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COMMERCIAL TENANTS: SHOULD YOU PAY RENT DURING THIS CRISIS?

In my opinion, the answer is generally no; don’t pay your rent for now.

Why?  Because it’s probably the only leverage you have over your landlord right now, and it is good leverage which most tenants don’t typically have with a landlord. A relevant Costar News Article discusses how The Cheesecake Factory is one of many examples of a business that has found it impossible to pay rent.  If you pay your rent as usual, why would a landlord offer you any kind of help?

I have been receiving many calls from business owners from existing clients and those that are becoming new clients related to what they should do regarding their commercial real estate leases.  Negotiate to terminate the lease early, sublease or assign the leased space, apply for governmental aid, make an insurance claim, etc. are some of the potential options. There are pros and cons to each option but one of the best options for a tenant right now is to simply not pay your rent.

Not paying your rent might not be a good idea if your landlord has offered you a reasonable alternative such as not paying rent now and adding on the deferred rent to your lease. This could be done either at the end of your term, via a term extension for three months, or whatever length of the deferred rent amounts to in months, or in some other fashion like raising your rent in the future to recoup the abated rent.  However, if this doesn’t work for you for some reason, then you have to find a different solution like one of the ones mentioned in the paragraph above. Here is a link to another article on this subject that you might find of interest.

But what if you ask the landlord for some kind of help and he isn’t responding to you?  Then in my opinion, not paying your rent could be your best option. Landlords and lenders both don’t want empty buildings as landlords might give a building back to a lender if too many tenants aren’t paying rent or vacating.  My experience is that by not paying rent you will get your landlord’s attention and get a response with what the landlord is willing to do for you quickly.

Some of my clients I have spoken with are worried about litigation if they don’t pay their rent.  “Won’t the landlord evict me?” or “Won’t this hurt my credit?” The answer to these questions is that the courts aren’t open now and might not be for some time. And if the landlord has to spend a lot of money on legal fees chasing a lot of tenants and creating a lot of vacant space at their property that traditionally has not gone well for a landlord or a lender.  Also, you can always change your mind and pay the rent once you get a notice of default as long as you pay within the allotted time but even then most times I would probably recommend that you still don’t pay.

Doug Schneider of Alabama-based Bayer Properties knows what store and shop owners are struggling with amid this COVID-19 crisis. In a recent Costar News article, Tony Wilbert states: 

“To help, Schneider, the executive vice president of operations at Birmingham, Alabama-based Bayer Properties, is starting a program to help tenants access some of the money available to them as part of several federal programs, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Small Business Administration Economic Injury Disaster Loans (EIDL). Tax credits are available under expanded provisions of the Family and Medical Leave Act as well, he said.”

Here is another great article from Bisnow: The Coronavirus Tenant-Landlord Playbook Revealed.

Each situation is unique and needs to be figured out carefully, so run it by your attorney, CPA or other counsel if you want help making the right decision on how to handle what you should do regarding your commercial lease.   I have settled these types of matters both as a landlord and tenant hundreds of times so I can assist you if you need help. Reach out at david@djmcre.com or 805-217-0791.

Here is a resourceful list of additional relevant articles:

 

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Tenant Rent Abatement During This Crisis

Many businesses are experiencing the same income drop that you and I are.

In a relevant Costar article, Brad Tisdahl states:

 “The people I’ve been in contact with are asking, how long and how serious is this going to get,” said Tishahl, adding he’s recently received a steady stream of inquiries from current and prospective clients. “Landlords want to get a sense of what they should be doing if they’re getting a lot of rent-relief requests.”

While it is true that many businesses are experiencing income drops, the landlords probably won’t give a rent reduction of any kind because they are going to have losses also as many businesses, especially in retail centers, will go out of business.

It doesn’t hurt to ask your landlord for a rent reduction, but you are going to have to prove your income drop, which is not normally something you do in advance, but rather in arrears after many months of the loss.  You also have to prove that you don’t have enough other financial resources to cover your debts without this income and that you are probably going to terminate the lease early if they don’t help you in some way.

However, no landlord I am aware of will even consider a rent reduction without a tenant sending them proof of their losses and showing they don’t have sufficient assets to cover these losses on their own.

