Landlords Face Rent Shortfall

Deferred payments. Percentage rents. Back-end lease extensions.These are some of the solutions San Fernando Valley landlords have acquiesced to as retail tenants struggle to pay rent during the coronavirus outbreak.After the pandemic broke stateside last March, state and city of Los Angeles officials instituted eviction moratoriums to protect tenants struggling to make rent because of direct or indirect COVID-19 impact.A year later, following several state- and city-mandated business closures and a laundry list of coronavirus-related limitations, where do landlords stand with rent collections, and what will happen once the moratoria are lifted?Benjamin Johnston, chief executive of Kapitus, a New York-based lender which has provided $3 billion in financing to more than 50,000 businesses nationwide — including in the San Fernando Valley — knows first-hand the plight of retail entrepreneurs.Johnston said in the early months of the pandemic that “many landlords were sympathetic (because) it’s pretty hard to squeeze blood from a stone. Many landlords were able to cut deals to forgive or delay certain portions of the rent.”“The landlord will have to put up with those limitations for a while,” said Lee & Associates L.A. North retail broker Bruce Milton. “The regionals, the big boxes are going to have a lot more leverage.”Retail broker Matthew May of May Realty Advisors in Sherman Oaks has noticed varying approaches from different types of landlords.“On the private ownership side, you’re going to see more working it out,” May said. “On the institutional side, you’ll see a little more hardball. … Some landlords agreed to rent abatement and tacking it onto the end of the lease.”What that means, May explained, is that the rent is a back-end payment on the lease, but the term of the lease is lengthened.Milton is wary of back-end lease extensions in lieu of rent.“I have seen a number of landlords accept those terms, but it will bite them four or five years down the road,” he said. The reason retail center owners are entering these agreements, Milton continued, is because “some of those shopping center owners are in a tough place because they need every inch of occupancy.” However, when that lease is up, new rental terms can be arranged that will make up for the loss.“Renewal time is when he can recoup,” Milton said. “Percentage rent is the best way; it gives the landlord and the tenant time to make it up.”Looming evictionsMay believes that “once the moratorium ends, you’ll see more evictions.” He has already seen some restaurants impacted in Ventura County.“When they had the initial shutdown, the restaurant just shut down. The landlord sued them (because) they breached the lease,” May said.Milton agreed. “We’re still going to see eviction activity or tenants quitting. Franchises will blow out of good centers mainly because they couldn’t weather the storm. Some are just going to quit anyway. People have different business models; some of those aren’t going to last,” he said.As a general rule, landlords won’t collect any rent from these bailers. “They don’t have any means for the landlord to go after,” Milton said. “Sometimes you have to let it go.”However, it may work to the landlord’s advantage. For example, Milton noted that some tenants build out their space; if they abandon the property, the improvement become a benefit for the landlord.Mark Sigal, founder of the Thousand Oaks firm Datex, which amasses statistics on national retail trends based on data inputted from thousands of stores, said the best scenarios is when landlords and tenants work together to bridge the rent shortfall, but there will be casualties.“There’s a lot of triage,” he said. “Everyone has a check to pay. … If the tenant isn’t doing what it’s supposed to do, you’ll see the landlords take a harder line.”Business size plays a big role in negotiations, according to May. “The bigger the landlords, the less flexibility,” May said, while the smaller, independent landlords, “They may have a little more empathy.”The same logic works on the tenant side, although not all national chains acted wisely in the crisis, according to May.“A lot of the national chains didn’t behave,” he said. “McDonald’s was great (but) Starbucks pissed everyone off. They stopped paying rent. They decided to take the low road.”Market adaptationAccording to Datex, rent collections have climbed and are stabilizing. Going by occupancy cost, Mark Sigal said that Datex has determined that “tenants have paid a higher percentage of their rent than they were expected to.”In February, landlords nationwide saw 80.8 percent in rent collections, slightly down from 81 percent in January but substantially up from last April, when rent collections sunk to 60.3 percent.Predictably, supermarkets and drug stores ranked in the high 90 percentiles for rent payment, according to Datex.One of the retail landlords who has navigated the pandemic market and sees light at the end of the tunnel is Mark Sigal’s brother, Sandy Sigal, head of Woodland Hills-headquartered NewMark Merrill Cos.“What a difference a year makes. We definitely think we’re coming out,” said Sandy Sigal, whose company owns or manages 80 retail centers in three states, including Janss Marketplace, the 458,000-square-foot shopping center in Thousand Oaks. “There’s no one answer for any one tenant,” said Sandy Sigal regarding his approach to collecting rent from tenants. He stressed that NewMark has done “everything we could” short of letting big tenants with access to capital skate through without paying up. “We are not going to be your lender of first resort,” Sandy Sigal said. “We lost money last year, but how much can you help before you kill yourself and everyone around you?”NewMark Merrill has helped tenants seek out PPP loans and other business assistance “with the clear understanding that if we help you get that money, you pay us what you can,” Sandy Sigal said. Companywide, NewMark has restructured 500 lease deals, including ones with deferred rent and percentage rent.“There’s no free lunch. If we defer rent, we’ll have to get it back,” Sandy Sigal said.Deeper into 2021With the rollout of vaccines and the slow reopening of businesses, landlords expect an economic rebound will begin later in the year.The most recent $1.9 billion stimulus package has inspired confidence, according to Kapitus’ Johnston, as consumers have more money and “small businesses are the direct recipient of consumer spending. Consumer spending will drive an uptick in revenue for small businesses as more consumers can go out.”Sandy Sigal said he considers himself an optimist, choosing to focus on the more heartening aspects of tenant survival.“The small tenant who had to figure out how to survive, figured it out, that’s an incredible thing, he said.As a retail center owner, NewMark has tried to meet tenants halfway by utilizing the down time to make new investments in properties. “We did 20 murals this past year,” Sandy Sigal said, including at Janss Marketplace in Thousand Oaks, where an Aldi’s and another Starbucks have opened. In addition, a California Fish Grill is coming and movie theaters will reopen soon; and NewMark created outdoor eating places and drive-in movie events.“These things are going to stay. We’re going to have welcome back parties, so the customer knows they’re appreciated,” said Sandy Sigal, who also expects the deferred rents to trickle in later this year.“I feel really good about that,” he said. “My guess is that we come out (of the pandemic economy) really strongly. (In California,) our traffic today is up 10 percent over this time last year.”