Everything feels a little bit crazy for everyone right now. With the spread of the coronavirus, the necessity of social distancing, and the corresponding economic effects, it may feel like your world has turned upside down in the past couple of weeks. While the health and safety of you and your loved ones is tantamount right now, if you own a small business or operate a business in leased commercial space, there are other implications that may be adding to your present feelings of concern.
We have compiled some of our top tips for commercial tenants here to help you navigate the current economic environment. This list is, however, not exhaustive. Our #1 piece of advice is to call your broker! If you don’t have a broker you have worked with in the past, now is the time to speak with an expert about your specific situation. Our brokers have spoken with many of the tenants we work with to find creative plans of action during this time.
We have more tips coming your way, including information on SBA loans, so keep checking back over the next few weeks or subscribe to get our new posts straight to your email! If you have any specific topics that you would like us to address, please let us know. Our hope is to be a resource to you during this crazy time. We will weather this together.
Review your lease
After taking stock of your current situation and your initial plan, pull out your lease and do some digging. Below are some of the pieces of information to pay special attention to. If you have not worked with a broker in the past, these will be some of the first questions they will ask you in order to formulate a plan of action.
- RENT: What is your total rent comprised of? What is your base rent? Do you pay any pass-through expenses? When is your next scheduled increase?
- EXPIRATION & OPTIONS: When does your lease end? What renewal options remain? What notice is required?
- DEFAULT: What constitutes a default on the lease? What are the landlord’s remedies if default occurs?
- GUARANTEES: If default were to occur, who would be liable outside of your business?
- FORCE MAJEURE: Does the lease excuse either party’s performance when outside circumstances intervene?
consult your broker
We have said it before, and we will say it again, it does not cost a tenant anything to consult with a broker! Unless specifically agreed upon, a broker’s fee is paid by a landlord or seller. As a tenant, therefore, you would be getting an expert opinion at no cost.
Our brokers have been spending the past couple weeks becoming experts in the economic situation and in our market’s specific impacts. They have been speaking to lenders, lawyers, property owners, community leaders, government officials, and countless other experts to ensure that they have a full picture of the market effects. This means that they will be able to answer questions, formulate a plan, and direct you to other resources that may be helpful in tackling this situation.
In addition to being a wealth of knowledge, brokers are skilled negotiators. This means that they can advocate on your behalf to the landlord and are more likely to find a beneficial solution for you.
approach your landlord
Keep in mind, with the current economic environment, your landlord should want to hear from you right now. Most likely, they do not want to be faced with vacant space. Losing a tenant and finding a replacement can be very costly to them. They have mortgage payments to make and other financial obligations as well, therefore it is in their best interest to find a mutually beneficial solution at this time.
Below are a few temporary solutions that we have found to be successful for our tenants. This list is far from exhaustive, but should give you a sense of some possibilities.
- RENT REDUCTION: This is perhaps the most obvious solution. A reduction in your base rent is most likely for a set period of time, or to be determined on a month-to-month basis. A reduction could also come in the form of a deferral, which would mean that it would be repaid at a later date. It could also be conditional, which would mean that the deferral would be forgiven if you agree to or meet some agreed upon contingency.
- APPLICATION OF DEPOSIT: If your landlord holds your security deposit, you can ask if they would be willing to credit this to your current rent obligations. If you have been a good tenant to-date, they may be amenable to this option.
- TRANSFER: If the current circumstances lead you to decide that you no longer want to, or can, operate your business in the same manner, you may consider working with your landlord to let you sublet your space. This could reduce or even eliminate your rent obligation while you think through what the next phase of your business looks like.
- BUYOUT: Another option is a lease buyout, meaning the landlord agrees to terminate the lease in exchange for a payment. Similar to the subletting option, this may allow you to continue operations at a new location or in a different manner.
Any of these solutions may require enticement on your end. Whether that be committing to an extended term, providing a new guaranty either personally or from a co-signer, or giving the landlord a share of your business, your landlord may need something to convince them that these solutions are in his or her best interest. Be prepared for this possibility and think through what you would be acceptable to you and where you would draw your line.
We realize that these tips are only a drop in the bucket when tackling the challenges you might be confronting, but we hope that they provide you with a place to start for determining next steps for you and your business. We will be continuing to add resources on our blog such as information on SBA loans, local resources, and other tips.
If there are any questions we can answer for you, please do not hesitate to reach out. While our team has moved to working remotely in order to protect our community, we are conducting business as usual. You can reach all of our staff at our main number (336.724.1715) or send an email to info@ltpcommercial.com and one of our brokers will be in touch.