On today’s show we’re talking about navigating the fine line between collecting commercial rent and pushing your tenants to close their doors.
The financial stress is all over the world of commercial. Rent collection used to be automatic at this time last year. Revenues are down for most businesses. Most importantly, even if a recovery is underway in some businesses, the worry remains that the recovery won’t last. We could experience a second wave later this year. We could see a subsequent shutdown. We see government programs to assist businesses drying up. In many cases, small businesses failed to meet the eligibility criteria for government assistance.
Commercial tenants are asking for rental concessions. They are clearly experiencing hardship.
Vacancy in commercial space is also a reality of the current environment. Solving the cash flow problem involves a two printed approach.
- Getting existing tenants to pay the rent
- Finding new tenants to fill the vacancy.
It’s often tempting to believe that you won’t find new tenants in today’s environment. While it’s true that so many businesses are having a hard time, there are still businesses looking for space in the current environment. That means getting aggressive on pricing and concessions in order to attract them.
Today we’re looking for tenants that are doing a bang-up business. At a time when the economy is on life support and the unemployed number in the millions, it’s hard to imagine businesses that are booming. But they do exist.
In one of our properties we had a single vacant retail space. We managed to find a tenant that was in desperate need of additional space. We had space that was ideally suited and they moved in a matter of weeks.
At the other end of the spectrum we have tenants that have been forced to close during the pandemic. They’re being kept afloat by government emergency benefits. They’re paying a fraction of their rent and they seem to be teetering on the brink of closing.
We asked them to pay the full rent this week, and they said that they simply don’t have the cash. They would have to close their door permanently.
So we accepted partial payment and have applied for another round of government relief on our rents. It’s a lot of paperwork for another 30 days of rent relief. The cycle of negotiation with this tenant will repeat in another 30 days.
At this time, the name of the game is survival. It’s not a time to optimize and maximize highest and best use revenue. It’s a time to be pragmatic.
We entertained several potential tenants for the vacant space. One was a construction firm that would have used the space as an office and material depot. They were looking for a low rent situation and there was concern that the traffic of equipment and materials would be incompatible with the existing tenants in the building.
We entertained the owner of a coffee shop who had a space rented a few blocks away at a much higher rental rate. She was losing money and could not afford her rent. She was looking to break her existing lease and get into a lower cost lease. When we evaluated her financials, it was clear that moving to a lower cost space would help her situation. But the deal breaker was the realization that she would have needed to sell an unrealistic amount of coffee in her old location, just to fund the monthly rent, without paying staff, buying food or generating a profit.
So the additional rent from our new tenant is being used to cover the negative cashflow and is making it easier to negotiate rent concessions with the existing tenants. We’re not making money at the moment, but we’re not bleeding red ink either.