Commercial tenants not paying, how should I structure?

Question

I have a good number of commercial properties and fortunately a lot of my tenants are essential. I just sent out my May statements and a few tenants responded that they are non essential so they will not be able to pay. Nothing that will hurt my business but still a good amount of money. I have waived late fees until this is over, but don't you think it is a bit premature to tell me your not paying me for May? I am about to send out a letter to tenants to make sure they understand they still owe rent for these months. Rent is "Deferred" not cancelled. How are you structuring deferred rent? Will they just be required to catch up once the pandemic is over? or are you making more set in stone payment plans.

Greg Dickerson · Answer

First step is to consult with your attorney and review your leases and your loan documents to make sure you do everything the correct way and in compliance with you RN loan obligations.

That being said it should be on a case by case basis. I think the best solution is to spread the deferred sum over the next year once they are back in business if you can. It’s doubtful they will be in a position to catch things up as soon as they reopen or get back to business as it will likely take many months to get to break even much less making a profit.

Joel Owens · Answer

The SBA is currently out of funds and waiting for more with the PPP loans. Not all businesses will qualify. If they don't follow certain rules on how and when to use the funds then the loan may not be forgiven and the bank will still want to know the borrower can repay.

On the retail strip center side most tenants are sending letters asking for 3 months rent relief. Instead landlords are asking that they show proof for  applying for PPP loans, do rent deferment broken out over 12 to 24 months, and then extend the primary lease term 2 to 3 years more for helping cash flow security stream of the center.

There are a lot of other items in the lease you can try to re-negotiate with the work out. See if your lease has a force majeure clause. Tenants have been trying to use that lately with the virus. Probably they would lose that position in court but landlords do not want to go after them so the tenant letters being sent out are more of a grab to see what they can get in relief from the landlord. No legal advice given.

Jacob W. · Answer

I'm in a similar position though I do have a modest bank note. I deferred all my tenants' rent for April. I'll probably do the same for May though I will require CAM payments. I'm going to allow my tenants to chip away at those rents as they can with the caveat that they need to be repaid within a year. I may consider reduced rents after May for a defined period of time, say 6 months, with the understanding that the balance will need to be repaid within the year after the 6 month period ends. I haven't thought it through in detail, but I'll need to have some mechanism in place where if a tenant reaches some amount of gross revenue per month, that this arrangement automatically terminates.

Ronald Isgate · Answer

First and foremost absolutely speak with your attorney regarding the terms in your lease regarding what you can and cant do.  That being said, one thing that I am telling all my clients is to open lines of communication with your tenants to educate them on the options that are out there as far as govt assistance - namely the SBA options.  You would be surprised how many people either dont know about them despite it being all over the news, or they dont understand/believe they would qualify for those programs.  Getting tenants to apply for those programs benefits everyone and ensures that they are able to catch up on rent as thats one of the requirements that the money must be spent on.

Best of luck

William Thresh · Answer

Thanks for the advice, I’ll get a addendum together. Only 5% of my tenants are not paying and they are mostly the small mom and pops so I am probably being too lenient.

William Thresh · Answer

Luckily I do not have any loans on my properties. Thank you for the advice, I think spreading it out like that is the best move. On one case I have just extended a tenants lease by two months. I do not want to do that with everyone though, I don't see that as the best way.

Joel Owens · Answer

You need your commercial attorney to verify that. In some states e-mail might be legal but non-enforceable in a court of law.

You need to determine ( Is this tenant worth keeping?) before spending lots of time on a workout. You might be able to land a stronger tenant. Example Earl's Tacos with a drive thru is struggling at the end of the retail center paying 20 bucks a foot. Earl's Taco's has paid rent but always some issue going on with them. Around you the area has built up over the years. Starbucks has been wanting to expand in the area and likes your location. The Starbucks is willing to pay more money per FT which increases NOI and the sale value is a lower cap rate now changing tenant mix for the center weighted to a national credit junior anchor.

No legal advice given.

Courtney Duong · Answer

@William Thresh  we are going through the same thing.  Following this thread.  Let us know how it turns out and what you guys end up doing.  Thanks.

Ronald Rohde · Answer

You need to get this deferment in writing, it sounds like everything is just communicated via email? It won't be worth the savings if you're trying to evict in 6 months...

Ronald Rohde · Answer

I don't think thats enough. You need a definitive agreement of the terms, acceptance by the tenant entity. Email is useful for one-way notice, but not for agreement enforcement.

Commercial tenants not paying, how should I structure?

Most Popular Reply