How will the Commercial RE Market handle COVID-19
I have a front-row seat to this question. I have spoken to dozens of people in the Commercial Real Estate space over the last couple of weeks. Everyone is trying to figure out how, where, and when relief will come. For the company properties, I am trying to figure it out myself. I am both an owner and an advisor in this case. The COVID-19 virus brought to light how the entire commercial sector is an invisible chain of connections not exposed unless in the face of a pandemic. The Tenant or Restaurant who rents from a Landlord, has vendors, insurance policies, leasehold mortgage (in some cases), payroll, and of course, operating expenses owed to the Landlord. The Landlord has to pay their vendors for maintenance of the Property, their insurance carrier, property taxes, and obligations to their lender. It is all connected and related. And the reality is, everyone wants to know who is going to pay for this “stall” in business. As of the day, I am writing this, the Stimulus Bill is headed to Congress for passage. As things come out perhaps much of these questions may be answered but so far, the overlying theme I have heard from our clients and friends, is this is a text-book example of force majeure; or an act out of all humans control that prevents the Tenant from operating no matter what.
In comes the infamous and often overlooked force majeure clause. While force majeure clauses are present in nearly every lease they have strengthened over the years. But to me, they have typically addressed Tenants’ hardships or at least were initiated and adopted with the intent of protecting a tenant from its inability to operate for reasons outside of its control. But what happens after the event passes. Who pays who to make a who whole? Other things like business interruption insurance are another option I have heard and even know of some that have already submitted claims for such. Another client of ours has submitted for a disaster relief grant from the State. Everything is on the table.
I will leave the legal side of this to the attorneys who will likely have a field day on this issue. The one thing I know is that this situation is fluid and changing every day and no one has the answers. What would you do if your phone rings from your Tenant who has never been late on a rent payment and they tell you (reluctantly) they cannot pay? Or what do you do when your mortgage is due, and your reserves can only support 2 months of carry and NO ONE is paying your rent. What do you do if you’re the lender and your borrower is late or missed a payment? While none of our clients or friends that I know have preemptively sought to terminate their leases (yet), some have come out directly and said: “We are no longer paying the rent”. Just today, Cheesecake Factory sent letters to all their Landlords stating they did not intend to continue to pay their obligations a move that will likely cause others to follow.
Ultimately time will tell what the effect of COVID-19 will be in commercial real estate. And unfortunately, all of this creates an “unknown” space which in some cases will have to be settled in the courts. I hope and believe that reason will find reason and commercial real estate owners and tenants alike will aspire to get things worked out quickly and reasonably so that the doors can (and will) open again!
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