1566 Views | Mar 20 2020, 07:15pm
What to do with your commercial lease during COVID19
Being a broker of record and fortunate enough to manage a brokerage team of leasing experts, allows me to review about a hundred leases a year. I humbly own real estate with both retail and office tenants, and this advice stems from my experience as a landlord during the current COVID-19 environment. To provide context, in the last three business days, 75% of our brokerage deals have fallen apart and our team has been inundated with calls for advice on how to deal with the material drop in projected revenues which the business world is scrambling to stabilize. No matter what industry you serve, you will feel the impact.
This is what we’re seeing out there and based on the calls we’re getting, this is a testimony to never rush your deals and use a competent broker!
1) Hospitality industry - restaurants and other entertainment venues - you will be the quickest and most adversely impacted. The good news is that your landlord is expecting your call and they do want you to be successful (or at least, they should). The best approach for these conversations would be to thoughtfully review your business results from last year and then do a comparison to the same period for this year from January 1st to March 10th to show how COVID-19 has impacted your sales before it became a larger and more public issue. The results will help put things into perspective on whether or not it makes sense to keep the doors open for takeout services. In this environment, it is harder to get employees to come in if they don’t want to work, vs. shutting down entirely. Yesterday, I provided advice to a restaurant in midtown Toronto to shut down entirely, after reviewing their financials. Immediately after, I wrote a thoughtful and helpful note to the landlord to ask for financial relief for the tenant. In a time like this, we must remember that people are always more willing to help than not.
2) Retail tenants – service companies and all others, if you are not ordered to shut down and you can still provide services – say a printing house or an optometrist - you have to really think about whether you keep your business open or not. A friend of mine who is a lawyer that deals with bankruptcies and insolvencies has said the courts and creditors will have to look at whether or not you are being reasonable. So, figure out what that means. In our perspective, the best practice here would be to formulate policies for your company no matter how big or small, no matter how detailed or general, for your employees to follow. This may become the basis upon how your decisions are viewed, and it will give you an opportunity to think through details you may have otherwise missed in the flurry of competing priorities. No matter what, make sure to do the financial review and make your projections for the year (if you haven’t already) and then stress test it for different scenarios as it relates to re-opening dates, or sales percentage drops, etc.
3) Office tenants – contrary to everyone’s belief, a significant portion of office users are in fact retail businesses and customer facing. Look at our firm for example – our revenues have dried up almost completely and we will be communicating with our landlord today for relief to help weather the storm until our revenues return post COVID-19. Take the time to explain to your landlord what % of your business comes from fixed contracts vs. retail sales. If it’s fixed contract, how ‘fixed’ is it? What do your key contracts say as it relates to ‘Force Majeure (a.k.a. unforeseeable circumstances that prevent someone from fulfilling a contract, such as COVID-19). Take advantage of this at work-from-home time to really clean up your books, run the numbers and stress test them. Take your analysis to your landlord and show them what you need. They will show up to help, and if not, there are always alternate solutions - so don’t feel trapped just yet.
MORE ON HOW COVID-19 WILL IMPACT THE WAY WE WORK
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Quick communication is the key. If these actions are made quickly, landlords will deal with their lenders and creditors accordingly in an effort to provide the relief that they can - the same way that everyone else pitches in to do their part during a crisis. Taking immediate action gives the landlord clarity about how many of their tenants need relief, so they can have more concrete conversations oh how they can help. In the current economically stressful environment, financial institutions always prefer to deal with the facts versus scenarios, as they go through their own internal policies, checks and balances.
In the face of negative outlook, it’s very important to keep a positive mindset. These are business processes that I believe will come to fruition in the post COVID-19 environment:
1) Business continuity planning for every company will be more thought out than ever. Policies will be given the appropriate level of consideration at major decision points as a company grows.
2) New revenue streams and products will no doubt be created. (In the last seven days we’ve pivoted quickly to provide more design guidance for landlords and also consultation services for tenants in need of advice now)
3) A paradigm shift, pushing companies to use online and digital technology even more than before, smarter and more effectively.
4) Landlords who are considerate and show kindness through working with their tenants will drive higher values for building owners downstream.
Most importantly, the one thing that will become clear is who has your back in times of need. In today’s world, with thousands of superficial social media connections, the greatest tangible outcome of this process is that your circle of friends and family will be re-illuminated and re-established. Moving forward, when the time comes to rejoice, you will no doubt be rejoicing with your truest, and closest friends and family.
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Edited by: Linh Nguyen