What do thousands of owners of restaurants, retail stores, parking structures and coworking businesses throughout the country have in common?
They are all being pushed to the brink of going out of business by the persistent COVID-19 pandemic and resulting government social-distancing restrictions, as well as fearful customers reluctant to return.
With top-line revenue severely reduced for nearly a year now and nothing but uncertainty ahead, business owners have had no choice but to take drastic cost-cutting actions. After making painful staffing cuts, they are still left with fixed costs that are unsustainable as long as revenues remain far below healthy levels. The owner’s largest fixed cost is almost always the building lease payment, or in the case of multiple-location businesses, the lease payments.
Landlords can agree to relief in any of several forms:
- Lease abatement, whereby a monthly payment or two is forgiven by the landlord
- Lease payment deferral for an agreed period of months, followed by resumption of somewhat larger payments and the lease term extended
- Reduction in lease payments for a fixed number of months to cover pass-through charges the landlord must make o meet legal obligations
Why would a landlord make any concessions on a legally binding lease agreement?
Landlords have bills to pay, too—including mortgage payments due to lenders for each of their properties. The landlord is likely facing a multitude of missed payments from business tenants and would prefer some reduced monthly income from each property rather than a series of blank entries on the income ledger. A reasonable concession to a commercial tenant that might save the business can be a win-win as opposed to a business owner going bankrupt and defaulting on the lease.
There is an art and a science to successfully negotiating the restructuring of a lease. Business owners who take this task on themselves sometime are too aggressive in their demands, poisoning any chance of mutual agreement. Or they may underestimate their financial predicament and fail to ask for enough relief, leaving their business with little hope for success. A trusted advisor like Virtas Partners with years of expertise in lease restructuring will advocate for a partnership approach that will benefit both the owner of the distressed business and the landlord with multiple delinquent properties.
David Kirshenbaum is a managing director at Virtas Partners. He has years of experience successfully restructuring leases to benefit owners and investors, including portfolio funds, of distressed businesses as well as their property landlords.