. they carried their high heeled shoes in their purse and put them on when they reached their destination. That continues to this day. In the midst of the Coronavirus, We are not shanking hands anymore. Instead, we pump fists. I would not be surprised if this becomes a permanent behavior change in society. We, in the real estate world, are always seeking situations that have upside potential. People have learned that shaking hands has a lot of downside.

The Corona Virus has given us many things to think about. A crisis can bring out the worst in people and it can bring out the best in people. Landlords and tenants are not necessarily polar opposites. Their interests are aligned in many ways. How they interact and support one another in navigating this crisis will impact the entire business and real estate community. Eventually, the Crisis will pass. Perhaps the Coronavirus crisis will spark creative solutions for Tenants and Landlords that will still be relevant long after business returns to normal.

Steven Silverman is the Broker at Tampa Commercial Real Estate. We have boots on the ground in the Tampa Bay, Florida and we are pleased to share some of our thoughts and observations. If you have thoughts or solutions that you can contribute to your real estate community, please comment on the blog page below. We are all in this together. Let’s learn from one another