https://www.youtube.com/watch?v=4s2H2B7nYIs

*** Transcript ***

Hello all,

I’m Shirley Johnson-Boyd. I’m a commercial broker licensed in and serving the Northern Virginia and the Washington DC Metro Area.

Today I’d like to talk about Some Options Commercial Real Estate Landlords can take when their Tenants can’t pay their rent.  This is especially prevalent because of the many shuttered businesses during this COVID-19 Pandemic.

So, let’s jump right in.

2 Ways Landlords Control Property 

To start out, I’d like to review the two basic ways commercial real estate landlords own or control the property rented to tenants.

1. They might own the property free and clear.  Owning property outright will give the landlord maximum flexibility in the ways they can help their tenants.  The owners might have employed two methods to own the property free and clear:

They might have paid cash for it at the outset, or

They might have initially had a mortgage which has since been paid off.

2. They might have a loan on the property.  This is a more common probability since investors like to use leverage to increase their return. The two most likely sources of a loan are:

Bank loan

Private investor loan

There are different types of private investors who can be 

Hard money lenders

SDIRA investors. These are people who take their 401(K) or other retirement savings and invest in real estate and other so called “alternative” investments

They might own the property in a syndicated deal.  These are deals where money is pooled together by a commercial broker or other entity to purchase property

At any rate, they have a loan which must be repaid according to the terms of the loan like any other loan.

Now let’s take a look at the 6 options landlords might use to work with tenants who can’t pay their rent.

Option 1 – Reduce Rent

One option landlord’s have for working with tenants who can’t pay rent is they may choose to reduce the rent. They have several options for doing this such as reducing the rent for:

1. the remainder of the term of the lease
2. a specified period of time (say 30-90 days until this COVID-19 pandemic hopefully clears some)
3. convert the rent to a perhaps smaller, fixed dollar amount from a percentage of sales formula.  This would be especially helpful since sales are currently lower or nonexistent 
4. convert (perhaps a larger) base rent payments to (strictly) a percentage of sales amount but adjust the threshold at which the rent portion kicks in, again being conscious of the current economic realities
5. make the rent a combination of base plus percentage of sales
   

All of these options, and others, gives the landlord and tenant the opportunity to work together to come up with a solution they each can live with.

Option 2 – Defer Rent

Another option commercial real estate landlord can use to work with tenants who can’t pay their rent is to defer rent payments.  Under this scenario, landlords can suspend rent payments all together for a specific amount of time, such as 30-90 days.  Afterwards, deferred rent can be 

1. tacked on proportionally to the remainder of the term of the lease or year’s payment
2. turned into a loan to be repaid under agreed upon terms
3. repaid in a lump sum, again at an agreed upon time
   

Option 3 – Rent Abatement

When a tenant can’t pay rent the landlord may choose to offer the tenant rent abatement.  This scenario might come into play when the landlord might be more concerned with keeping the space occupied.  In a challenging economic cycle, it might take a long time to release a space.

Also, the landlord might not want to go through the trouble – and legal expense – of evicting a tenant. Depending on the jurisdiction, a tenant might end up being behind on rent payments for months before the court process is completed.  This is all time, and money frankly, that the landlord can’t get back. 

Further, If the landlord opts to evict the tenant or let them just leave, the space will need to be re-leased.  There are costs associated with leasing a space, and I’m not taking about the cost to a commercial broker.  I’m talking about tenant improvements of TI as it’s called in the industry.

There are various ways a landlord can “finance” tenant improvements.  The landlord can:

1. pay out of pocket to make the space ready for new tenants
2. offer the tenant free rent for a number of months and let the tenant spend the up-front cash to make the space ready
3. a combination of the two
   

Forgiveness of rent for a period of time or rent abatement, avoids all of these problems.  Of course, the landlord will have to have sufficient cash reserves or own the property free and clear to do this.  If they need the cash on a monthly basis to cover their mortgage to the bank or investors like we talked about earlier, then this might not be an option.

Option 4 - Convert Unpaid Rent Into A Loan

When a landlord offers to suspend rent payments to a specified amount of time and convert the unpaid rent into a loan, both the landlord and tenant can benefit.  

Landlord Benefits of converting unpaid rent into a loan:

1. Tenant Retention - The landlord benefits because they first of get to retain the tenant and keep the space occupied.  Unoccupied commercial space has a negative impact of surrounding areas.  No one wants that.

2. Payment for Arrears Rent - Another landlord benefit is that they will eventually receive payment, in full ideally, for unpaid rent.  

3. A third benefit is that the landlord can sell the right to receive the rent payments, the note, at a discount in exchange for immediate cash.  Just like other types of investments, there are people who seek out and invest in nothing but receivables.  But that’s a topic for another day.

Tenant Benefits of converting unpaid rent into a loan:

The tenant can benefit from turning the unpaid rent into a loan because the tenant will 

Be able to retain the lease and have a pre-negotiated timeframe to repay the back rent.  

Option 5 – Apply Deposit Towards Rent

A fifth option commercial real estate landlords can use to help tenants who can’t pay their rent is to apply the deposit towards rent payments.  

Advantage of applying deposit towards rent:

This option allows the tenant to remain current on their rent.  This is especially useful when the landlord needs the rent to make the payment on the property.  

Disadvantage of applying deposit towards rent:

A disadvantage of applying the deposit to the rent payment is that it exhausts the security deposit. So, when the tenant moves out, the landlord will no longer have that money to draw from if there are damages to the property.  Also, the tenant will not be getting that money back upon vacating the property because they would have already spent it.

Option 6 – Sublease the Space

Subleases is something that property owners – residential and commercial – really don’t like.  There is so much confusion around this topic but I will just touch on a few points.  Essentially a sublease is when the tenant brings in another party to use part or all of the space and that party pays the rent.  

Having someone sublease space does not get the original tenant off the hook.  They are still legally responsible for paying the rent and maintaining the property in good order.

The tenant should be aware that not all leases allow for subleasing while others require the tenant to get the landlord’s permission to sublease the property.  The tenant should review their lease to see what’s allowed and get legal advice before proceeding, especially if they’re unsure of what their rights, options and obligations are.

Now What?

Now that we’ve discussed some options commercial real estate landlords, and tenants, have for dealing with not being able to pay rent what should you do not.

Tenants

Call your landlord and communicate your situation.  They can’t help you if they don’t know what’s going on.  

Landlords

Call your tenants to see how they’re doing.  Don’t wait for them to call you or worse, not call and just not pay rent.  

Communicate

The only way forward is through communication early and often.

I hope this information was helpful for both landlords and tenants dealing with how to pay rent during these challenging times.  Please share with other people you think could benefit.  

If you need more information feel free to contact me.  My information is on the screen or in the comments section.

In the meantime, let’s be optimistic.  We well get through this global crisis together.  Take care of yourself and take care of others.  

And again, share this with other people you think could benefit.  

Until next time, this is Shirley signing off.