Rent Concessions in Retail: Taking The Long View and the High Road
Recently it was April 1st, famous for being a day of jests and frivolity. However, we’re in the middle of the COVID-19 epidemic and few of us feel frivolous. In this troubled year of 2020, for landlords and tenants in the retail real estate industry, April 1st had another meaning altogether: It was the first monthly rent deadline since COVID-19 in the United States really hit the you-know-what.
As a result, landlords have been receiving emails and letters from their tenants — and sometimes, tenants’ attorneys — asking for rent relief. The requests started coming in earnest three weeks ago and ratcheted up like the virus itself as April 1 approached and sales plummeted.
In a less fraught time, when a particular retailer faces an acute issue like supply disruption, weather anomalies, or other unforeseen difficulties that do not fit into the narrow squeeze of force majeure clauses, a tenant may make a rent relief request. It could come in the form of rent abatement (free rent), a rent concession (discounted rent), or rent deferral, which for all practical purposes is a loan.
In such a normal time, if a landlord is willing to entertain a rent relief request, it probably will insist on concessions in return, and will require a written lease modification or forbearance agreement with the tenant. The landlord will usually insist on deferral, with rent being paid in one lump sum later or amortized over a certain period. But the landlord may also take the opportunity to go back and renegotiate provisions that were “tenant-friendly” in the lease, such as those giving the tenant the drivers seat in who else can and can’t be a co-tenant in the shopping center and what uses are prohibited.
These are not normal times, though, and this was not a normal April Fools Day.
Retail is where the housebound buyer would have spent her money if she had a job and could move about freely. Retailers truly need help, because no one – not the landlord, not the tenant — wants rows of desirable stores to be empty in six or eight months. Proceeding according to “normal” landlord behavior is unnecessary—and unwise.
This is certainly what Gary Rappaport, the founder and CEO of Rappaport, thinks, judging from his comments to over 1500 industry viewers on April 1st in a Bisnow webinar entitled “Leadership in Uncertainty.” Rappaport (https://www.rappaportco.com/), the company, is a Washington DC-area retail brokerage and shopping center owner/manager with approximately 1750 tenants in numerous higher-end shopping centers across the Greater Washington area.
450 of those 1750 tenants have already contacted Rappaport with requests for some sort of rent relief. By the end of this COVID-19 period, Gary expects at least 600 tenants to not be paying rent. E knows the pain is going to be real, and the pain is going to last throughout the year. “Plan for this to be a long-term problem,” Gary told his audience.
Gary is famous in the industry for his unusual availability to offer retail real estate advice to anyone who asks him. Those, like myself, who have spent even a little time with him can tell that he thinks that doing good is good business. This is why it came as no surprise to today’s webinar attendees that Rappaport, the company, has told every one of the 450 tenants who have requested rent relief – and will tell all those other tenants that will come to him – that there will be no short-term consequences – no late fees, no defaults, no threats — arising from inability to pay their rent. Instead, what Rappaport will say is, “Let’s kick the can down the road 60 days and see where things are then.” Taking dire action now, Gary said, “is not a good business decision.”
Sixty days is a meaningful period of time in a business where landlords, like Rappaport, themselves have mortgages and institutional investors that may not have a huge amount of patience. Taking rent off the table for 60 days is not a pleasant development for an investor.
Ending up with empty stores when the virus abates is not attractive either, though.
We’ve heard this a lot, but it’s what you have to believe, whether you own a shopping center, rent space within it, or work in a store or restaurant: “We’re in this together,” Gary said today. “And we’re going to get through it.”
Jared Burden (email@example.com) is a Partner with GreeneHurlocker, PLC, where he practices commercial real estate and corporate law. His leads the Firm’s Harrisonburg office.