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COVID-19’s War On Main Street: The Status of Small Businesses

COVID-19’s War On Main Street: The Status of Small Businesses on morrissegroup.com

The fight to keep small businesses alive

By now, we are all too familiar with the artists’ illustrations of the virus that causes COVID-19. A sphere with spikes, scientists say this family of viruses resemble a sun, and so they call them “coronaviruses.” A more appropriate description of this round, spiky appearance may be a naval mine. Because right now, this country—in all of its regions and sectors—is at war.

One segment being crushed by COVID-19 is small businesses, places that line the nation’s Main Streets and strip malls. It’s these local stores that help define a community. For their owners, they are the dependent children into which they’ve sunk their savings and financial futures. Right now, those children are very ill. And each business’s failure could mean financial ruin for the owners, their families, and their employees, in addition to impacting the communities they call home.

COVID-19’s impact on small businesses

To get a better idea of COVID-19’s effect on small businesses, Main Street America (MSA), an organization dedicated to revitalizing commercial districts, conducted an online survey of 5,850 small business owners from March 25 to April 6. Of these organizations, 91% have less than 20 employees. As in all things related to COVID-19, the numbers are staggering.

  • As a result of quarantining and supply chain interruptions, it’s estimated that 3.5 million small businesses are at risk of permanently closing in the next two months. If the crisis lingers, that number swells to 7.5 million.

  • At the time of the survey, 35.7 million small business employees were potentially facing unemployment. The most recent number, as of this writing, is that a staggering 22 million people have filed unemployment claims.

  • Not surprisingly, small business owners overwhelmingly said their primary need was financial assistance and penalty-free extensions on bills.

The government’s response

There was great fanfare when both houses of Congress and President Trump reached an agreement and signed off on the $2 trillion economic stimulus package. As part of the efforts to help smaller entities, the Small Business Administration (SBA) was put in the lead. But shortly after the stimulus’s rollout, the SBA was swamped with claims and had to adapt.

The hallmark of the act, and one that directly served small businesses, was the Paycheck Protection Program (PPP), a $350 billion fund enabling qualifying organizations to cover eight weeks of payroll expenses. As of April 19, the PPP had run out of money, and additional funding was locked in a political tug-of-war between Republicans and Democrats. A second wave of funding is likely to pass soon, however.

Money, relief, and the national debt

Before the onset of COVID-19, the national debt was already swelling. And the final bill for coronavirus relief will likely send that number to unprecedented levels that have serious consequences. That said, most economists seem to believe—as of right now—that the combination of the ability of financial markets to absorb this debt, consumer demand in a post-COVID-19 recession, and low interest rates place the US in a strong position to initiate relief efforts and get the economy back on track.

The more critical issues are long-term. COVID-19 debt will remain on government balance sheets for years and, possibly, decades to come—especially as the Baby Boomers continue to age, further changing the demographics of the country and stressing entitlements programs. Policy changes to deal with the debt could include raising the retirement age, increasing taxes, and heavy government spending cuts.

What small business owners can do

While the government continues to hash out the details of future stimulus packages, small business owners should be proactive and take steps now.

  • All levels of government are working on packages and programs to help local businesses survive. Check with local government entities and visit the SBA website. Once funds are made available, the SBA and banks will again process claims and applications. Become familiar with the loan forms and gather the required information so the application process can begin. Stick with the tedious process and attempt to get the money as soon as you can, given the possibility it will again run out—first come, first served.

  • Make a three-month financial plan. Speak to suppliers, landlords, and lenders to explore options for offsetting costs.

  • Develop a business plan for how to survive the changes in a post-COVID-19 world, with a nod toward how customers may behave, how services and/or products can be made available online, and how to market the business’s adaptations and offerings for regular and new customers.

What we can do

At the start of this post, we mentioned that it might be more appropriate to look at the illustration of the COVID-19 microbe as less of a sun and more of a naval mine–for good reason. The only way to consider the mind-boggling numbers—from infections to the number of unemployed to the stimulus dollars—is that this is a war. As in other wars, when national debts have historically skyrocketed, it will take time to recover.

At Morris Southeast Group, we are holding firm to the belief that we are all in this—and will get through it—together. And if history is any guide, the eventual aftermath of this shock event will see renewed success for our economy and small business owners.

We are here for you and the small businesses in our communities. We hope you join us in shopping these businesses if they are open during quarantine and as restrictions slowly ease.

If you have any commercial real estate concerns or questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Can You File a Business Interruption Insurance Claim to Survive COVID-19?

Can You File a Business Interruption Insurance Claim to Survive COVID-19? on morrissegroup.com

Does business interruption coverage provide protection during a pandemic?