The First thing I would recommend is checking with your insurance carrier to see if you have business interruption insurance (you probably do) and to see if it covers mandatory required government closings and loss of business income otherwise for any other applicable events.  There is usually a 90 day waiting period before a claim can be made on such policies. Click here for a promising link about this type of coverage. The main point here is to make the insurance claim so if your insurance company either decides to cover it or is required to cover it by the government you are in the queue before the other thousands of claims that will come in. This is to ensure, if there is coverage, you will get your money earlier than those who waited.

Landlord’s also have loss of rent insurance so you can check with your landlord to see if their coverage is in effect; if it is they will allow you not to pay rent. Because landlords will have to make a claim, I am recommending they do it sooner rather than later, even if they think there probably won’t be coverage. This is for the same reasons mentioned above regarding your business interruption insurance.

Many tenants are going to be in the same situation as you, so something will have to be done, or the landlords will have a lot of empty space.

In my opinion, your options regarding your current lease are the following: 1) Give back part of your space to the landlord. I don’t think this will appeal to your landlord much because currently the demand for space is very low and it will not be easy to lease it; 2) Sublease part of your space to others, especially those that might be potential referral sources for your business; you might actually end up receiving more rent than you are paying this way, but you also might want to make a better deal for someone who is a potential referral source for you. However, it might not be easy to sublease quickly because of demand for office space right now; 3) Terminate your lease early and relocate to another space in the building or to another property. Again, I don’t think this will appeal to your landlord but they may accept this option, or option #1 because it’s better than losing a tenant entirely. Moving to another property would be a more aggressive approach, but in my experience and opinion, you can usually get out of any lease for 6-12 months of your current rent. California usually requires landlords to mitigate a tenant’s lease damages, and the courts time and time again have stated this is the amount of time it should have taken the landlord to release your current location. I rarely see any award over 12 months of rent, but in most cases, the courts have awarded between 6-9 months of rent, as it really depends on your current market and how fast space is leasing for your particular type of space. 

In a recent Bisnow article, Michael Huddleston states:

” Waiting for the government to force closure is a dangerous game of damned if you do, damned if you don’t, Huddleston said. “The problem is if you voluntarily shut the business down, and you have one of these policies that provide the coverage for when the civil authority shuts you down, you are going to potentially lose the coverage or at least limit the coverage if you shut down before the civil authority acts,” Huddleston said.  “[But] if you wait for the civil authority to act, then you are potentially incurring liability to patrons coming in because you know there is a danger … that’s a liability exposure.” 

I can help you with all of the matters mentioned above, but if you reach out to your landlord to see what options they offer, it won’t hurt.

I hope the above helps, and let me know if you want to discuss any of the above further, as each option has many more details that need to be considered.

Here are two additional resourceful articles on the topic:

Before You Break That Lease Over COVID-19, Negotiate First, Brokers Say

Force Majeure And Business Interruption Insurance May Not Be The Solution CRE Hopes 

If you have questions about selling, buying, or leasing CRE or have any other CRE needs, please contact David Massie at david@djmcre.com or 805-217-0791.

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SELL & LEASE YOUR COMMERCIAL REAL ESTATE FOR THE MAXIMUM PRICE

In my experience as an owner/landlord and broker of commercial real estate (“CRE”), most brokers hired to list office, retail, industrial or other types of CRE properties for sale or lease put up a “for sale” or “for lease” sign and list a property online at a couple of Commercial Real Estate (“CRE”) websites like Loopnet and CoStar.  This passive approach waits for the interested parties to find the property by driving by it or searching for it online.

The passive approach discussed above, while necessary, is not the best way to sell or lease your property for the maximum price and/or fast as possible as it takes the least amount of effort by the broker.  In some hot CRE markets with lots of demand and limited supply, this might be all that is required. However, even then you aren’t seeing all offers and might not be selling or leasing for the highest price or as fast as you could have.  In conjunction with this passive approach, there are many other meaningful actions that can be performed but they take the knowledge that most brokers don’t have as well as time, energy and dollars that these brokers simply don’t want to invest.

