The financial consequences of the COVID-19 pandemic have been widespread, leaving many businesses searching for ways to reduce overhead expenses. With May rent due today for most office tenants, frustrated executives are staring at invoices for space that most likely has not been used in the past 45-60 days, nor will it be used at full capacity for the foreseeable future. As this crisis continues and tenants navigate through their options for cash conservation, many business leaders are wondering what they should do about May rent, which is a complicated question to ponder.
Further complicating matters, a false and misleading marketing campaign by a California-based tenant representation firm has inaccurately suggested that Seattle area office landlords are providing rent relief to tenants on a widespread basis. Not only is this claim untimely, it is also not true. By creating the false hope of rent relief, this firm is using this campaign to get in the door with companies (some, our clients) at a very vulnerable time; an approach we view as borderline predatory. This firm has also advised companies, to which they have no fiduciary duty, to NOT pay rent in order to force their landlords to the table to renegotiate. This could trigger default and put businesses at risk of losing important lease rights, or even losing their spaces altogether.
Washington Partners would like to clear up the confusion that has been created by that firm’s misleading campaign, as well as distance ourselves from these untrue statements.
Now, let’s talk about the real facts:
Extending Tenants Lifelines Out of Necessity, Not Generosity
Most Class A and B office buildings in the Seattle area are owned by institutional landlords that also hold large portfolios of retail and hospitality properties. Retail, restaurant and hospitality tenants have been particularly affected by the COVID-19 shutdowns, leaving many such tenants with existential threats to their businesses. It does not help that funds from the Paycheck Protection Plan program ran out quickly, and even funds that were committed in the first round have taken too long to reach the businesses that desperately need them. This is leaving many retail tenants on the brink of bankruptcy, and as a result, retail landlords have had no choice but to extend lifelines to these tenants to keep them afloat rather than get the space back at a time when demand for retail space is very limited.
Most Landlords are Fiduciaries for Other People’s Money
Institutional landlords have a fiduciary duty to their investors, which may be pension funds, insurance companies, private capital investors, passive LLC members or public stock shareholders. This fiduciary duty prohibits landlords from offering financial gestures of goodwill.
When a commercial landlord provides rent relief to a tenant of any type (office, retail, etc.), they are doing so as a practical matter in order to avoid an increase in vacancy. Just as it is the landlord’s fiduciary duty to extract as much income from the property investment as possible, that fiduciary duty extends to mitigating the risk of income disruption through increased vacancy. Thus, rent relief is being provided to tenants that can not only demonstrate financial hardship, but whose prospects are so bleak that they are likely to go out of business if drastic cost reduction measures are not taken.
When commercial tenants of any type approach landlords looking for rent relief, they can expect to receive several long forms to fill out. Below is a list of some of the types of questions we have seen on these forms:
- Have your operations suspended based on government or municipal mandate related to COVID-19?
- Do you have quantifiable losses related to COVID-19?
- Have you laid off staff?
- Have you adjusted executive compensation?
- Are you able to conduct your business remotely?
- Do you have business insurance that covers loss of revenue, or other catastrophic losses?
- Have you applied for any government assistance?
- What other resources have you exhausted to alleviate your current situation?
- Please provide one year historical and month-to-date financials including P&L, balance sheet and cash flow statements
- Please provide a general description of the desired concession or short-term proposal for rent relief?
When the answers to these questions convince landlords that rent relief is a necessary lifeline, without which the tenant would go out of business, they are sometimes willing to defer rent for 2-3 months or make other similar concessions. Even then, the rent obligation is rarely forgiven, it is just deferred to a later date.
Landlords with large retail portfolios are getting so many requests for rent relief right now that some are forced to draw on lines of credit to meet their mortgage debt service obligations and pay their property taxes and contracted services. There is a huge potential ripple effect to rent relief, and it exposes the fragile underpinnings of our economic ecosystem.
Should You Seek Rent Relief, Or Renegotiation?
We would be more than happy to discuss your particular situation with you and develop a thoughtful plan. If you are an office tenant considering making a rent relief request, it is important to first understand who your landlord is, and whether they have substantial exposure to the retail or hospitality sectors. If your landlord falls into that category, there is nearly a 0% chance that you will receive rent relief of any kind because the landlord may also be facing a difficult financial predicament.
If your business is facing a legitimate existential threat from the COVID-19 fallout, we have found that “principal to principal” discussions between tenant and landlord are more productive than going through a broker or an attorney, but even in that case we can offer some advice behind the scenes.
Perhaps your business has the financial resources to weather this financial storm, but you still would like to explore ways to negotiate cost reduction by putting some other negotiating cards on the table. We can evaluate all of the dynamics with you, and explore a variety of scenarios that may be mutually beneficial to both tenant and landlord. If your office lease expires within the next 24 months, there are many such cards to play.
These are trying times that we are all going through, but we must remember that this pandemic will not last forever. The fact is, you will continue to have a business relationship with your landlord until your lease expires. As such, it serves you well to remain in good standing with your landlord so you are perceived as a strong and desirable tenant during your next lease renewal negotiation. As the market shifts from what has been an extremely landlord-favorable market to one where the balance of power is shifting back to the tenant, the most stable tenants will reap the greatest concessions. How a tenant is perceived in the eyes of the real estate ownership community will matter.