Landlords, Retailers in Metro Atlanta Impacted by COVID-19 Seek Middle Ground in Lease Negotiations
The financial impact the COVID-19 economic shutdown is having on tenants and landlords is a difficult mix of immediate drastic reduction (or elimination) of revenue, along with little or no ability to forecast when the end will come. This combination of severity and unclear duration makes finding potential win-win compromises a real challenge for tenants and landlords in the metro Atlanta area.
While deal pipelines across the industry have ground to a halt, companies, teams and individuals are using this sudden influx of time as an opportunity to take up important tasks that, while not producing revenue, will set up future opportunities. They are catching up on conversations, expanding their networks, engaging with social media, doing industry research, continuing their professional educations and learning new skills.
Landlords, on the other hand, are having to take this challenge head on and are testing the waters with solutions like pause agreements, rent deferrals (in many cases, equivalent term is added at the end of these leases) and other creative ways to provide relief to their tenants while not endangering their own interests or those of their lenders. There’s no certainty that these issues won’t have to be addressed again, periodically, as the initial relief periods get closer to expiration, but at the very least there appears to be a can-do spirit between the parties for now in many cases.
Some landlords that own their properties outright, such as Publix Super Markets Inc., have publicly offered flexibility and immediate assistance to their tenants. In addition, landlords are offering flexibility in rent commencement dates as an incentive to tenants to get deals to close, despite the uncertainty in timing of the current situation. The triggers for the rent commencement date delays are often tied to other delays, such as with permitting due to closed government offices, but we’ve seen instances of deferred rent commencement simply as an incentive to sign a lease now rather than waiting for more certainty to take hold.
For their part, tenants are dealing with the double-edged sword of having to make tough economic decisions to survive, while gutting their cultures and brands via layoffs and furloughs.
Restaurants have clearly been devastated over the last month, and that fallout will continue for the foreseeable future. They are learning to adapt by marketing their takeout more aggressively, in the absence of bar business and dine-in guests. They recognize that although sales have been drastically impacted, they need to focus on generating whatever revenue they can to make it to the other side of this lockdown without having to shut their doors permanently.
In instances where we are seeing landlords willing to help their restaurant tenants to get by, these conversations normally originate from direct conversations where landlords are trying to ascertain what their tenants really need based on material revenue shortfalls. An example would be to reduce rent proportionally to sales reduction using occupancy cost ratio analysis.
Some tenants such as hair and nail salons, and other service-based businesses where person-to-person interaction is essential to the operation, hope they can ride out the storm after being closed for over a month in Georgia. In these situations, we are seeing many landlords forgive rent (typically the current month or the next) and finding a way to amortize the concession over the lease year to come, or alternatively, adding that month to the back end of the lease.
The most exciting things going on right now are truly creative solutions like offering “bonds” to bring in funds now in exchange for enhanced value in the future. One of our clients did this two weeks ago and raised enough to cover a significant portion of its payroll. Now that same client (among others) is offering the public the chance to donate delicious food to hospitals via their website; a great turn of events at a time when we can all be pulling together for the common good.
Along those same lines, a medical group client of ours wanted to open a drive-thru coronavirus testing station here in Atlanta. They asked us to help them find the site, and we were happy to do so pro bono.
Difficult times like these require communication between both tenant and landlord because ultimately their fates are closely tied, neither can be successful without the other. For our part, we are thankful that we have largely seen that happening and generating solutions that can work for everyone.
— By Greg Eisenman, Senior Director of Retail Tenant Services, and Sam Krueger, Director of Retail Landlord Services at Franklin Street’s Atlanta office.