One such action a broker can take is contacting your current client base (via LinkedIn, email, phone call, etc.) and even your personal contacts (via Facebook, Twitter, etc.) to see if they have any interest or know of anyone that does.  The power of these contacts is not to be underestimated especially if you have strong business and/or personal relationships and have kept in touch with them. I have found the more personable broker that has a reputation for putting people first over making commissions and that specialize in certain cities or certain parts of larger cities know the local people that actually live and work in these areas. This helps them get more referrals to help them sell their listed properties faster.  I recently received an office lease listing where a large national brokerage firm could not lease the space for 2 years but I was able to lease it in less than 30 days because of the aforementioned personal relationships and referrals to me from them.

Another action a broker can take is changing up the listing and flyer information periodically.  I prefer doing this monthly but it does depend upon the property type and demand for it but at a minimum, I would recommend doing this quarterly.  I recommend changing the listing and flyer to highlight different important property features and use different headers so interested parties that might have seen the original marketing information see new information that they might not have seen the first time.  I recently received a new office lease listing that a large regional brokerage had tried to lease the space for years where the listing, flyer and other marketing information simply was never changed and I was able to make it better and have created new interest in the property with multiple offers coming in now.

To reiterate, there are many other actions a broker can take to help his client sell or lease their CRE for a higher price and/or faster but many brokers simply lack the knowledge, don’t want to invest the time (they might work for a big brokerage and be focused on volume rather than quality), don’t want to pay more for different listings other than what their company has access to, don’t have a good reputation, etc.  And these are areas I have overcome as both an owner/landlord and broker for CRE and I can help you sell or lease your property in a better way.

If you have questions about selling, buying, or leasing CRE or have any other CRE needs, please contact David Massie at david@djmcre.com or 805-217-0791.

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Commercial Landlords In California Facing Potential Large Property Tax Increases

California commercial landlords, owners of office, medical, retail, warehouse/industrial spaces and more, are in for a shock if the current proposition on the ballot passes in November.

In a recent Bisnow article, Rex Hime states: 

“If this comes into effect, they [small businesses] are gone,” Hime said to Bisnow after his presentation during the ICSC Southern California Idea Exchange event Thursday at the Long Beach Convention Center. “The second issue is, you have these large corporate property owners with many, many tenants, and since most are under triple net leases, they are going to pass that tax along to their tenants, and some of them will not be able to survive.”

But what Hime doesn’t state is that this will not just adversely affect retail landlords but all commercial landlords who own commercial properties of any type.  It’s not just retail leases that pass through the cost of property tax increases.  Office and industrial leases usually do it also even though they are modified gross leases and not triple net.

Also, how will these potential tax increases affect commercial real estate prices?  I think it will cause sales prices to drop.

The commercial real estate market in California, and also nationwide across the US, has been doing very well for the past decade with prices at all-time highs with no real end in sight as of now. But if this initiative passes in CA and it causes prices to drop and vacancies to increase as predicted, California is in for some serious financial pain.

And those owners/landlords who bought at high prices in the past decade won’t like it much if this initiative causes prices to fall and vacancies to increase. This will probably also lead to more bankruptcies and foreclosures because of loan defaults.

If you want help with leasing, buying or selling your commercial real estate, whether office, medical, dental, retail or warehouse/industrial space, contact David Massie of DJM Commercial Real Estate at david@djmcre.com or 805-217-0791.  

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More Medical Tenants Leasing At Retail Locations.

In 2017, I had written a blog predicting that medical leasing in a retail center would be beneficial, and more prevalent in the future. This prediction has recently come true, as there is, in fact, a shortage of medical space available.

Bisnow article on the matter states:

“In the last three years, we [retail brokers] have done more medical deals in retail spaces than I have ever done previously in my career,” Franks said. “Additionally, we have done more specialty retail uses in traditional retail space than we ever have done before.”

From my previous blog on the topic, I stated that it would not only be good for a landlord to capture medical tenants and bring in potential new business for the other retail tenants in the center but also that it may bring in new patients for the medical tenants as well.

However, the main problem for medical tenants leasing at retail centers, particularly nice ones where they probably want to be most, is that the rent is usually higher than a nice medical building. Retail landlords don’t typically pay for the medical improvements needed for leased space as a medical building landlord would. Because of this, the medical tenant usually takes the cheaper way out and leases at a medical building. But what if leasing at the more expensive retail center brought in more income because of the retail exposure? If it more than covered the extra costs for rent and improvements, it should make it worth doing.

