Tenants Should Be Fully Transparent With Financials To Get Fairest Deal When Renegotiating Leases
This week, the No. 1 topic among real estate professionals everywhere is how rents will play out this month and beyond.
“The goal here is sum zero,” said Vagabond Group CEO Avra Jain, known for trendy, adaptive reuse projects and affordable housing initiatives.
If a landlord gets paid by tenants, then he or she should in turn pay mortgage obligations, she said. Same goes for the reverse: If lenders offer relief, then that should get passed on to tenants.
“We want to see that they’re making an effort to apply for some of these incentives that the government is offering,” such as the Small Business Administration’s 7(a) loans or payroll relief, she said. “The banks are going to want to see proof of hardship from us. We’re going to want to see the same from our tenants.”
On Thursday, Jain, wearing a black face mask — “That was my Burning Man outfit,” she quipped — and Tricera Capital co-founder Scott Sherman, in a plastic stormtrooper mask of his son’s, spoke on a Bisnow webinar with Becker & Poliakoff shareholder Philip Rosen to discuss the outlook for South Florida commercial real estate in the wake of COVID-19.
Rosen said his law firm clients are finding that most lenders, outside of commercial mortgage-backed securities debt, are offering 60 to 90 days' forbearance.
"They’re certainly not letting payments go," Rosen said. "They’re going to tack them on at some point.”
Rosen said he has advised clients to be fully transparent with their financials; that way they can get the fairest deal and maintain a good working relationship.
“You should go open-kimono,” he said. “When did your business go down? Mid-March? Wouldn’t it be fair for you to at least pay half your rent?”
Sherman, whose focus is on value-add urban retail projects, has a lot of small-business tenants. He said he has been on phone calls with individual tenants to get a sense of their challenges and help them through.
Jain advised being careful about what was put in writing.
“If we renegotiate leases, we have to look closely at our loan documents because disclosures are required,” she said.
She has found one positive as a developer in the coronavirus outbreak.
“We’re seeing construction pricing coming down — oil’s coming down and copper’s come down,” she said.
For projects nine months out, she’s estimating a 10% reduction on costs, which Rosen remarked was "a significant drop."
Sherman said he’s playing “90% defense” at this point, but that investors with cash are ready to seize on opportunities any day. However, for projects needing financing, banking is a holdup.
“Deals in the pipeline where appraisals have been done and a big deposit is at risk, those are going forward,” Rosen said. But new deals with leverage above 40% would probably not be until appraisers figure out how to price in coronavirus risk.