What you can do in the face of never-before-seen conditions
Arguably few industries have been as disrupted as those in the business of office space. As millions of employees continue to work from home, and thousands of businesses shutter, commercial real estate is challenged to a degree that hasn’t been seen since at least the not-so-great recession.
Previous economic crises affected industries unevenly. To a certain degree, that sentiment holds true for the current pandemic-recession. Some food service concepts have been enjoying sales that exceed pre-pandemic levels. Likewise, hospitality and other concepts that depend on considerable foot traffic, may never rebound to pre-pandemic levels. Yet, the phrase “we’re all in this together” conveys the widespread nature of a global health crisis, especially as it relates to conventional “office” or white-collar jobs. These jobs were among those that, pre-pandemic, were subject to “noise” regarding the potential to shift at least a portion of the workforce to remote arrangements for at least a portion of the time. It’s these types of telework-appropriate jobs that are wreaking havoc on commercial real estate, particularly the office segment.
Those offices that may have reopened are not utilizing to the degree that they once did, allowing for flexible or hybrid work arrangements, whereby some employees may return to the office two or three days a week. Even those legacy organizations that were resistant to remote work, or were slow to adopt technologies to support remote work, have been surprised to secure efficiencies and productivity benefits. These businesses may never return to the “old bricks and mortar way of doing things,” characterized partly by constraints on available talent pools. The sky is the limit when one’s hiring opens to markets outside of the immediate (or commute-able) area. At best for those in the bricks-and-mortar business, tenants may be questioning, “Why are we spending so much on an empty (or near empty) space?” They may be considering downsizing, or doing away with this costly asset altogether. The reality is, there will probably always be a place for an actual space within the wider world of work. We are humans, after all, and people crave and often thrive off of actual conversations ‘round the watercooler, rather than sometimes forced or inauthentic conversations mediated by technology, most of which are now held infrequently if they are held at all as workers tend to complain about “Zoom fatigue.”
So, what to do in the in-between?
It is generally a good practice to not act rashly in the COVID-19 moment. This applies to both tenants and to landlords/property managers. The endlessly-referenced “we’re all in this together” can work in your favor when partnering with your landlord. Landlords generally want to keep their buildings filled. While they may be experiencing considerable hardship, they know that it is a sound and humane practice to at least be open to other arrangements that will support tenancy.
Perhaps, your new needs for space are also driven by hardship. Maybe, even when the COVID-19 dust settles, what remains of your workforce is a fraction of the size of the workforce you needed prior to the pandemic. In those situations, you and your landlord may have more in common than not, and the willingness to consider alternative arrangements as lease renewals come up, may be coming from a place of real understanding. When we talk “alternative arrangements,” this is what we mean:
Rent reductions – You can’t just break your lease out of the blue and not expect to be saddled with the balance of the rent that is due over the life of your remaining lease. Expect to be “served” if you do that and don’t fork over afterward for what you owe. A much better alternative (that won’t potentially haunt you and your reputation and record), is to ask your landlord about deferring a portion of the rent. The deferred amount would then be paid for at a later date either as a lump sum or with increasing rent payments.
Abatements – This is the fancy term for a landlord agreeing to forgive an amount of past-due rent if you as a tenant are significantly behind on your payments. As part of this arrangement, you’ll need to get current with the rent afterward.
Converting to a loan – A “twist” on the above option might be to take the amount that is past-due and do a conversion instead, whereby the amount that you owe and are behind on is turned into a loan that you pay over time.
Use your deposit – One form of relief may be to use the deposit that is held to help to fulfill your current obligations as a tenant.
Sublet – In the present work environment, it may pay off in a big way for your landlord to consider bringing on a new tenant for at least a portion of the space. The smaller space may better fit your needs, and also provide some relief from hefty rent obligations. In fact, your payment outstanding may be reduced or eliminated. It’s a win-win, as your landlord is able to replace lost revenue on a consistent basis.
Of course, any number of factors can influence the amount of flex you have with regard to alternative arrangements or adjustments. Your relationship and past history with your landlord, for one, as well as the specific language within your lease, can either expand or constrain your options. Notably, when speaking to the language of the law, “force majeure” is a French word that translates to “greater force.” When you see this in a contract, it is usually in reference to “Acts of God.” For instance, your insurance covers damage to your home caused by fire when that blaze was sparked by lightning or another act of God. Often, these are acts of Mother Nature – such as freak storm damage. However, the blaze that damages your home may not be covered if the fire was sparked by faulty wiring. If ever there as an example of “words matter,” it would be “greater force.”
What one may assume is an “Act of God” isn’t always reflected as such in the language of the law. Not all force majeure clauses include pandemics, epidemics, or their ilk. This facet has become such a bone of contention during COVID-19, that the clause itself is evolving; more contracts are including stand-alone language to cover the likes of pandemics. Speaking of insurance, it also pays to understand the language within your policy. See what applicable coverage options you may have available to you. Also, be sure to explore all options for relief that may be available to you. Most notably, as we speak, the second round of Paycheck Protection Program funding is underway. A portion of loan proceeds may be used by commercial tenants to pay for the rent.
1, 2, 3’s of PPP (for rent relief)
As with the First Draw PPP loan program, the Second Draw program or round of PPP funding allows for the loan to be forgiven if at least 60% of the proceeds are spent on payroll. Now, eligible non-payroll expenses include those that have to do with your bricks and mortar. For instance, PPP may provide much-needed relief from the burden of eligible business rent, lease payments and relevant utilities. For the loans to be forgiven, it is a must to complete the appropriate forms and to provide documentation such as a copy of the current lease agreement, cancelled checks that verify previous payments, and invoices or receipts for utilities. Hurry to apply. Applicants who are structured as sole proprietors or who have fewer than 20 employees can submit until March 9. The deadline for all eligible applicants is March 31.
Be sure to watch for changes or new programs here. At the time of this writing, the SBA was solidifying the development of a new grant program for organizations that support the hard-hit entertainment and educational sectors. Eligible organizations include theaters, museums and partnering business such as promoters or talent representatives. Do not make the mistake of missing out on real opportunities for relief, out of the potentially presumptuous assumption that your landlord will give you the breathing room that you need.
No matter the relationship, you must be prepared to approach your landlord with information on how the pandemic has affected your business, workforce and needs. A well-articulated narrative on the pandemic’s effects should be supported with real data. Be prepared to answer potentially difficult questions, or to get some push-back. Again, when we endlessly say, “We’re all in this together,” it goes both ways. We have considerable empathy by and large for others’ hardships, as their hardship is often our hardship. However, that very seemingly universally or widespread turmoil may be just the reason that your property owner is limited in his or her options to help, as much as he or she may want to provide some breathing room. Explore all of your options, and many parties may be able to breathe a sigh of relief again.
O’Donnell, Ficenec, Wills & Ferdig lends comprehensive, rich expertise to each and every client engagement. More recently in its long, 70-year history, our firm has supported organizations facing never-before-seen challenges during the pandemic, including helping our clients to navigate the COVID-19 relief fund process. Do not wait another day to feel more secure in your business’s sustainability.