By Steve Marrer & John ArcherLease Concessions

Even before Ohio Governor Mike DeWine issued an Executive Order “requesting” that commercial landlords suspend rent payments and commercial lenders forbear loan payments, commercial tenants and borrowers were trying to find ways to reduce or defer monthly payment obligations. Commercial landlords are feeling the economic pressure of the state-ordered shutdown, and even as restrictions are beginning to lift, significant uncertainty remains. It is unclear whether the economy will pick up where it left off, which leaves many commercial landlords with the pressures of default to their lenders on the one side and maintaining rent rolls with financially distressed tenants on the other.

For many landlords, retaining existing tenants may be a priority, particularly when faced with the challenges of finding replacement tenants during the state-ordered shutdown. Even as the restrictions are lifted, there are no guarantees that landlords will be able to fill vacant space with solvent tenants. Therefore, many landlords may want to consider rent deferrals to maintain occupancy and help tenants weather the storm.

Before a landlord can consider any lease modification, however, they must understand what is permitted and prohibited by the loan documents. Landlords are encouraged to have their legal counsel review current loan documents to identify latitude in providing tenant concessions such as rent deferrals. While some lenders will readily permit borrowers to provide certain concessions and lease modifications in their business judgment, other lenders are stricter. Most CMBS lenders, for example, prohibit borrowers from granting any rent concessions or other lease modifications without the lender’s prior written consent.

Commercial landlords will typically approach a lender for two types of concessions:

(a) permission to grant lease modifications to tenants, and

(b) some form of loan payment deferral.

LEASE MODIFICATIONS                

The primary concession is likely a rent deferral. Rent concessions may include deferral of base rent and pass-through expenses for up to three months, with the deferred amount amortized over some number of months commencing in January 2021. Other concessions could include an extension of the lease term or requiring the tenant to exercise an extension option early.

The positive news for landlords is that it may not be in the lender’s best interest to take a hard line, as it may not be prepared to deal with an avalanche of loan defaults, nor do they want to see the values of their portfolios plummet. Many lenders may consider the better course of action to grant borrower requests to provide rent deferrals and lease concessions.

Once the landlord has an understanding of its latitude to provide rent deferral and other lease concessions to tenants, the parties need to memorialize the modifications in writing. In addition to changes to the payment of base rent and percentage rent, if applicable, landlords may also want to consider the following:

(a)        Financial Statement Requirements: The landlord may also consider requesting further assurances in the form of periodic financial statements, financial projections and any other rental assistance resources that may be available to the tenant.

(b)        Relief Programs: Landlords may consider requiring tenants to apply for local, state and federal relief programs.

(c)        Waivers: The lease modifications should have the tenant waive any claims it may have against the landlord in consideration of the rent deferral. This may protect the landlord in the event the tenant asserts any claims for default or breach against the landlord prior to the date of the lease modification.

(d)       Buildouts: If the landlord is in the middle of building out tenant space when the rent deferral is requested, any consent should be coupled with a modification to the force majeure definition in the lease so that it will contemplate coronavirus related construction delays.

Incorporating the above into a lease modification with lender knowledge and consent may help facilitate loan modifications.

LOAN PAYMENT DEFERRAL

Typical lender concessions during the shutdown have included deferral of principal payments for three to six months, with the deferred principal becoming repayable on the original maturity date of the loan. Lenders may still require interest-only payments during the deferral period, plus contributions to tax and other escrows. It may also be possible to get the lender to: (a) apply escrow balances to the payment of the interest-only component, and (b) extend the maturity date of the loan. Landlords should act quickly with both tenants and their lenders as government stimulus may soon be expiring forcing businesses to make tough decisions.

Lenders, landlords and tenants all have differing interests, but are tied together by a shared goal of maintaining their businesses in the face of the global health crisis. Compromise among these entities may be the key to emerging from the pandemic as healthy businesses.

If you have questions regarding lease concessions, reach out to Steven Marrer  at sam@kjk.com or 216.736.7267 or John Archer at jpa@kjk.com or 216.736.7224, or contact any of our Real Estate professionals.

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