Landlords Defer Rent to Keep Tenants Open
YOUNGSTOWN, Ohio — At the height of the coronavirus pandemic, during which many businesses saw marked declines in business or were closed altogether, landlords had to negotiate rent relief for some of their tenants or risk them closing permanently.
For companies that manage several multitenant properties across the United States, that’s easier said than done. Deals had to be worked out case-by-base, landlords say, to ensure they were helping the ones who needed it and not being taken advantage of.
In the last month or two, Carnegie Companies LLC has negotiated more than 300 amendments with its tenants, says Cole Pesses, director of acquisitions and dispositions. The process has taken a lot of time from its property managers and leasing team, he says.
“I think we’ve done a good job trying to be proactive and help those who need it,” Pesses says. “The main goal is what’s good for your tenant long term is what’s good for you. You want to see them stay in business long term.”
Typically, the Solon-based real estate firm offered one to three months of a 50% reduction in base rent plus the tenant’s share of operating expenses, he says. Some tenants agreed to extend their leases for two years for three months of rent forgiveness.
“Those were the two routes that we tried to go as far as structuring deals that would help our tenants but would also allow us to receive some benefit if at all possible,” Pesses says.
In January, Carnegie purchased Tiffany Plaza for nearly $8 million. Thus far, tenants there have been fine with paying their rent, with only a few needing temporary relief, he says.
The plaza features a Marc’s grocery store anchor, which helped keep revenues coming in for Carnegie, Pesses says. Many of the 45 properties in 14 states that Carnegie operates have grocery anchors, which fared better than those without.
“We saw grocery sales skyrocket. Especially in March and April and carrying into May,” Pesses says. Pre-pandemic, there was a shift in consumer spending that saw restaurants overtake grocery, but “that trend actually reversed throughout the pandemic as people shifted back to grocery.”
In April, Carnegie collected above 90% of its budgeted income across all of its properties. And collections were just shy of 90% in May, he says. June is in “the solid 80 percentile,” he said at mid-month. That puts Carnegie ahead of the national trend.
Nationally, grocery-anchored plazas collected 60% to 70% in rent collections from March to May, on average seeing a drop of about 40% despite essential tenants remaining open, reports National Real Estate Investor. Plazas without grocery anchors averaged 50% or less in collections, the trade journal reports.
“Many, if not most tenants, sought some form of rent relief or lease modification in response to COVID-19,” Phil Voorhees, vice chairman at real estate services firm CBRE told the publication. “It varies tenant to tenant as to whether these are short-term or long-term modifications,” he notes.
America’s Realty, which operates Boardman Plaza, saw collections closer to the national average. South of the Mason-Dixon line, the Pikesville, Md.-based company saw 75% of rent collections from March to May, and 60% in northern states, says its vice president and chief operating officer, Bob Waugh.
Like Carnegie, America’s Realty took assistance case-by-case. Any forbearances it received from its lenders were passed on to tenants, Waugh says. If a tenant wasn’t open, America’s Realty offered 60 to 90 days of forbearance, then would work out a repayment for the next six months to a year, he says.
Most of the company’s 170 shopping centers are anchored with a grocery store and include a pharmacy and dollar store, which were deemed essential businesses during shutdowns. “We’re not heavy in restaurants, which is good for us,” Waugh says.
Not all tenants were candidates for assistance, however. If a tenant remained open and bringing in sufficient revenue not to be affected by the pandemic, they were likely denied.
Carnegie’s Pesses recalls a situation with a national pizza chain that was being unreasonable in demanding a rent deferral, he says.
“If anything, they were busier than they normally were because everyone was home ordering pizzas,” Pesses says. “That was one situation where we felt we were being taken advantage of, as compared to a nail salon or barber. Those were the types of tenants we were trying to work with and help out.”
Generally, locally owned mom-and-pop businesses were given more leeway, as were small businesses that regularly pay their rent on time, the landlords say. Restaurants and nonessential service-oriented businesses that closed were approached first with assistance options.
Favorable consideration was also given to businesses that made efforts to apply for assistance through the federal Paycheck Protection Program, or other local or state grants and loans. Both property companies ensured they kept their tenants in the loop on those opportunities.
America’s Realty has also temporarily reduced some of its services to manage overhead costs, Waugh says. Weekly mowing was reduced to once every 10 days, trash cans are removed from parking lots where tenants were closed to save those fees, and the company is delaying painting projects.
Still, most of the tenants that were given a forbearance were willing to help pay for security, lighting and utilities, and mowing.
“It’s a new world. We’re writing this playbook as we go,” Waugh says. “The ones who are going to survive are the ones who are communicating and willing to work with their tenants.”
That’s not to say landlords will walk away unscathed. Waugh expects it could take a minimum of 18 months to two years to make up for the losses and get rent collection back to normal – even up to three years “depending on how the virus goes,” he says. Some states are already seeing increases again in positive diagnoses.
“This is like being in a hurricane. We’re kind of in the eye of the hurricane right now,” he says. “The backside of the hurricane is always the worst.”
The positive news is that the pandemic hasn’t halted business. Landlords and tenants alike are eyeing property.
Recently, America’s Realty purchased Field Club Commons and Westgate plazas in New Castle, Pa. It’s also in talks with a prospective tenant about a vacant 50,000-square-foot space in Boardman Plaza.
“There are still some opportunities out there,” Waugh says.
Carnegie Companies signed a few leases during the pandemic and, now that the economy is reopening, negotiations are picking back up on conversations that were put on hold, Pesses says. The pandemic has certainly informed the negotiations, he notes.
As certain lease language may have been ambiguous before the pandemic, “now you might start to see more tenants push more heavily on language that would protect them,” he says.
From the landlord’s perspective, more consideration will be given to what type of business is brought into a plaza, particularly if the available space allows the business to abide by health-related guidelines during a pandemic and still provide their services.
Landlords are also likely to be more strategic about the type of tenant they sign and ensuring some tenants complement each other.
“As a landlord you want to make your property successful for the long term,” Pesses says. “You have to be conscientious of who the tenants are and how they jibe with each other, And you want it to be a situation where they enhance each other.”
Pictured at top: In January, Carnegie Companies purchased Tiffany Plaza for nearly $8 million.
Copyright 2020 The Business Journal, Youngstown, Ohio.