Most of the attention around eviction moratoriums have focused on residential tenants and issues facing their landlords. However, commercial property owners have also had to deal with tenants not paying rent. While commercial evictions can be faster, there are a lot of other concerns, especially this year.
CBS Chicago reported on how one landlord on Chicago's South Side has been struggling for months to evict a tenant on her tow yard. The tenant had promised to pay in court in 2019 but never followed through, and the landlord has been unable to evict the tenant due to court delays. Meanwhile, the tenant appears to still be doing business on the property. It's a terrible situation for the landlord, who is still paying a mortgage but not receiving income.
Illinois doesn't currently have a commercial eviction moratorium in place. Other states, including New York, which has extended its commercial moratorium until January, are giving small businesses a chance to recover.
Says Marina Vaamonde, a commercial real estate investor and founder of PropertyCashin.com, based in Houston: "A number of our mixed-use properties downtown, which are leased to restaurants, retail shops, and other small businesses, are unable to make their rent payments. Many of them have decided to close all together because they don't believe corporations will ever bring back their employees into the office."
When a small business or restaurant decides to close, that doesn't release them from a lease. Data from the end of September showed the number of small businesses open was down by 24.1% compared to January, and revenue in these businesses was down by 23.2%. What's not clear is how many of those businesses leased space, but the number of retail and transportation businesses open was down by 19.1%, and the number of hospitality and leisure businesses that were open was down by 36.9%. Many of those businesses likely had some form of physical space. All of that adds up to a lot of strain on commercial landlords.
While many strip malls and shopping centers are owned by large real estate investment trusts (REITs) and institutional investors, there are also plenty of smaller landlords who may only own one or two properties and rely on rent to make their mortgage payments.
What makes commercial evictions different?
Residential and commercial evictions follow a similar path, but one consideration for commercial landlords may be what sort of lease they have with the tenant. Many retail tenants are on a triple net lease, which means if they aren't paying, the landlord is out more than the rent -- they may also have to pick up property taxes and insurance.
Commercial leases also vary by tenant. Many tenants install trade fixtures, or equipment they need to do their business. Even if the landlord can get the tenant to leave or lock them out, they still need to determine how to handle any property left behind, especially attached fixtures.
Consider the case of the tow yard mentioned above. It will be challenging for that landlord to repurpose that property for another tenant. As with residential evictions, some landlords may have to spend time and money making a property suitable for its next occupant.
This is just one reason commercial leases are often multiyear affairs. However, with COVID-19 wreaking havoc on businesses, many tenants, both large and small, are renegotiating terms, either asking for rent reductions or in some cases, paying to get out of leases early. Recently, LVMH (OTCMKTS: LVMUY) paid $24.5 million to end a lease for its Givenchy brand on New York's Madison Avenue.
What commercial landlords need to know
There's no denying commercial landlords have taken on additional roles this year. Tenants and landlords have been in communication now perhaps more than ever, and landlords have become counselors, resources, and experts on loan and support programs, as well as sanitation, contact tracing, and more.
Adds Vaamonde: "I have spoken to all of our tenants and provided additional resources to them that they can use to get their business through the pandemic. With the ability to defer principal payments by up to two years and interest payment for a year, applying for the Main Street Lending Program is a great option for small businesses to consider."
A second stimulus or the passing of the HOPE Act could provide support for both commercial tenants and their landlords. However, the threat of a prolonged second lockdown is causing many commercial tenants to wonder how long they can hold on if they can't do business in a normal manner. In the case of restaurants, some tenants are considering going dark for the winter months.
The Millionacres bottom line
There are no easy solutions right now. Landlords seeking to evict a tenant through legal channels may be in for a long wait as the courts deal with residential evictions. Another consideration is that some tenants may file for bankruptcy, making it even more challenging for landlords to get back rent. In many cases, pushing for full rent may not be possible, making the landlord's best course of action to either compromise and negotiate for what they can get or focus on finding a new tenant.