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What is Going to Happen with Rent Payments?

September 9, 2020

CRE rental payments - Retail space available sign in a commercial real estate building
Commercial retail space available sign.

Commercial real estate landlords are understandably nervous about the future 

The economic impacts of COVID-19 won’t be fully measured for quite some time, but one thing is clear:  many commercial real estate owners aren’t receiving rental payments from tenants. 

Even as communities reopen, numerous restaurants, personal-service providers, and retailers don’t do enough business to pay their bills. Restaurants operating at 25% of capacity, for example, are seeing revenues well below normal, even though they are now technically open for business. In March, industry experts predicted that 2020 would see a loss of up to 75% of independent restaurants in the United States, representing five to seven million lost jobs and $225 billion in revenue. 

Small businesses are unable to pay their bills across the country, leaving commercial real estate landlords to ask, “What about the rent?” 

In the spring, as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, the federal government imposed a moratorium on foreclosures and evictions, keeping both homeowners and small businesses in their properties during the initial shutdown. But that moratorium expired in July. 

In Florida, Governor Ron DeSantis extended the statewide moratorium to September 1st. But that extension only applied to residential tenants who have been “adversely affected by the COVID-19 emergency”—the order did not affect CRE rental payments.

Then, on August 8th, 2020, President Donald Trump signed four executive orders for coronavirus relief, including one that was positioned as preventing evictions. That executive order is widely seen as having no legal teeth, however. It merely recommends that federal agencies consider whether a moratorium on residential evictions is needed—it doesn’t actually prevent evictions of any kind.

And while Florida currently has no statewide order preventing commercial real estate evictions, both Miami-Dade and Broward Counties have enacted some moratoriums

Broward’s “order prohibits the issuance of any writs of possession until normal court operations resume,” and “the sheriff’s office has suspended serving eviction notices during the COVID-19 pandemic.” Miami-Dade has “suspended [police department] enforcement of any eviction orders until the COVID-19 emergency expires.”

Broward County’s order is in place “until further notice,” and Miami-Dade County’s directive is in effect until “expiration of the emergency period”—which was extended on March 18th and remains ongoing.

What does all this mean for CRE rental payments and contracts? 

All rental agreements are contracts, of course. And when contracts lose meaning, much of the foundation of our economy and society unravels. 

Landlords are caught in the middle—between compassion for their tenants and the need to make their own mortgage, insurance, and property tax payments. While almost everyone in the CRE equation understands and empathizes with the unique economic burden COVID-19 has placed on businesses, it’s vital that contracts become enforceable again—and that evictions happen when they are absolutely necessary.

In the meantime, is it fair if landlords lose their investments? And what about tenants who may be experiencing temporary economic hardship? 

The current situation calls for flexibility and a diligent eye on the longer-term implications of each tenant-landlord relationship. Landlords and tenants should keep open communication lines and review leases to see if any necessary accommodations can be reached as the economy reopens. 

Some high-profile tenants are pushing back on terms

Starbucks, for example, has reached out to all of its commercial landlords to renegotiate rental payments. 

“Effective June 1st and for at least a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures,” said the letter distributed [in May] signed by Starbucks Chief Operating Officer Roz Brewer. 

Chipotle Mexican Grill and Shake Shack have followed suit. Dunkin’ Donuts, Applebee’s, and Yum Brands, which includes Pizza Hut, KFC, and Taco Bell, are undertaking similar efforts, including tying terms to lease extensions.

It’s not out of the question to expect this trend to continue as various businesses—large and small—operate under government capacity restrictions and other limitations. 

Should landlords forgive or renegotiate CRE rental payments? 

Many landlords hesitate to drop the amount for rental payments to accommodate tenants because “accounting rules still allow them to book income if rent is deferred, as long as it isn’t reduced. Temporary rent forgiveness or discounts would also reduce their property valuations, which could hurt an owner’s ability to get a loan.”

That said, landlords may be able to work out temporary deferments or other measures to keep some income flowing, tenants in business, and property values stable. 

Again, landlords and tenants should keep the lines of communication open. If you are a landlord, tell your tenants not just to go dark and stop paying: “Keep us in the loop so we can help, and let us know what’s going on with your income stream.” Having those numbers will make it easier to approach your commercial lenders with renegotiations or forbearance requests. 

Also, keep in mind: While landlords might work something out with bank lenders and insurance companies, commercial-backed mortgage securities (CMBS) are another matter. CMBS are a type of financing with no single “entity”—investors pull together into a security instrument, so there is no one to speak with about renegotiating terms.

Thus, if you have CMBS financing, tenants stop paying, and you can’t pay, there’s little you can do. The moment you are late with a payment, the financing goes into special servicing, and the property is in immediate jeopardy. 

This creates a unique problem for CRE investors with this type of financing—and getting overdue rent payments or being able to evict non-paying tenants becomes even more critical. 

Keeping an eye on the CRE situation

The pandemic continues to contribute to disrupted business and high unemployment, which snowballs into even lower business revenues, among other consequences. All of these factors are affecting the ability of many commercial real estate tenants to pay their rent. The federal government is still working on a follow-up to the CARES Act that may provide some relief, but government assistance can only do so much. And it’s essential for CRE investors to closely monitor the national and local economic outlooks and stay adaptable.

In these most uncertain of times, a trusted advisor and property manager can be a valuable resource. At Morris Southeast Group, we’re closely watching how all of this plays out, and we’ll be sure to keep our readers and clients informed as the situation changes. 

If you have questions about CRE investing strategies, property leasing needs, or property management services, 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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