As commercial property owners and their tenants continue to seek new ways of coping in a COVID-19-weary world, they are looking at ways to recoup some of the losses incurred as a result of preventative shutdown and isolation measures. One area getting a lot of attention is Business Interruption/Income Insurance (BI).

Designed as a means of covering physical damage or physical loss, BI is typically an add-on to commercial property insurance policies. While that certainly seems pretty black and white, there are gray areas—and COVID-19 is shining a spotlight on the gray. The question for policyholders, carriers, courts, and governments involves determining how and if a pandemic meets that standard.

Three critical areas of business interruption insurance

Generally speaking, there are three key areas when it comes to BI:

  • Business income coverage provides for sustained loss of income due to a suspension of operations by a covered cause that resulted in the physical loss or damage to the policyholder’s property.

  • Contingent business interruption coverage extends sustained-loss coverage to when the physical damage occurs at another property, such as at a customer or supplier. Any damage that impacts the income of the policyholder may be covered, as long the damage is listed as a covered cause in the holder’s policy.

  • Order of civil authority coverage provides for BI losses when a civil authority prohibits or impairs access to the policyholder’s property.

Policy language and COVID-19 coverage

It almost goes without saying that policyholders and insurers are currently at odds—or will be for years to come—as a result of COVID-19 and the terms of BI coverage. In the vast majority of cases, the resolution of any disputes is based on the wording in individual policies and previous court decisions.

  • The first prevailing concern is the idea of “covered cause.” Most BI policies are cause-specific, and many of the reasons leading to a claim are disaster-related, such as hurricanes, earthquakes, or fires. Crucially, as a result of the 2003 SARS outbreak, the insurance industry added an “Exclusion of Loss Due to Virus or Bacteria Endorsement” to most BI policies, which likely means the pandemic won’t be covered. In addition, courts have ruled in the past that contamination does not necessarily constitute “physical damage,” a term that is critical in filing a BI claim.

  • This same idea applies to contingent interruption coverage. Again, this is a loss incurred by the policyholder as a result of physical damage elsewhere, such as at a supplier. These claims can only be filed if the damage is listed among the specifics. And, depending on the policy—a virus is likely excluded and not a listed reason.

  • As property owners find the margin for filing a BI claim shrinking, many might look to submitting a claim under the civil authority clause, since this clause does not necessarily require physical damage. Again, looking at previous court decisions, claims filed here were typically rejected because it was determined these orders were issued to prevent future damage or—in the case of COVID-19—to protect the labor force. There is a case in Louisiana, however, in which a restaurant is claiming that the state’s COVID-19-related public gathering restrictions triggered the civil authority provision.

What a policyholder can do now

Despite the intricacies of policy language and what may be some lengthy legal battles over claim disputes, it’s imperative for policyholders to be proactive—because that’s what insurers are also doing.

  • Contact your insurer and request a complete copy of your insurance policy. Once in hand, look for the phrase “cause of loss to trigger coverage.” From here, check to see which coverages are included in the policy and the length of time of each. Look for the “Exclusion of Loss Due to Virus or Bacteria Endorsement” exclusion.
  • In addition to BI policies, it’s also important to review other insurances, such as general liability, pollution liability, workers’ compensation, and employment practices liability. It cannot be stressed enough that the current pandemic is uncharted territory, and it’s better to be prepared than to be surprised by anything that may or may not be covered.

Behind the scenes and out front

While this is sure to be a litigious process for some time and rates may certainly rise, there are also efforts happening behind the scenes to help ease the burden on policyholders and carriers. More than likely, the federal government will negotiate and pass additional stimulus packages while working with the insurance industry to create a solution to assist businesses. At the state level, bills have been introduced to address COVID-19 and BI coverage.

A legislator in Massachusetts, for example, introduced a bill that would “require insurance companies in the state to provide business interruption insurance to policy holders whose businesses have been negatively impacted by COVID-19.” Similar measures have been proposed in New Jersey and Ohio.

The insurance industry is fighting these efforts, however, for simple, fundamental reasons that go way beyond safeguarding their profit margins. Most policies have an exclusion for viruses; any legislation that alters the terms may violate the Contract Clause in Article I of the U.S. Constitution; and there simply won’t be enough money to pay out all such claims. Some form of federal assistance will be necessary, whether it flows through the insurance industry or not.

We know this is a lot digest, and we certainly understand how your anxiety may be shooting off in different directions. But as we’ve said from the start of this emergency, the team at Morris Southeast Group believes that commercial real estate investors and tenants will get through this crisis.

