Many industries have been upended by the Coronavirus epidemic and the local, state and national government response. Because of the fundamental role Real Estate plays in our economy and the broad umbrella of activity that falls under the category of “Real Estate Development”, developers, property owners and tenants have been particularly impacted. Landlords, tenants, contractors, lenders, buyers and sellers of real estate, and all others who participate in the acquisition, development, leasing or sale of real property are all being impacted in different ways. This series of client alerts takes an in-depth look at specific questions, sectors or issues related to Real Estate Development against the backdrop of COVID-19 and the nation’s response to it. In this alert, we focus on leasing, and how landlords can communicate with tenants that might be having difficulty making rent payments.
Leasing: Communication Is Key
Companies across the world are reeling from the sudden suspension of economic activity resulting from well-placed concerns over the Coronavirus. Tenants large and small are feeling a direct and unexpected hit on revenue, with a massive number of commercial tenants questioning whether they will be able to make their upcoming April rent payments.
The relationship between a landlord and tenant can feel like a partnership at times, as the economic wellbeing of a tenant is critical to the landlord’s success. Many landlords recognize this, and are looking at options to help ensure their tenants remain viable in the short term in the hope that they are able to resume their normal economic activity in the very near future. Complicating this issue is that all landlords have some combination of significant obligations of their own that are dependent on rental revenue, like loan payments, operating costs, vendor contracts, taxes and the like. If a landlord is willing to offer some form of rental assistance to their tenants, small differences in what exactly the landlord provides in terms of relief can have a large impact down the road.
The most prudent path right now for a landlord looking to provide relief to their tenants would be to offer targeted assistance to those tenants that actually need relief by temporarily suspending a portion of rent payments on a month-by-month basis, and encouraging tenants to look for relief wherever available. Those avenues for relief may include new stimulus programs, assistance provided by private lenders, and the filing of a claim under business interruption insurance. As we intend to discuss possible coverage for claims under business interruption insurance in detail in a future alert, this client alert focuses on providing targeted rent relief and obtaining government assistance for small businesses.
Providing Temporary Rent Relief
While the impact of COVID-19 and recent government restrictions on business operations is being felt broadly, not every industry is uniformly impacted. Some larger businesses are seeing increased sales, while other industries that support online retail (such as warehousing and distribution) are extremely busy. Landlords looking to provide rental relief should limit their potential losses by targeting that relief to the businesses that actually need it. Landlords should be discussing the impact of shutdowns, quarantine measures and local health emergencies with their tenants to determine which businesses are most likely to need assistance.
In addition, any relief actually offered should be characterized as a temporary suspension of rent payments, rather than rent forgiveness. If a rental obligation is forgiven, it may preclude the tenant or landlord from being able to file a claim under their business interruption (or rent loss) insurance, or from taking advantage of one of the many relief programs anticipated to be made available in the near future.
Finally, decisions on how much relief should be offered and for how long should be specifically tailored to provide the assistance a tenant may need to stay viable while also preserving as much of the landlord’s ability to pay their fixed expenses as possible. As circumstances change quickly, landlords should be discussing temporary payment suspensions on a month-by-month basis.
Relief Through Stimulus Programs
There are a number of avenues opening up for small businesses to pursue relief in order to keep revenue flowing during this challenging time. While the programs described in the CARES Act are generally not yet available, there are positive indicators that once those programs are brought online, many tenants will be eligible for loans to help compensate for lost revenue. States and other local governments are also making grants and loans available to help various small businesses. As eligibility requirements will vary widely, it’s important that landlords and tenants have current, accurate information about these programs so they can pursue and obtain any available relief.
New stimulus measures include the Paycheck Protection Program, offered through the SBA and Department of Treasury (with applications being processed through private lenders). That program can be combined with other relief being offered, and will provide certain small businesses with zero-fee loans of up to $10 Million and loan forgiveness for up to 8 weeks of average payroll (as well as other) costs if a business retains their employees and salary levels.
Other measures provided for in the CARES Act include Economic Injury Disaster Loans of up to $2 Million. Those loans allow for an advance of $10,000 within three days of applying for the loan to help cover immediate needs, including rent. That initial advance will be treated as a grant under certain circumstances, and may be available to certain businesses even if the application for the loan is subsequently denied.
Landlords and tenants may also be eligible for relief under their existing loans, both as part of the stimulus package and as a result of the guidance recently put forth by the FDIC (a summary of which was recently provided in a prior DarrowEverett client alert). Payment deferrals, loan forgiveness, refinancing debt and programs providing for a period of interest-only payments can help tenants direct their revenue towards payroll and rent obligations, and can help landlords direct the revenue they’re receiving towards other fixed costs like taxes and operating expenses.
Be Prepared
DarrowEverett’s attorneys are here to help guide you through this challenging time. Whether you’re looking for assistance in communicating with your tenants, have questions about the new relief programs being offered, or are interested in approaching your lender for some form of relief, we can advise you on how to proceed with the most current information available.
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Please note, our primary goal in providing these updates is to keep our clients informed. We are working diligently to remain well informed and up-to-date on information and advisements as they become available. However, information is changing rapidly, and depending on the specific language in your contracts and the situation you are facing, the advice contained in this alert may not be appropriate for your individual circumstances. As such, please reach out to us if you need help addressing any of issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Stay safe and healthy.