Landlords Provide Practical Solutions for Tenants Who Can’t Pay Rent
As the coronavirus pandemic continues to keep businesses closed around the country and many out of work, tenants are having trouble making rent payments.
For property owners and managers who can afford to do so, waiving or reducing rent for the next month could be the right course of action.
Back in mid-March, two days before California Gov. Gavin Newsom issued a shelter-in-place order for the state, McNellis Partners, a Palo Alto, California-based commercial real estate development firm, waived April 2020 rent for their mom-and-pop tenants whose operations would be shut down for the duration of the pandemic.
“I have found the right thing to do is usually the most inconvenient thing to do,” says Principal John McNellis.
One Shop Owner’s Story
For some landlords, it’s a matter of weighing what they can afford to forgive — or postpone — with the value of doing the right thing and helping to keep the tenant in the location.
Berry Fresh Desserts, a frozen yogurt shop in Bayport, New York, had to shut its doors just as it was prepping for its busy season. Because owner Joanne Jennings had good communication with her landlord, she was able to have her April rent payment postponed until mid-month, at which point, he told her, they could revisit to formulate a plan that worked for both of them.
Jennings says her landlord had helped her growing business out in the past, too. “He allowed me to pay less for three months to help me get through the winter,” she says.
Berry Fresh Desserts contributes to a solid mix of stores in its shopping strip, which includes a yoga studio and full-service restaurants. The shopping center has had a few vacancies in the past, and keeping those storefronts full can help attract high-quality tenants in the future as the economy begins to pick up again.
Spreading Goodwill
Dennis Beaver, a Bakersfield, California, attorney, also waived rent for his single-family residential and retail tenants. Beaver says that hanging on to his tenants was not the impetus behind the decision, although it will help them stay afloat.
“We felt it was simply the right thing to do. These people have been good tenants, and we’ve been good landlords,” he says. “When a landlord thinks of the welfare of their tenants, they ultimately acquire the best tenants. They appreciate you.”
Beaver emphasizes that every landlord may not be able to waive or reduce rent, or even offer a payment plan to tenants. But those who have the means to do so also have an obligation, he says.
“Landlords who own the property outright, who don’t rely on the rent to pay the mortgage or live off of, and who have their lifestyle taken care of through other investments, yet don’t have the heart to reduce or waive rent, are the ones who give good landlords a bad image,” Beaver says.
Beaver encourages his real estate investor clients to do the same for their tenants.
“I’ve heard from landlords across the country who says they were thinking of waiving rent, and after hearing [my perspective], now they’re going to do it,” he says. “It’s been very touching.”
McNellis similarly says he hopes his actions will inspire others, sparking a wave of goodwill gestures that can help small-business owners survive the pandemic and beyond. He says he’s happy to see many small, private developers following his lead, but as the pandemic and resulting lockdowns and closures look like they will continue into May and potentially longer, there’s more to be done.
Options for Landlords
Covering the rent for a tenant for several months may not be possible if a landlord has a mortgage, interest, utilities and maintenance to pay on the properties, as well as payroll for their property management firm and other expenses. “All the landlord’s expenses are fixed,” McNellis emphasizes.
The protections put in place by the Coronavirus Aid, Relief, and Economic Security Act apply only to very specific multifamily housing, leaving retail landlords and their tenants with limited options. If a landlord offers rent forgiveness for the month, they might not ever recoup that money.
Many landlords are in a tight spot with no means to evict tenants and no other tenants to fill the space if they could, points out McNellis.
“The idea that another business can come in and backfill the space — that’s wishful thinking. I don’t think there’s going to be any new retail leasing in 2020,” he explains.
For McNellis’ firm, which houses tenants of varying sizes, the choice to waive rent involved a sort of “financial triage,” he says. The company was able to fully waive the month’s rent for mom-and-pop shops and help similar franchisees with matching funds if the franchiser was also offering financial support. He notes that future help may include rent deferrals, downstream rent increases or partial rent forgiveness tied to a lease extension.
Practical Solutions
McNellis is also offering practical help to his individually owned stores by walking them through the steps to apply for funds through the Paycheck Protection Program, Small Business Association loans and other money available through the CARES Act. He says he may defer rent for some tenants while they wait for their financial aid from the government.
“This is a year for investors to focus inward. Focus on your existing portfolio and spend the time with your tenants,” he says.
Whatever the final solutions, if landlords and tenants can work together to keep small businesses from closing permanently, it may help communities that rely on local businesses stay afloat during a downturn, especially as some economists predict we may be headed toward a recession as the country bounces back from shelter-in-place orders and the closing of nonessential businesses.
Waiving rents or offering concessions such as payment plans or reduced rates shows solidarity as we work together through an uncertain time.
“You’re going to have to be creative or have a prolonged repayment schedule, so it’s not all due now. Over a period of months, the rental payments would be increased slightly to catch up,” Beaver says. “We’re fighting this war together.”