Implications for Real Estate Investors and Occupiers
Dear Clients and Colleagues,
The COVID-19 pandemic has impacted our lives like nothing ever before…. Its implications on the healthcare system, financial markets, and economy are far-reaching… including commercial real estate…
Over the past few weeks, I have been on the phone and video conference calls with many clients, investors, occupiers, service providers, design-builders and experts of many facets of commercial real estate, including calls with Cushman & Wakefield’s GTA and Global leadership, SIOR, etc…
I wanted to provide you with a brief update on what I have learned so far about the impact of COVID-19 pandemic, but please keep in mind that the situation is changing on a daily basis…
So let’s take a look at where we stand as of today… April 3rd, 2020
The Government of Ontario issued a state of emergency and ordered all non-essential employers to close their doors…. Which was followed by many layoffs and furloughs…
As is always the case each month… Rent, Utilities, and Insurance payments are due…
And everyone has been impacted in our world of commercial real estate in a causal chain.
From Tenants to Landlords and Lenders… Many Tenants have approached their Landlords looking for some kind of relief, with Landlords approaching their Lenders in turn…. So what can Lenders do? And what type of relief can they offer? Well, lenders are now bracing themselves for a wave of missed payments…Billions of dollars of monthly commercial real estate loans are coming due and if rents are not paid on time, starting on April 1st (and subsequently in May, June, July…..), it will pose a threat to the commercial mortgage market…
As a result, what can Tenants do to manage the COVID-19 Impact?
The first round of bills was due on April 1st for big multinational corporations, as well for small- and medium-sized companies. And irrespective of their size, they are all trying to manage the impact…
They are asking themselves questions like:
- What obligations are we required to pay?
- Which could we potentially postpone?
- How many employees can we afford to keep on the payroll?
- Can we get a break on our rent?
And the reality is…
As far as rental payments are concerned, there are so many different approaches… depending on the size of the Landlord, the size of space, lease term, the covenant of the Tenant, etc… Landlords are taking a closer look and making decisions on a case-by-case basis…
Everything is on the table…
In many instances, and especially in the industrial real estate world, Tenants are not even asking for rent relief… and when Landlords are asked, in some cases, are not responding favourably to such requests. In some cases, rents are being deferred from one to four months, on the basis of a net rental to gross rental payments deferral, and with the amount deferred being amortized over six to twelve months, with or without interest…
As you can see, there is no one single solution, but rather, all are custom to the situation in question…
Where possible, Landlords are generally empathetic with tenants that are facing true hardship and seek to foster relationships that will extend beyond the current lease term… but a Tenant’s ask needs to be realistic. Like any negotiation, creative avenues of rent relief or rent deferral versus full rent relief will demonstrate a willingness to find a solution.
Depending on the ownership structure (e.g., Institutional Landlord, REIT, Private Equity, or generational private landlord) and level of liquidity and governance, decision results will vary. Debt service payments will continue as will property operating expenses. Landlords may need to escalate asks to lenders and/or joint venture partners in order to obtain approvals for any kind of rent relief.
Rent Relief Options We Keep Hearing About in the CRE Industry:
- Some Landlords are considering the use of the Tenant’s Security Deposit for the next month or two, and then re-evaluating at a later time…
- Some Landlords are asking the Tenant to pay rent for April 1 and to then see where things stand before further consideration.
- Some Landlords are considering a deferral of rental payments, where the deferred amount is amortized over the remaining Term.
- Some Landlords are considering deferring rent payments, and then tacking on the number of months deferred onto the end of the Lease Term (usually 2-3 months)…
- Some Tenants have literally sent letters to their Landlord saying they are stopping rent payments for the next 3 to 6 months..
- A major retail Landlord launched a $30-million program to “bring immediate relief” to small business owners in the company’s portfolio during the crisis created by the COVID-19 pandemic. (In this case, Tenants applying for relief need to submit their last two years of financial statements and not everyone is qualified).
What Landlords are saying (A collection of sound-bites and opinions):
- “We are only considering deferring—not waiving—rent as we don’t know if the government will provide assistance later on that may put the Tenant back in a position to continue repaying us.”
- “Although we are sympathetic to the current difficulty, given the Landlord’s continuing costs (e.g. mortgage payments, utilities, etc.), the Landlord’s ability to defer rent is limited.”
