This article was published in 2020 as part of our COVID-19 Resource Center series. This article will not be updated but please contact us if you have specific questions regarding the information in this article.
AQUILA has been working tirelessly to understand the impact that the COVID-19 crisis will have on the commercial real estate industry so that we can, in turn, properly advise our clients during this unprecedented time.
Several of our tenant representation clients have asked about the possibility of rent relief to help ease the significant financial burden they are suddenly encountering, so we have been working with our network of brokers, landlords, lenders, tax consultants, and others to understand what potential rent relief solutions might look like.
In this article we will discuss:
- Three possible structures that could provide immediate rent relief
- How soon rent relief might be possible, and
- Suggestions for what you can be doing now to help speed up the process
Three Possible Rent Relief Structures
It is important to understand that every company’s situation is unique so there isn’t a good one-size-fits-all approach to rent relief. That said, here are three potential rent relief scenarios that landlords might be open to, depending on the unique situation of your company.
1. Abated Rent (Amortized)
This structure would call for abated base rent in the short term, but the value of this abated rent would then be amortized into the base rent in the future.
What does abated rent mean?
Commonly referred to as “free rent,” abated rent simply means that for a period of time the landlord agrees not to charge rent. Free rent can be a little misleading, however, because it often does not mean the tenant is paying nothing for those months. In most cases, it is the base rent that does not have to be paid, while operating expenses and other costs not associated with the base rent are still paid by the tenant.
You wouldn’t need to extend your lease, but your monthly rent would increase in the future to essentially “pay back” this rent over the life of your lease.
For example, if your monthly rent payments are $50,000 per month and your landlord gives you two months of abated rent, that $100,000 ($50,000 x 2 months) would be paid back over the life of the remainder of your lease. If you have five years remaining on your lease, you would end up paying an additional $1,667 per month in rent over the remaining lease term ($100,000 ÷ 60 months).
If you have more than five years of term left, this could be an attractive option since the increase in rent could be paid back over a longer period and thus not dramatically affect your monthly occupancy cost.
2. Abated Rent (Lease Extension)
In this structure, you could also negotiate abated base rent in the short term, but as opposed to amortizing the abated rent value into your existing rent schedule, you would extend your lease term a few additional months.
This structure may make more sense if you have less than five years of term remaining on your lease as it would not increase your existing monthly rent obligation, but merely extend it. Additionally, landlords may be more receptive to this if your lease expiration is looming, as it would ensure your tenancy in the building for a (slightly) longer period.
3. Lease Restructure
If you have less than two years remaining on your lease and have a certain degree of confidence you may want to extend in your current space (or downsize into a portion of your current space), you may consider restructuring your lease.
In exchange for a longer commitment, the landlord might be willing to offer up-front abated rent, as well as a tenant improvement allowance should you need to perform any work in your space to make it suitable for you long-term.
Given the uncertainty of the current market (and the fact that there is 4.5 million square feet under construction that is not accounted for with leases), we may see some landlords start to be aggressive in the short term in order to get ahead of the curve and limit their exposure down the line.
How Long Will It Take to See Rent Relief?
The understanding of severity and duration of the impact this pandemic will have on commercial real estate is occurring in real-time, and we are learning more each day. While we have seen some landlords agree to these concepts already, most building owners would say that it is still too soon to dive deep into discussions surrounding abated rent scenarios.
Building owners that have debt on their buildings need lender approval to modify any rent schedules or provide rent relief, so they are currently busy having these conversations regarding what can ultimately be done and at what point in time. We anticipate that landlords will have a clearer understanding within the coming weeks of what may be possible, at which point they can begin having substantive conversations with their tenants.
What You Can Do Now to Speed Up the Rent Relief Process
Review Your Lease
The first thing you can do is have an attorney review your lease to make sure you have a thorough understanding of your rights, particularly the force majeure section of your lease.
An experienced tenant representation broker can also help you review your lease and make suggestions on questions you might ask your legal counsel to review.
Prepare Documents to Share with Your Landlord
Since the potential solutions laid out above contemplate concepts that are likely not included in your existing lease, enacting these solutions will require a certain level of willingness and cooperation from your landlord.
Landlords have uniformly told us each tenant will be handled on a case-by-case basis and an understanding of their past, present, and anticipated future financial position is going to be paramount.
To understand what you might need to provide your landlord, read our article What You Need Prepared Before You Approach Your Landlord for Rent Relief Negotiations.
During this uncertain time, AQUILA is here as a resource for you, and we are ready to help with any questions you may have.
To get more information on your unique situation, schedule a consultation with our tenant representation experts.