Tips to navigating new relationship between landlords and tenants

TRA provides 10 tips to navigating the new tenant/landlord relationship in the age of COVID-19 and beyond.


https://facilityexecutive.com/2020/10/tips-to-navigate-relationship-between-landlords-and-tenants/
TRA provides 10 tips to navigating the new tenant/landlord relationship in the age of COVID-19 and beyond.
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Tips To Navigate Relationship Between Landlords And Tenants

TRA offers advice in the age of COVID-19 and beyond—landlords asked to become quasi-creditors as tenants seek relief efforts to stabilize and grow their businesses

Tips to navigating new relationship between landlords and tenants

With the landscape for commercial landlords and tenants changing rapidly following the outbreak of COVID-19, Bradley Tisdahl, CEO of national tenant credit consultancy Tenant Risk Assessment (TRA), contends that the relationship between the two parties has also fundamentally changed and needs to be viewed through an entirely new lens.landlords and tenants

“Tenants are approaching their landlords to assume a quasi-creditor stake in the tenants’ businesses through the extension of deferrals, abatement, or broad restructuring of existing leases,” Tisdahl says. “Landlords and tenants both need to be prepared for this conversation and the long-term implications inherent in these requests. We expect this dynamic will have a long-lasting impact on their relationship beyond the pandemic.”

Tisdahl notes that the dramatic reduction in demand for retail, restaurant, hospitality, advertising, and entertainment sectors has put significant liquidity and solvency pressure on many companies, while the office sectors also continue to struggle. “Companies large and small have been forced to cut costs and shore up liquidity wherever possible,” he says. “This has meant some dramatic reductions in overhead expenses as well as a strengthening of their balance sheets.”

To better navigate the multitude of rent relief requests from tenants, Tisdahl suggests that landlords consider the following five steps:

TRA’s Top Tips for Landlords: 

  1. Create a universal rent relief request form that requires tenants to disclose ownership structure, status of PPP loans/grants, other government support (Disaster Relief Fund loans, state and local grants, etc.), insurance coverage, annual and monthly financial statements for 2019 and 2020, and a detailed rent relief request
  2. Prepare a tenant credit report on the tenant both prior to and during the pandemic
  3. Formulate a framework for granting rent relief, including debt service cash flow requirements, tenant history, tenant value (both tangible and intangible), importance to weighted average lease term (WALT), and anticipated future value of tenant’s lease
  4. Amend leases to require the tenant to provide regular financial updates
  5. Establish performance, liquidity, and leverage metrics (when relevant) to ensure the tenant’s compliance with the amended lease

The onus of responsibility, however, is a shared experience, Tisdahl says. To assist tenants obtain various rent relief through the extension of deferrals, abatement, or broad restructuring of existing leases, he suggests their CFOs consider the following five steps:

TRA’s Top Tips for Tenant CFOs: 

  1. Outline the steps your company has taken to trim expenses since the start of the pandemic, including furloughs, layoffs, compensation adjustments, and other reductions to discretionary spending
  2. Share annual financial results, including an income statement, balance sheet, and statement of cash flows for 2019 as well as monthly statements for 2020
  3. Provide detail on additional contributed capital from investors
  4. Summarize the current status of outstanding debt, including upcoming interest payments, covenant status, upcoming maturities, and discussions with lenders
  5. Prepare a specific rent relief request, which may include the length of relief, the amount of relief needed on a monthly basis, and an updated business plan to navigate through the pandemic and beyond

“The steps outlined above for tenants and landlords assist in redefining the relationship,” Tisdahl says. “Bankruptcy is a last resort for most tenants, as it hurts all stakeholders in a tenant’s business, so when there is room for a landlord to work with a distressed tenant, we work with our clients to find creative solutions.”

Tisdahl further explains that following these steps may prevent or delay a material write-down for the tenant’s investors and creditors, while buying time for tenants to change their business trajectory. Following these steps also synthetically brings landlords into a tenant’s capital stack as a quasi-creditor and, if structured appropriately, improves a tenant’s sustainability while strengthening the landlord’s WALT.

“If a tenant enters bankruptcy, the future cash flows on any lease are significantly less certain,” Tisdahl says, “so there is often a mutual interest for landlords and tenants to work toward a resolution. Following these steps will help them get there.”

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