- “If a Tenant was already in default prior to COVID-19, we are not renegotiating. Otherwise, we will consider, but are insisting on confidentiality clauses with any Tenant.”
- “We will investigate the government-announced mortgage relief program to see if we may take it into consideration when responding to rent relief requests. “
- Some Landlords are not charging late fees or accrued interest.
- “For leases expiring soon, we will consider accepting promissory notes signed personally by the Tenant for deferred rent if they are renewing.”
- “At this point, we believe Tenants’ financial resources, along with available government resources, ought to be able to withstand unforeseen events for the time being. As such, rent remains due in full on April 1st.”
- In the event the current state of business persists, the Landlord will consider whether rent assistance will be granted for May 1st rent payments.
Bottom line is, there has been no bailout for Landlords (so far)…
What Lenders are saying:
Each time a client would like to defer their principal payments on a loan we would need to complete an amendment application. Some are pre-approved, and some need some due diligence. If due diligence is required, then we need credit checks before proceeding. There are certain situations that would disqualify people from any assistance:
- Pending or in bankruptcy (owners or related businesses)
- Legal situations (fraud or disputes between businesses and employees)
- Settlements that have not been paid as agreed upon
A company can defer their principal payments for 4 months (6 months if they have real estate security). This does not change the contractual amortization of the loan. Therefore, when the payments resume the payment will be inflated to meet the obligation termination date.
For business loans, it is business as usual with the following due diligence questions:
- Is the business still operating?
- Fully open/partially open/fully closed?
- If open – any staffing or supply chain concerns?
- If partial/fully closed – what percentage of revenues can be expected until the business re-opens?
- What expenses can be eliminated or significantly reduced (Labour/Supplies/Other)
- What expenses/payments can be deferred but would have to be paid eventually? (Rent/Loan Payments/Other)
- Cash Flow:
- Once all adjustments are made, what is the weekly cash flow (positive or negative) during shut down?
- If negative, what is the sum of the negative cash flow for the shutdown period?
- Does this amount need to be funded?
- What are the current cash balances?
- What personal resources do the owners have that can be injected?
- What other sources of cash can be accessed?
- Physical Distancing Phase:
- How much cash is required to meet the minimum obligations while the business is fully or partially shut down?
- Can this need be met from the “Resources” section above?
- Ramp up Phase:
- How quickly will they get back to normal once they re-open?
- Will they quickly get to BAU or will it take several months to get back to prior revenues?
- Will there be pent-up demand causing them to actually be busier initially?
- Will they have difficulty hiring back staff and re-establishing supply chains?
- Will they need additional working capital to fuel growth (e.g. will they have increasing A/R and or inventory needs before they can collect cash from their customers)?
- The Business-As-Usual Phase:
- What is the realistic expectation of profit/EBITDA?
- How was DSC before COVID-19?
- What are the new obligations that need to be managed (eg. Deferred rent or loan payments) and how will that impact DSC?
- Were personal obligations deferred and do draws/salaries need to increase to cover the owner’s personal expenses?
- All-in, what is the expected DSC once BAU is re-established?
- Other Considerations:
- Is this business in an industry (or reliant on one) that could be especially hard-hit and perhaps see a protracted downturn?
- Are there potentially other sources of additional funds?
- What type of security do we have?
- Are there other industry or business factors that could impact risk?
What the Federal Government is doing:
Canada Emergency Response Benefit and new support for SMEs
To help small- and medium-sized businesses (SMEs) keep their employees and maintain their financial stability, the Canadian government has announced a number of measures:
Canada Emergency Response Benefit (CERB)
This taxable benefit would provide $2,000 a month for up to four months for workers who lose their income as a result of the COVID-19 pandemic. The CERB applies to many Canadians including contract workers and self-employed individuals who would not otherwise be eligible for Employment Insurance (EI). Additionally, workers who are still employed, but are not receiving income because of disruptions to their work situation due to COVID-19, would also qualify for the CERB. This would help businesses keep their employees as they navigate these difficult times while ensuring they preserve the ability to quickly resume operations as soon as it becomes possible.
The portal for accessing the CERB will be available in early April. Canadians would begin to receive their CERB payments within 10 days of application. The CERB would be paid every four weeks and be available from March 15, 2020, until October 3, 2020.
