• Derek Hermsen, Union Street Corporate Real Estate

Strategies for Covering Rent

After more than a week of hearing about different tenants' situations related to income loss and office closures, we have been exploring many different cash-flow relief strategies and rent abatement techniques (while even implementing some of them successfully already). Below are some ideas to discuss with your broker and attorney to assist you in developing the best strategy and structure for your company.


Application of Security Deposit.


Define a period of time out in the future that your company will replenish the security deposit and permit the landlord to apply it to current rent due. This will help with current cash-flow issues and buy some time to replenish the deposit.


Landlord Rent Restructure.


With many years remaining on a lease term, abate rent for period (i.e. 2 months) and define period of repayment (i.e. 2 months paid back over remaining 7 months of the year, which is 2/7th monthly rent added to existing monthly base rent). Ideally, spread it out over the balance of the lease term. This is especially useful if you're existing rental rates are already below current market rents.


With little time remaining on a lease term, abate rent for period (i.e. 2 months) and add equal period of term at the end of the existing lease (i.e. if your lease was to expire 9/30/2020, amend the expiration to 11/30/2020 with either same monthly rent or more). This strategy not only gains a couple months of abatement for the tenant, but it also gives the landlord a couple more months of term, which buys time with its own leasing strategy and efforts.


If there is/are future "free rent" period(s) already in your rent schedule, or pre-paid rent applicable to future periods being held by the landlord, restructure the rent schedule to advance the "free rent" periods or pre-paid rent periods. Similar discussions can be held around any outstanding tenant improvement allowances due from landlord to the tenant.


If you're in the midst of lease renewal negotiations, push for that free rent now; even if the free rent was supposed to occur during the extended term. Even tenants midway through a lease term can look to get "free rent" today in exchange for adding some term in the future. Just be thoughtful in the amounts proposed since we may be heading into a period of rental rates cooling down.


Leases have so many variations of rent structures, deposits, allowances, remaining term, etc., that you will need to be creative in what you propose to your landlord and have a reasonable solution in mind prior to contacting them (because your landlord won't know what's best for your business). Discuss your lease with your attorney and broker and choose how you'd like to initiate the dialogue based on your specific situation.


Borrowing.


Use your existing lines of credit and bank relationships. A lot of banks are extending lines of credit for 90 to 180 days. Also, the SBA has made loans available.

More can be found on the SBA's website here: SBA Disaster Loan: Coronavirus

Really long amortization terms and a rate of 3.75% for small businesses. 2.75% for non-profits.


Insurance.


Not a ton of luck with Business Interruption coverage related to the pandemic, but there may be a strategy around arguing the Civil Authority route. Tenants in the "healthcare industry" may, due to Gov. Inslee's order, conduct a gross misdemeanor with the continuation of practice . Therefore, the Civil Order provision may become applicable under the Business Interruption policy.


Force Majeure.

Again, if your lease has this clause, have your broker and attorney review it. Even if it excludes the payment of rent, there are still opportunities to possibly delay other obligations or monies due under the lease.


There is still a lot to be worked through with both the Governor's and Mayor's orders and tenant relief moratoriums (small business, non-profit), the Feds, insurers, and lenders. Avoiding gray areas and potential lease default is important. Having something in writing with your landlord will take away a lot of the guess work and get you some interim rent relief to help cash-flow issues. Please reach out to your attorney and broker to discuss which strategy will be best for your company. derek@unionstreetcre.com 206-264-9000 www.unionstreetcre.com

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