And we are here to answer any questions you may have. Call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

How Will Lenders Respond to COVID-19?

How Will Lenders Respond to COVID-19? on morrissegroup.com

Financial institutions face unprecedented measures in unprecedented times

April 1 was a key milestone on everyone’s mind—the first date that many payments would be due in a COVID-19-weary world on lockdown. In the weeks leading up to that date, the Federal government negotiated, passed, and signed a monumental $2 trillion relief package. Some CEOs, like Wayne Kent Taylor of Texas Roadhouse, announced that they would slash or surrender their salaries so employees could continue to be paid. Many banks began formulating new policies and programs, including payment deferrals and less-expensive lines of credit for small businesses and consumers.

Many stakeholders who could started pitching in, hoping to provide an economic bridge to weather this crisis. Then came reality, as the government signaled a continuation of the lockdown for 30 more days. May is now another critical milestone in fiscal responsibilities that may be missed.

What will the lending industry do as this crisis continues?

Where are we now?

When experts are asked to predict the economic impact of the coronavirus pandemic, they usually have a range of answers and scenarios. There is simply no way to predict anything accurately—other than there will most definitely be a huge financial fallout. One recent study, for example, ran more than 12,000 bank-held commercial loans through a worst-case-scenario algorithm. Factoring in a 35% plunge in CRE prices over the next two years, it predicts a dramatic increase in commercial defaults, up to 8% from 0.4%.

This study sees the hotel industry taking the most immediate hit, with a 35% cumulative default rate. This is followed by retail, with 16%. Office, multifamily, and industrial sectors would also see a loss but at a more measured pace.

Where are the lenders now?

The fear, of course, is that once borrowers begin missing payments, defaulting on loans, or permanently locking doors, the lending sector will be the next domino to fall.

If there can be any kind of silver lining in all of this, it’s that today’s crisis is not like 2008, when the financial sector was blamed for wrecking the economy while its recovery was made the responsibility of taxpayers. And it’s believed that banks will be able to weather short-term loan losses, although some lenders may become overwhelmed should the economic crisis linger.

Many analysts also think the current situation is an opportunity for the lending industry to step up—to prove that it is not abandoning communities, employees, or borrowers. Among the efforts already underway are donations to charitable organizations, “fee waivers; deferred payments for credit cards, auto loans and mortgages; loan modifications; low-rate and zero-rate loans and other accommodations.”

In addition, the initial $2 trillion stimulus package gave banks strategies to provide aid to businesses, including $350 billion in government-backed, low-cost or forgivable Small Business Administration (SBA) loans. This initial round of funding, however, has run out. As of this writing, the second wave of small-business-loan financing—about $370 billion—is set to be passed by Congress. Many analysts project that this money, too, will run out. And “first come, first served” is the order of the day for small businesses seeking these funds.

How lenders are preparing for tomorrow

Like many business and government sectors, simultaneous conversations are occurring to address the possible long-range implications and how best to prepare for them. Among the items up for discussion are executive pay cuts, suspending dividend payouts, and examining how long financial institutions can delay job cuts and changes to their business models. It is, without a doubt, a very delicate balancing act, and each effort will have its own share of consequences.

Naturally—and this can’t be stressed enough—it is simply too early to make any concrete predictions. While Congress is about to pass a fourth stimulus package—and more legislation may be on the way— it’s the progression of COVID-19 and the timing of a vaccine that will ultimately determine the longer-term response of the Federal Reserve, the stock market, and the lending industry.

How you can be proactive

Lenders have implemented steps to help consumers through the COVID-19 maze, including identifying at-risk borrowers and geographies, clarifying approval criteria and new procedures, and developing programs to assist those impacted by the pandemic. And consumers also have an opportunity to be proactive. They should reach out to their lenders to learn precisely what options are available while clearly communicating the financial impact of the pandemic and economic shutdown.

Commercial real estate property owners should collaborate with lenders and explore ways to provide relief to hard-hit tenants. Business owners with a mortgage may be able to seek some accommodations that salvage cash flow in the short term, as well. In most cases, lenders have a vested interest in hammering out arrangements that keep borrowers solvent—and to stop the potential fall of financial dominoes that could wreck the economy.

At Morris Southeast Group, we are holding firm to the belief that we are all in this together. To that end, we are here for you. If you have questions, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Rent In The Time Of Coronavirus: Tips for CRE Landlords and Tenants

Rent In The Time Of Coronavirus: Tips for CRE Landlords and Tenants on morrissegroup.com

Proactive advice for landlords and tenants who are navigating the COVID-19 crisis

As soon as the coronavirus began its relentless march around the world, one phrase was repeated by world leaders, experts, local officials, and neighbors: “We’re all in this together.” In many ways, that sentiment applies as we all try to negotiate the economic impacts of the COVID-19 pandemic. This is an all-hands-on-deck moment for an overwhelming majority of industries, including commercial real estate (CRE).

