Understanding the Impact of COVID-19 on Landlords
As commercial tenants are now faced with the possibility of shutting down their doors, it is only a matter of time before they approach Landlords about negotiating rent and other financial conditions in their lease.
When a business suddenly closes, even temporarily, and the tenant cannot produce rent, landlords may begin to have difficulty paying their mortgage and other expenses. There is no win-win in this scenario.
Evaluating Financial Challenges Faced by Landlords
Rent Reduction. The landlord can reduce the cost of the tenant's rent for a portion or all of the term left on the lease. The standard forms of rent reduction are to reduce the base rent, operating expenses, or both. In regard to retail, it may be even feasible to think about converting base rent to percentage rent.
Rent Deferral. In this case, the landlord can defer a portion of the tenant's rent but would require them to repay the rent deferred at a later time, either in a lump sum or by increasing subsequent payments. A variation of rent deferral could be to cap or set a base year to operating expenses for a short or extended period of time.
Rent Abatement. If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter.
Loan Conversion. Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The tenant would, however, continue to pay the current rent. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
Application of Deposit. If the landlord holds a deposit, this amount could be credited against the tenant's current obligations.
Subletting. Bringing in a new tenant (for part of or all of the rented space) could reduce or eliminate the rent obligations while replacing revenue for the landlord.
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