Commercial Landlord’s Guide: Your Tenant Just Asked for a Rent Concession.
This past week, I’ve had numerous phone calls with commercial tenants and landlords who are concerned with the upcoming rent that is due on April 1st. Naturally there are tenants that are well capitalized and some that have been struggling before these uncertain times. We believe in being prepared for all events. If it hasn’t happened yet, tenants will be requesting rental assistance regardless of their financial health. We are here to help, and in the event a tenant approaches you and is looking for rental concessions, here are eight (8) ideas that will help maintain income and occupancy:
1) Listen to your Tenant: People generally want to be heard, and listening and showing empathy can help remove anxiety and provide comfort to your tenant. Listening is absolutely the first thing to do.
2) Share Your Plan: After listening to your tenant's story, share your plan. Hopefully you have started or are thinking of a plan to help with the cleanliness of the property. Sharing your plan with confidence may help make your tenant see the value of your property and doing business with you. Also let your tenant know that you also made a commitment to your tenant, which may be (depending on the agreement of the lease) providing janitorial, utilities, security, etc. Sharing your plan and holding up your end of the agreement may make it easier for your tenant to pay rent if they are considering which invoice they should pay first.
3) Gather More Information: Gather as much information as you can. Request recent and past monthly income & expense reports, personal financial statements, and a written description to include their current status and future plan. It may be uncomfortable to request more information, and your tenant may push back. If they do, let them know it would be easier and quicker to make a decision with the more information you have. Also, you may want to research what other businesses in their industry are doing.
4) Request an Offer from the Tenant: Let the tenant tell you what they need such as free rent, discounted rent, rent deferral, etc.
5) Communicate: Get back to tenants in a timely fashion. The sooner the better. These times can be very stressful and irrational decisions are not uncommon. Communication can help ease the tenant, and you can help navigate their decision. Communication may the most important thing to do.
6) Come to an Agreement: If you are going to make a rental concession, then there should be a trade-off. Here are some considerations:
- Free Rent: If you are going to give free rent, here are some considerations: 1) make it contingent that the tenant pay all upcoming rents on time or else this rental abatement will become due and payable the month rent is late; 2) tenant pays for April then tenant gets May (or another future month) for free, or 3) discount rent by 50% for two months.
- Early Termination: If tenant asks to terminate early, 1) then remind the tenant of their ability to sublease and their responsibility to make sure the rent is paid; 2) ask tenant if they have a subtenant in mind; and/or 3) ask tenant to find a subtenant. If termination is a must then think about collecting 3-6 months of rent and/or the tenant return the unit in a move-in ready condition for your next tenant, which may include new carpet, paint, working light fixtures, etc.
- Rent Deferment: Most tenants will probably ask for free rent, but rent deferment can be another approach. Consider April's rent be amortized over the remaining term of the lease or for a shorter period. The amortization can also have interest attached to it such as 6%. This will look very similar to a short term loan. Here's an example. Assume April's rent is $2,000 and there are 14 months left in the lease, then starting May and every month thereafter, tenant pays monthly rent as indicated in the lease with an additional $148.27. We can very easily help run these calculations if needed.
- Blend and Extend: This is a lease amendment that extends the term of the existing lease and blends the current rent with future rents. In short it’s a renegotiation of rental payments and an extension of the term.
7) Step Away: If you are talking directly to your tenant, avoid feeling the need to give a firm response at that moment. Step away and consider how your decisions will affect your existing and future cash flow.
8) SBA Government Assistance: Share this information with your tenant. The SBA is providing low-interest disaster loans to businesses of all sizes, private non-profit organizations, homeowners, and renters. SBA disaster loans can be used to repair or replace the following items damaged or destroyed in a declared disaster: real estate, personal property, machinery and equipment, and inventory and business assets. Loans are up to $2,000,000, have low interest rates, and may be for 30 years. Here is the SBA website with additional information and where to apply: https://disasterloan.sba.gov/ela/Information/Index.
Start by listening to your tenants and show empathy. They are your existing and future customers. At this time, landlord’s are calling us to negotiate existing leases, protect cash flow, and protect the property value. Let us know if we can help or if there are any questions.
Stay safe.
Gary Martinez, CCIM
Ashwill Associates
(714) 905-9383
gary@ashwillassociates.com