Three Ways A Commercial Landlord Can Maintain Cashflow During The Pandemic
The second national lockdown has once again brought many retail and leisure businesses to a halt. It has also re-emptied offices, leaving buildings empty across towns and cities. For commercial property owners that rely on rental income, this is a highly uncertain time.
Maintaining cashflow is of paramount concern. While government support has helped to a certain extent, the ongoing impact of the global pandemic is running cracks through even the strongest landlord/tenant relationships. RSM partner Damian Webb outlined three places a property owner can look to keep cash flowing.
Look Up The Chain
“The key for most landlords to manage cashflow effectively is to interact with lenders,” Webb said. “Landlords are often highly leveraged and many will have debt servicing requirements and it is often the major cash outflow. They need to understand what can be changed and what can’t.”
Many property owners will be repaying both the capital and interest on a loan. Webb highlighted that banks may consider the deferral of capital repayments, but may be more resistant to the deferral of interest payments.
Many banks and lenders have indeed been flexible and supportive of borrowers. They have deployed significant funds via the Coronavirus Business Interruption Loan Scheme, which ensures businesses have no interest payments in the first year.
However, since the initial forbearance in the spring many lenders have increasingly required borrowers to fulfil their debt servicing obligations. This is increasingly leading to difficult conversations for many landlords that note the difficult market many of them are operating in.
Look To The Building Itself
“Landlords need to look closely at the costs of the building itself,” Webb said. “We have seen many property companies shut down aspects of a building to minimise costs and reduce the burden of offering services. Some whole floors of offices have been shut down.”
Closing an entire floor would reduce energy costs, cleaning costs and the cost of management staff. This could be an obvious way for the owner of a flexible office building to minimise spend, for example. However, elements such as insurance repayments can only be mothballed to a certain degree.
Shutting down elements of a building is also trickier in sectors such as hotels and leisure. A hotel can mothball areas and aspects of a building, but cleaning and maintenance will need to be maintained to not undermine the property and ensure that when the world normalises the property can be rapidly made operational. While this doesn’t have to happen as often as when a hotel is operational, it is still a cost that the property owners need to absorb.
Look Down The Chain
“Thirdly, it’s all very well to save cash but landlords also need to generate cash,” Webb said. “What can a tenant pay? It’s not unreasonable to ask them to pay the service charge and insurance, for example.”
Webb highlighted the fact that more than 1.2 million businesses in the UK have received government-backed Bounce Back Loans to help them through the global pandemic; could this mean they can afford to pay their rent? While landlords have so far been generally very accommodating to tenants, he believed that there is a hardening in the market.
“Now there’s a sense that debts need to be paid and tenants need to do their part,” Webb said. “There have also been some opportunistic requests for rent holidays, when a tenant could actually pay, which has been leading to friction between landlords, tenants and their advisers. Many tenants will have reached some sort of agreement with landlords already, but regrettably there are a number who have not engaged and are utilising the moratorium preventing landlord action to preserve cash.”
The way to iron out increasing friction, Webb said, is to ensure that open conversations take place now. It would also be wise for a property owner to look ahead to next year. The moratorium that prohibits eviction will end at some point, which Webb believed could lead to a raft of court cases as landlords look to act. Business rates will also return and a landlord could be liable for rates on empty space if a tenant has left.
Looking ahead reveals even further uncharted territory. The government has indicated that a nationwide lockdown could continue for longer than November. For those managing commercial property, having as firm a handle on cashflow as possible is vital.
This feature was produced by the Bisnow Branded Content Studio in collaboration with RSM. Bisnow news staff was not involved in the production of this content.