Five Issues Landlords Should Consider Regarding a Pandemic's Impact on Commercial Tenants
Originally published in NAIOP's Summer 2020 Issue By Michael Stewart
Many tenants need rent relief, but what are the best ways to go about providing it?
As state and local governments rolled out measures to prevent the spread of the novel coronavirus in March, commercial landlords began getting calls for help from tenants. In an environment where social distancing has taken hold and more customers are staying home, retailers and other consumer-facing businesses are feeling the impact of decreased demand, supply-chain interruptions, and in some cases, mandatory closures.
In light of this rapidly evolving situation, here are five issues landlords should consider before negotiating concessions with commercial tenants.
Loan documents could limit tenant relief. Before agreeing to any reduction in rent or other modifications to a lease, owners should carefully review their project’s loan documents. Many documents include financial covenants that must be maintained during the term of the loan. Owners should ensure that aggregate rent reductions will not reduce net operating income to a point where financial covenant tests are tripped, triggering a default or other lender protections (such as cash management) under the loan documents. Additionally, owners need to confirm whether their loan documents permit the modification or termination of a lease, or acceptance of less rent than stipulated.