Small businesses struggling to survive in the pandemic are coming up against a hard fixed cost: Rent.
The federal government’s forgivable loan program is tied to payroll costs, but for many small businesses, payroll is only a small portion of their operating expenses. Other types of federal aid, while helpful, may still not be enough to help small businesses overcome the slew of pandemic-induced business challenges they are facing.
That leaves many small businesses stretched to the brink to make rent payments, even though in some cases landlords have offered a break. In some instances, what’s been offered isn’t enough to relieve the pressure. In others, landlords have too many requirements for already stressed-out tenants, leaving many businesses—like Pizza And More in Rapid City, S.D.—between a rock and a hard place.
Jaida Lu, who co-owns the pizza shop with her husband Nick, says they asked to extend their lease by the number of months they couldn’t pay, but the option wasn’t accepted. The landlord agreed to forgo payments for April, May and June, but wanted the full amount paid back by next February. That would have added an additional financial burden, so the couple instead took out loans to help cover their already high rent of more than $6,000 a month.
“We’re just taking it day by day,” Lu says.
It’s not necessarily that landlords are trying to be the bad guys. Commercial real estate businesses have had a hard time accessing PPP loans and landlords’ ability to offer rent reductions or other compromises may be limited by their own debt agreements.
The majority of commercial properties are financed, so it can be tough for landlords to be flexible, if they’re being squeezed by their lenders, says Chris Hurn, founder and chief executive of Fountainhead Commercial Capital, a nonbank commercial lender that mostly does SBA loans. “It’s a vicious cycle.”
Another issue is most municipalities have not taken affirmative steps to ease the property tax burden on landlords, says David Wolfe, co-managing member of the Livingston, N.J., law firm Skoloff & Wolfe PC, who represents commercial landlords. “Thinking of ways to mitigate the landlord’s costs would enable landlords to forgive or be more lenient with tenants,” he says.
In some areas of the country, states or local governments have stepped up to help, issuing eviction moratoriums and rent-relief measures for commercial properties. But to be most effective, the relief needs to be more widespread, Wolfe says.
The situation is likely to get worse, if the pandemic continues to rage on unabated. In the early months of the pandemic, many landlords made concessions—such as delayed payments, reduced rent, amortized payments, allowing tenants to use their security deposits as payment or not enforcing personal guarantees. Notably, 76.8% of respondents to a June poll of National Commercial Real Estate Development Association members said they had accepted delayed payments and amortized them over the remainder of the lease; 57.7% said they made adjustments to the loan length in exchange for rent relief.
But there are widespread concerns that, going forward, landlords may not be able to be as forgiving, even if they want to be, according to Main Street Alliance, a national network of small businesses..
“We are on a financial cliff for small businesses, for those running out of PPP dollars, those left out and for landlords themselves. Congress needs to act urgently and put a set of comprehensive long-term programs in place or we risk a dramatically expanding fiscal crisis,” says Sarah Crozier, senior communications manager for Main Street Alliance.
To be sure, a landlord’s willingness to work with a tenant depends on many factors, including the landlord’s finances and financial obligations, the likelihood of being repaid, state and local laws and the relationship between the parties. In some cases, landlords that have sufficient cash flow may be more willing to negotiate. In other cases, some lenders, with little or no personal connection to the community, may be more rigid.
Especially in smaller communities, situations may be more flexible. Generally speaking, it’s less likely for landlords to take a hard line with tenants who are their friends and neighbors, says Shannon Berns, owner of Du Nord Consulting, a business consulting firm in Alexandria, Minn., who is also a landlord. Other landlords, however, view these matters purely from a business perspective, leaving emotions out of their decision-making; other landlords simply have little choice from an economic perspective. Because everything is a case-by-case basis, it can be frustrating for small businesses. Even within the same building, landlords don’t always offer the same deals to different tenants.
Fiona Hilario owns Lay Bare Waxing Salon, located in a Studio City, Calif., strip mall. She lost substantial revenue while her business was closed for three months, but she was able to negotiate a deal with her landlord for her rental payments of more than $2,500 a month. She started having conversations with the landlord in March and made special payment arrangements. In mid-April, all tenants received a form letter saying there would be legal action taken if rent was unpaid, but she continued to pay one-third at a time and negotiate, keeping the landlord up-to-date on her revenue situation and status of her PPP loan. Ultimately, she was offered a substantial break on her rent for April, May, June and July, retroactively, in exchange for paying the July balance early in the month, a deal she jumped at.
Throughout the process, she didn’t fight management and tried offering suggestions to them on how she could make it work. She was always very amicable and she says this made all the difference in her situation. Meanwhile, the salon closed again in mid-July due to the resurgence in her area, so going forward is a wait-and-see experience.
Other businesses, however, haven’t been as lucky. In some cases, landlords have threatened eviction, kept security deposits or offered options that would cost the business way more in the long run. In other cases, they’ve even raised rent.
Lu, the pizza shop owner, says her landlord’s offer to help came with a requirement for substantial documentation, which isn’t uncommon. The National Commercial Real Estate Development Association’s poll shows that 68% of respondents requested tenants’ financials and/or proof of distress. In her situation, Lu says the document process would have been too onerous, so she and her husband made other arrangements.
Alex Linsker, who owns Collective Agency, a co-working space company in Portland, Ore., also hasn’t gotten all the relief he’d like. Before the pandemic, he had three locations. One lease he opted not to renew at the end of its term. He tried to get out of a second lease that is now losing money each month, but says the landlord threatened a lawsuit if he did, so he’s stuck with that lease. His third landlord, he says, successfully lobbied the state to get a six-month pause on landlord mortgage payments, yet tenants are still required to pay 100% of their rent, albeit over a longer time frame.
Contrast that with the actions of local landlord Berns of Du Nord Consulting. She let a tenant—a restaurant owner who had begun construction with the hopes of opening this summer—out of the lease completely and even offered the first right of refusal if she finds another tenant. She knows of other landlords in the area, however, who weren’t as flexible. She cites the example of a hairstylist client whose local landlord—relying on these payments for income—upped the rent, effectively forcing the hairstylist to find a different space.
While negotiations can be tough—and may not work—Davis Senseman, a small business attorney in Minneapolis, Minn., advises small businesses to be as open as possible with their landlords. This includes updating them regularly about your ability—or inability—to pay in full so they have time to mull over options. “You don’t want to reach out the day before your rent is due—or even the week before,” she says.
Another tip: Don’t just say you can’t afford to pay, but, rather, offer them a few repayment options, she says. Also, knowing what’s in your lease is extremely important, especially if you’re facing eviction. Figure out what belongs to you and what’s the landlord’s. Also determine what leniencies, if any, the lease offers, and whether there’s a personal guarantee clause; if not, you may have more flexibility, Senseman says.
Small businesses should keep these things in mind because their situation could get worse before getting better, if at all, experts say.