May 1, the second rent day since the coronavirus crisis hit with full force, is fast approaching. Meanwhile, small businesses around the country are waiting for additional funding as a follow-up to the initial $2 trillion relief package. The $349 billion first wave small-business funding ran dry in less than two weeks, raising questions about the new wave of loans, which is expected to exceed $300 billion. And will those additional resources be enough to help ease the stress for tenants and landlords?
Todd Rosenberg, co-founder & managing principal of Pebb Capital, together with Ophir Sternberg, founder & CEO of Lionheart Capital and its subsidiary Out of the Box Ventures, talk about how they are meeting their tenants’ needs, as well as other mid- and long-term options for small businesses during these challenging times.
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We’re several weeks into the lockdown caused by the coronavirus. How would you describe the small business tenant-property owner dynamic at this point?
Sternberg: We have a great dynamic with our tenants and have been extremely responsive to their requests. The tenants are enormously grateful for the rent relief. Landlords and tenants right now are all in the same boat. There’s obviously a lot of pain going around in this crisis. A few weeks ago, we started receiving different requests and inquiries from tenants expressing they were definitely in need of some type of relief and asking what was on the table. That prompted us to think: What can we do to help their businesses that would also be fair to both sides? And we think we came up with something that’s extremely fair.
Rosenberg: So far, people are all trying to work together. The reality is that the best outcomes are from cooperation between tenant and landlord, but the longer the economy remains shut, the more strain will be put on the relationship. This necessitates swift and directed action from the federal government through one comprehensive program addressing all stakeholders.
The SBA stimulus package is encouraging, but that financial relief seems to be a short-term fix. What other solutions do you see for minimizing tenant burden in the next months, particularly as prospects for May and June seem increasingly gloomy?
Sternberg: We are doing what we can do as a landlord. We have been helping by directing some of our tenants to apply for the different government assistance programs, but the rent relief, we feel, is the most impactful, as it is in our control. So that’s our main initiative. We’ve also offered some of our vacant big boxes to FEMA and other governmental agencies in case they can use them in this time of crisis.
Rosenberg: The current programs (Paycheck Protection Program and Main Street Lending Program) are a good start at providing immediate liquidity through existing bank networks, but they are already proving to be too little, and too slow. The rules also keep changing, which is frustrating applicants. The interim regulations dictate that PPP borrowers must use at least 75 percent of the proceeds on payroll or be subject to liability (in addition to not being forgivable), irrespective of whether they are open for business, which undermines many of the positive aspects of the first few drafts of the bill.
Payroll is just one element of the expense burden of any business, and to address all stakeholders, loans should be for small businesses that can establish (that) they have been directly injured by the shutdown of our country. Then, they should be sized based on lost revenue over that same defined period of time to ensure that the entire ecosystem continues to function properly. If small businesses make what they would have made, and then pay everyone what they normally pay, then no one else needs assistance.
While we understand this would require a large commitment from the Treasury, by effectively funding the revenue small businesses would have otherwise earned, absent of COVID-19, the U.S. government will need to provide a more complete remedy and reduce spending elsewhere by enabling:
• Each business to continue paying its employees and its owners, reducing the strain on existing unemployment programs;
• Vendors to continue to generate revenue, thus reducing downstream reliance on these and other government programs; and
• Creditors and landlords to continue to be paid, maintaining liquidity in the system and reducing defaults.
What should small business tenants prioritize for the short- and mid-term in this context?
Sternberg: They should prioritize plans to reopen their businesses as quickly as possible once the state mandate is lifted.
Rosenberg: Staying in business! As stated previously, if small businesses can only get support to pay a piece of their payroll while they are closed, then they might never be able to reopen when the economy does and the PPP would have been paid for nothing.
Are you for or against rental payment deferments or partial rent payment?
Sternberg: I am 100 percent for it and encourage any retail landlord that is in a position to offer rent relief to do so, as the financial health of our tenants is extremely important to the industry. Doing it right now has the most impact. We did it because we feel it’s the right thing to do in this time of crisis and because we can do it. We are fortunate to have very low leverage, and that allows us the flexibility to make this type of offering.
How would you advise landlords to approach the situation when tenants cannot make full rental payments?
Sternberg: Take each situation as a case-by-case basis. Be compassionate and understanding—every situation is different.
Rosenberg: Every situation is nuanced. It’s important that tenants and landlords are rowing in the same direction. Sometimes, that could include deferrals of either all or some of the tenants’ current rental obligations. Now is not the time to play hardball, unless it’s obvious a tenant is trying to take advantage of the current environment and is looking for a handout.
What are other alternatives do landlords have to minimize property-related costs at this point?
Rosenberg: There are not many options for landlords other than to keep tenants in place, seek forbearance from their lenders and seek out any potential insurance claims. Additionally, property taxes will have to be reconsidered to account for the substantial loss in value this year due to reduction or complete losses of revenue and in turn value of assets.
How easy or how difficult do you estimate it will be for landlords to find new tenants in the next months if they decide to evict the current ones or if current tenants need to close their businesses?
Sternberg: This will definitely be challenging. We need to think out-of-the-box, literally.
Rosenberg: I don’t think landlords are looking to evict tenants now and are going to try to work with their tenants through this tough time. And if a tenant does leave, there will likely be few options for backfilling the space. The landlords will have to ride it out until the market rebounds and expansion becomes an option again for tenants.
What measures has your company taken so far to minimize the economic impact of the coronavirus pandemic, and what is your strategy mid- to long-term?
Sternberg: The proposal we came up with for tenants is: In lieu of the full rents for April and May, just pay your share of the common-area maintenance charges and property taxes, and we’ll cover the balance of the rent. That varies from property to property, but it amounts to an average discount of 60 percent to 70 percent of the full rent amount. If there is further relief on some of the other expenses, such as property taxes, we’re committed to passing those on to the tenants, which will further lower their payments.
Rosenberg: For properties which have been affected by the lockdowns and economic impact has been seen, we are working with our lenders on short-term deferrals, filing insurance claims in the event our policies provide coverage for such events, cutting costs wherever possible, applying for federal stimulus if applicable, working with tenants to keep them in occupancy and reshuffle payment timing, internally escrowing positive cash flow today for potential further cash flow shortages in the future as well as taking any and all other steps necessary to ensure we survive what will hopefully be a short term hit to our cash flow.
Our strategy in the mid to long term is to continue moving forward on our existing projects, which are at various stages of their development, so we can deliver these assets over the next few years into what we expect will be a strong post-COVID-19, newly-normalized market. With respect to new acquisitions, past crises have taught me to bravely look through today’s situation and acquire based on fundamentals.