While many aspects of the emergency are unpredictable, it has certainly brought us together because we are all worried. The pandemic comes with a giant question mark: How do we do business today to prevent a domino effect tomorrow?

What landlords can do

In many ways, landlords are caught between a rock and a hard place—wedged between compassion for the economic plight of tenants and their own financial obligations to lenders and tax collectors. Given that position, landlords may want to use a multi-pronged approach, one that can adequately balance both short- and long-term issues. Here are some crucial steps:

Review leases. Looking closely at the terms helps property owners understand their rights. Still, they should also know that some of those rights may be limited due to crisis-centered government regulations and social pressure. Miami-Dade is one locale that has already banned commercial evictions during COVID-19. That being said, this review will help landlords proceed in an informed way when meeting with tenants.

Review loan documents. Many CRE loan documents contain clauses requiring lender approval for any lease amendments—which may be necessary when instituting flexible arrangements.

Meet with tenants. Looking at the big picture, the coronavirus shutdown is temporary. When life returns to normal, it will be important for a property owner to have fully operational tenants rather than a row of vacant spaces. The sooner tenants can be back in business, the quicker property owners can. Meet with tenants to collaborate on strategies to smooth this transition.

Be creative and flexible. Learn what tenants need and explore ways to achieve a result that works for everyone. With an eye toward both tenant survival and owner loan obligations, solutions can take several forms:

  • Short-term rent deferment (with repayment made in monthly increments or at the end of the lease, once the economy is up and running).

  • Temporary rent reduction.

  • Payment of only the tenant’s share of common expenses.

  • Applying the tenant’s security deposit toward rent and replenishing it after the crisis is over.

Whatever is decided should be put in writing and signed by all parties.

What tenants can do

CRE tenants also have their own concerns and responsibilities—to customers, employees, and their families. They have to develop a fiscal plan to survive. Depending on the business and the lockdown rules that are in place, this can mean operating on a limited basis or as a pop-up, or moving to an online format. Most potential steps involve talking with your landlord.

Be prepared. Just like the owner, the tenant needs to know the lease and all financial needs so the business can adjust and survive. Remember, it is usually in the landlord’s interest to maintain viable tenants long term, so carefully evaluate if you can weather the storm and communicate the steps you are taking to do it. As in any negotiation, both parties will have to find common ground.

A brief word about clauses and provisions

Any discussion of how to prepare wouldn’t be complete without a word about business interruption insurance, civil authority clauses, and force majeure. As both owners and tenants seek ways to stay afloat, these three items are in the spotlight:

  • Business interruption insurance is usually added to property insurance or as part of a broader insurance package. It’s most often used to compensate for lost income should a business need to close down as the result of a fire or natural disaster. Typically, it covers operating expenses, payroll, taxes, loan payments, or a move to a temporary location until any damage is repaired. Unfortunately, due to the outbreak of SARS in 2003, most business interruption coverage now contain an exclusion for losses due to virus.

  • Civil authority clauses, an uncommon form of coverage, are designed to protect landlords and tenants from monetary losses if public authorities bar access to their commercial properties.

  • Force majeure is a provision that relieves parties from performing or completing contractual obligations as the result of some a “superior force,” typically a natural disaster.

Because of the current situation, what constitutes a “natural disaster” is now more of a gray area. It’s unclear how insurance companies and the judicial system will interpret each of these categories, but be aware of how they may apply to your situation and any negotiations.

Morris Southeast Group is here for you

On March 27, the White House signed the CARES Act, a $2 trillion coronavirus stimulus package that includes economic stimulus funds to assist small businesses, consumers, industries, and state and local governments. While this is undoubtedly a tremendous fiscal help, receiving these funds will require aggressively pursuing small business loans and other assistance. And this money won’t go far if we fail in our relationships with one another.

It’s a bit like the scene at the end of the classic film It’s A Wonderful Life. The people who filled the Bailey house didn’t automatically show up to help George. That kindness was the result of his years of cultivating relationships. And as corny as all that may sound, our relationships with one another are going to help all of us manage this crisis—and serve everyone’s practical long-term business interests.

Relationships have always meant a lot to us at Morris Southeast Group. As we all look at the question marks ahead, our team is here for you. We will get through this together.

To learn more about what Morris Southeast Group can do for you now and in the future, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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