If you want help with leasing, buying or selling your commercial real estate, whether office, medical, dental, retail or warehouse/industrial space, contact David Massie of DJM Commercial Real Estate at david@djmcre.com or 805-217-0791.

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COMMERCIAL BROKER DUAL REPRESENTATION :  GOOD OR BAD IDEA?

Dual Representation is not legally allowed in many states.  Why?  Because it can’t be done without violating ethical issues as there are simply too many conflicts of interest.  The tenant/buyer loses big time and the owners and their brokers gain big time. This is why so many brokers and owners are in favor of it.

For 25 years I directed some very large real estate companies that owned millions of square feet of commercial property across the US and even internationally.  Many brokers wanted my business because I could give them 5 or 6 figure salaries off some of my properties in any one region that I controlled.  As a landlord, I loved it when my brokers were able to do dual representations because I had a great amount of leverage over the brokers who worked for me.  If they, or anyone in their firm representing a tenant/buyer, pushed too hard for a tenant/buyer at one of my properties –all I had to do was hint that they might not be able to keep my listings.  Would a broker risk losing a 5 or 6 figure salary working for me over one deal where they also represented the tenant/buyer?  Not likely.  That is all it took for the tenant/buyer to not get as good of a deal as they could have received had they used another broker from another firm; a firm that was not affiliated with a listing broker who worked for me or that wasn’t trying to get listings from me.  This is why dual representations shouldn’t be done.

Even though dual representations are legal in California, I won’t do them.  They should be outlawed.  Ask any good real estate attorney how it goes in court when they have to defend a broker for a dual representation. Attorneys that I have spoken with that have experience in this matter have said “it’s not a matter of whether they can win the case but rather of how much they can settle for”.  This is because these attorneys know that it is impossible for a broker to represent both parties correctly without fault.  Can you imagine an attorney who has represented a large property owner for decades attempting to also represent a tenant in a dispute in court?  It wouldn’t be possible to represent both parties fairly.  It doesn’t happen. This is the same reason why dual broker representation should not happen.

Every tenant/buyer should hire a broker that doesn’t have any conflict of interest with a landlord/seller or their broker.  The landlord/seller pays the tenant/buyer’s broker’s commission so it costs the tenant nothing.

Brokerage firms that specialize primarily in representing tenants/buyers are a very good choice because they don’t have the conflicts mentioned above.  If a tenant/buyer is thinking of representing themselves –that can potentially be even worse.  Hire an experienced broker who only has your interests in mind instead.  You will save a lot of time, money and headaches if you use the right broker.

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Outsource your commercial real estate department for free – and save money, time, and headaches

Frustrated by how much time and energy it takes to lease or buy commercial real estate (office, medical, dental, retail, industrial, etc.), whether you have to open up multiple locations across the US or even just one?

What to look for in commercial real estate deals

Although you’re great at what you do relating to your business, you’re probably not an expert at all the aspects of commercial real estate that affect your bottom line: Continue reading “Outsource your commercial real estate department for free – and save money, time, and headaches”

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Commercial Leasing: Never do it on your own

You are a business owner with barely enough time in the day to run your company, much less worry about real estate. Someone on your staff reminds you that your lease will be expiring in a few months, so you start to think about what that will mean. Mostly, your current space works for you. You might need more or less space and the carpet and the paint might need replacing but it works. You are comfortable and moving is a hassle!

At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office some in nice buildings. Continue reading “Commercial Leasing: Never do it on your own”

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How to choose the right commercial broker/agent

Let’s face it – it is difficult to buy, sell, lease or manage commercial real estate properties without the help of an expert. Would you go to court without an attorney? Then why would you negotiate a lease without an expert representing you?

Hiring a good licensed commercial real estate agent is your best bet against losing thousands of dollars you will likely spend when you make costly mistakes, or miss out on solid commercial real estate investing opportunities.

That is why finding and hiring the right commercial real estate agent should be your first priority. Continue reading “How to choose the right commercial broker/agent”