This benefit would be one part of the Canadian government’s COVID-19 Economic Response Plan.
Payroll support has been increased to 75% of wages for qualifying businesses, for up to three months. This will help businesses to keep and return workers to the payroll. More details on eligibility criteria will be shared before the end of the month. The subsidy will be retroactive to March 15, 2020.
Canada Emergency Business Account
This program will provide up to $25 billion to eligible financial institutions so they will be able to offer loans of up to $40,000 to qualifying businesses. Guaranteed and funded by the Government of Canada, these loans will be interest-free for the first year. If businesses meet certain conditions, up to $10,000 will be forgivable.
Small and Medium-sized Enterprise Loan and Guarantee Program
This program will enable up to $40 billion in lending through Export Development Canada (EDC) and the Business Development Bank of Canada (BDC). Businesses will be able to apply for guaranteed loans through their financial institutions to assist with their operational cash flow requirements.
HST payments, as well as customs duties and taxes owed on imports, have been deferred until June.
What the Provincial Government is doing:
Ontario’s Action Plan – Responding to COVID-19
The Ontario government’s action plan is the first step in its response to COVID-19 and includes $7 billion in additional resources for the health care system and direct support for people and jobs. It will also make available $10 billion in support for people and businesses through tax and other deferrals to improve their cash flow, as well as protecting jobs and household budgets.
Specific measures to help businesses include:
- Supporting more affordable electricity bills for eligible residential, farm, and small business consumers, by providing approximately $5.6 billion for electricity cost relief programs in 2020-21. Further support includes setting electricity prices at the lowest rate, known as the off-peak price, 24 hours a day for 45 days to support ratepayers in their increased daytime electricity usage as they respond to the COVID-19 outbreak.
- Cutting taxes by $355 million for about 57,000 employers through a proposed temporary increase to the Employer Health Tax (EHT) exemption.
- Making available $6 billion by providing five months of interest and penalty relief for businesses to file and make payments for the majority of provincially administered taxes.
- Deferring the upcoming June 30 quarterly municipal remittance of education property tax to school boards by 90 days, which will provide municipalities the flexibility to, in turn, provide property tax deferrals to residents and businesses.
- Making available $1.9 billion by the Workplace Safety and Insurance Board (WSIB) allowing employers to defer payments for up to six months.
Having said all this, the biggest question that remains with us today is,…
What actually happened on April 1st when rent was due and payable?…
And what will happen going forward on May and June 1st when rents will again be due and payable?
So, will the rent be paid, and if it hasn’t will the Landlords make Tenants pay? And if they don’t pay, what will the Landlords do about it? Will the banks have leniency on Landlords when it comes to them making mortgage payments?
It remains to be seen…
The relationship between the Tenant and the Landlord has to be a symbiotic one. Tenants need their premises to run their businesses, while Landlords need financially-stable Tenants to pay their rent so that they can service the debt …. Empty buildings are no good for anybody. It is essential that all parties navigate this situation together in an equitable way, respecting each other’s position. This is going to be what gives the parties the best chance of coming through this successfully…
The bottom line is, rent is still due and payable and nothing lets the Tenant off the hook from the payment of rent. If the rent is not paid the Tenant is in default, and the Landlord doesn’t have to do anything. There is no right to claim abatement or deferral unless it is specifically mentioned in the Lease Agreement…
DISCLAIMER: All information herein is for informational purposes only. This is not intended as professional legal, tax or accounting advice. We are not liable for any damages, real or perceived, as a result of you receiving or consuming this information. Please consult your attorney, accountant, or other counsel prior to making any decisions…
As we navigate through these uncertain times, rest assured that our team is working diligently to meet the needs of our clients and colleagues. The manner in which we do business is changing constantly, but our commitment to providing the best information and advice remains the same.
Cushman & Wakefield’s leadership team and research resources are committed to providing information on the overall economic and, specifically, the commercial real estate impact due to this pandemic. Please continue to check cushmanwakefield.com for the latest information regarding COVID-19 and the commercial real estate industry.
We’re all in this together, so please reach out with any needs you may have during this time.
Please stay healthy and safe.
Goran Brelih, SIOR
Senior Vice President, Broker
Cushman & Wakefield ULC, Brokerage.
Immediate Past President, SIOR – Central Canada Chapter