The traditional motto in real estate has always been “location, location, location.” In today’s market, that might be changed to “communication, communication, communication,” says developer Donnie Jarreau, president of Donnie Jarreau Real Estate in Baton Rouge, Louisiana.

Jarreau has been in close contact with both his tenants and lenders since Louisiana issued a stay-at-home order for nonessential workers on March 22. That’s when many tenants let him know they wouldn’t be able to make rent and he began checking in with lenders to see whether they’d work with him on mortgage payments.

Generally, the lenders have offered a 90-day deferment on payments, and he’s working with tenants on a case-by-case basis if they can’t pay their rent. This month, he expects to only collect about 25% of the rent he typically receives from more than 250 tenants occupying about 2 million square feet of space.

Jarreau’s situation is not unique. As business for retailers and restaurants has evaporated amid COVID-19 restrictions on travel, gatherings and business closures, many commercial landlords have been looking for ways to help out tenants whose cash revenue disappeared overnight.

Many landlords who have a bit of financial breathing room have offered short-term relief on rent and promised not to enforce lease requirements that a business remain open and continue operations. But some landlords are cash strapped themselves or they have covenants in their loans that forbid lease modifications.

However, as it becomes increasingly clear that social distancing may remain in place for longer than initially thought, landlords are looking closely at how long they can or should offer accommodations — and at the economic impact they may make.

Limited Options

In many places, business owners don’t have a choice as to whether to keep their doors open or not. About 40 states have closed nonessential businesses, including eat-in restaurants which can currently only offer take-out and delivery. That has some businesses attempting to invoke force majeure clauses in their contracts (unforeseeable circumstances that prevent someone from fulfilling a contract), though whether they apply in this circumstance is unclear.

Regardless, many small businesses simply don’t have the revenue to pay rent. But evicting them in today’s market would only leave landlords with vacant space, since there are few viable tenants who could move in and open for business right now. That leaves landlords in a difficult position since they still need to pay their own debt obligations, as well as cover property taxes, insurance and the costs of maintenance for their buildings.

Communication Is Key

Landlords should maintain contact with both their tenants and lenders about the current situation and monitor how it changes going forward.

“Lenders will need to figure out what their own debt service obligations are and whether they can get any accommodations from their lender,” says David Jaffe, principal of Birmingham, Michigan-based Jaffe Counsel PLC. “If your loan has been sold into a security of some sort, you may be out of luck. But if not, you can call your lender and see if there’s a program available to help you and whether you qualify.”

There may also be ways to adjust the terms of a lease to allow for deferred rent, a lower rent payment, payment on a nonmonthly basis or some other agreement. Absent regulatory intervention, agreements between landlords and tenants will likely occur on a case-by-case basis, heavily influenced by the financial situation of both parties and the economic and public-health landscape in the region.

Ethan Geis, a real estate attorney with Milwaukee-based firm Davis Kuelthau, has been working with landlord clients to create applications for tenants who request a rent break.

“The onus right now is on the tenants to provide information,” Geis explains. “We need to see their financials and whether or not they’re actually struggling, so we don’t run into opportunism on the part of tenants when a rent abatement is not actually necessary.”

Geis suggests that tenants who negotiate rent deals sign nondisclosure agreements, so that other tenants don’t expect to get the same deal. Both parties should put any alterations to the lease in writing and have a lawyer review them.

Both landlords and tenants should also contact their business insurance providers to see whether they have business interruption insurance that might help cover their rent in the interim, although some such policies exclude pandemic coverage. Small business owners, including landlords, may also qualify for assistance via the Small Business Administration or get help from the fiscal stimulus. One provision of that bill, for example, offers forgivable loans to small businesses who promise not to lay off workers during the crisis.

Looking Ahead

What the commercial real estate industry looks like after the COVID-19 crisis depends on how long it lasts and how deep a toll it takes on the economy. In some cases, landlords may need to start making plans for a situation in which the tenants don’t make it through, Jaffe says.

“If forbearance isn’t enough and tenants go out of business anyway because of their own debt obligations or other reasons, you may end up with a lot of empty space,” Jaffe says. “It’s probably not too soon to start thinking about what the plan is to market that space in a world in which there might be a lot of competition for tenants.”