Landlords Detail Lease Deferral Conditions

closed COVID-19 sign on door

For non-essential retail, once again rent is due and revenue is marginal. This time, as the May leases come due, the financial situation is more desperate and landlords are feeling the pinch as the coronavirus pandemic continues.

At least, however, landlords seem to be making accommodations for retail. For example, Empire State Building Trust, the owners of the iconic New York City midtown location, detailed its rent collection efforts in an April 23 call with analysts. It showed that as of April 20, it collected 69 percent of total April rent charges, broken down by 73 percent for office tenants and 46 percent for retail tenants. The firm received requests for rent deferral from 170 office and retail tenants that represent 32 percent of its annual rental revenue.

The conditions for deferral were also detailed. A tenant must prove that it has applied for financial relief through the CARES Act as well as any available insurance. Deferral requests have averaged three months. “Our smaller food and service type retailers have been hit particularly hard, they provide critical amenities and services to our office tenants,” the firm noted. The company stated in the call that is committed to reopenings for retail and food providers. And it has been surprised by some other requests.

“Clearly, there are certain industries that have been more severely and directly impacted by COVID-19, particularly those with direct ties to retail, hospitality, travel, and then even some of the advertising, consulting and legal firms that support those businesses,” said Thomas N. Keltner, Jr., executive vice president, general counsel and secretary for Empire State Building Trust. “I will say that we have seen opportunistic requests by both office and retail tenants, with good balance sheets and credit, and we’re surprised by those requests, and we will pursue aggressively collection of rent. These tenants are obligated to pay their rent. But overall, the tone out there by tenants is to conserve cash, lengthen the runway of cash spent through the downturn, and some of this approach has showed up in tenant’s attitude toward rent payment. We’ll work with some tenants on deferrals. We will reject certain deferral requests, and we will pursue all collections across the board. What we saw in April is not an indication of the future. And at this point, we certainly can’t make any prediction about May and the months ahead.”

At least one real estate executive thinks retailers are getting bad advice when it comes to lease negotiations. Information about the landlord’s portfolio, not financial desperation, is the key in requesting lease accommodations, says Peter Wilson, a Managing Director at A&G Real Estate Partners.

“Even in normal times, when retailers are faced with a cash crunch and a strict timeline for closing and restructuring their leases, a surprising number of them come to the table with incomplete information about their portfolios,” he writes in Chain Store Age. “In particular, they may be operating with inadequate information about anchor-store closings and co-tenancies in the portfolio; the current owners of particular shopping centers in which they lease space; and the status and accuracy of prevailing rent schedules and lease abstracts.”

With so many anchors closing stores and filing for bankruptcy, it is more important than ever for retailers to know exactly what’s happening with each location within their portfolios and how this stands to affect other operators with co-tenancy provisions in their leases, Wilson advises.