Millions of owners or renters of commercial real estate confront unforseen hurdles during the COVID-19 pandemic. At a time of suddenly-shuttered restaurants and stores, as well as sky-high jobless rates, tenants and owners must navigate unchartered waters. Tenants may not be able to pay rent, while owners face issues regarding mortgage payments and more. What both need is a roadmap regarding leases and loan agreements that can help them chart the least disruptive course of action during the Coronavirus pandemic.
Providing just that is Christopher Herthel, who has spent his career formulating and implementing investment management strategies across the commercial real estate spectrum on behalf of institutional and private clients.
The Irvine, Calif.-based real estate director for accounting-consulting firm Moss Adams, and a real estate veteran of a quarter century’s standing, Herthel recently mashalled his thoughts regarding the aforementioned daunting headwinds, and set forth a few common-sense suggestions for real estate owners and renters.
Tenants must grasp their options and act swiftly, Herthel says. Tenant business operators should review lease documents and understand their rights regarding force majeure rights (rights related to unforeseeable circumstances preventing fulfillment of contracts), rent payment and cure period timing, co-tenancy provisions and landlord obligations.
Bargaining power can help tenants. Suggesting alternatives to eviction can benefit both them and landlords, because landlords facing pressures value retention of occupancy even if accompanied by rent reductions and modified lease terms. Herthel urges tenants to discuss their circumstances as early and often as possible with landlords and lenders. He also advises tenants create feasibility plans based on current and anticipated future conditions, striving to gain approvals when necessary from their landlords and lenders.
For landlords and owners
Landlords and owners need to comprehend the breadth and depth of their options. In addition to understanding majeure rights and rent, loan and cure period timing, they must avoid failing to meet critical operational obligations. They also should do their best to retain occupancy even if doing so calls for lease modifications, rent reductions or temporary rent relief, which can help minimize the risks associated with evictions and long vacancies.
Like tenants, landlords and owners must communicate early and often with stakeholders such as tenants, lenders and limited partners, and craft feasibility plans resting on present and likely future conditions, acting expeditiously to gain any needed approvals.
Landlords/owners also must work to continue to involve limited partners and investors, making sure to notify them of their plans and actions.
“For owners without an advisory board consisting of major investors, consider forming one on an ad-hoc basis and discussing all major decisions regarding lease and loan modifications with your advisory board,” he noted. “Communicate your proactivity, hard work and commitment to protecting investors’ interests through this period.”
Financial and cash-flow projections should come in for revision. Conduct scenario planning using up-to-date and conservative financial projections. Report potential impact on profits and investor returns, which can help yield long-term plans for financial success.
Also, seek opportunities. Don’t forget the decade following the 2007-08 Great Recession witnessed an enormous recovery along with substantial value creation, Herthel points out.
It’s highly possible today’s economic uncertainty could furnish a stage for key acquisitions, portfolio repositioning and refinancing into lower interest rates that could stand landlords and owners in excellent stead for years to come.
“Navigating real estate issues during times of uncertainty and market upheaval can introduce strategic and operational challenges,” Herthel concludes. “Businesses with sound planning can move forward with confidence, including adopting restructuring challenges, reviewing portfolios or documentation, navigating negotiations and more.”