That has created an uncomfortable tension and interdependency with the often small, independent landlords or small real estate firms from which they rent. Those landlords, after all, have their own expenses and taxes to pay.
Andy Sommer, who owns a lifestyle boutique store called Forth and Nomad in a high-end Houston shopping district, is one year into a 10-year lease, which costs him $16,000 a month. Sommer said he has a good relationship with his landlord, who has told him to pay what he can for now and they’d figure out how to make up the difference later. But, in April and May, he couldn’t afford to pay anything.
Sommer was able to pay three-quarters of his rent for June and July – thanks to money from his Paycheck Protection Program loan and some revenue from his store’s online site. Going forward, though, he doesn’t know how much he’ll be able to pay, especially given that Houston may soon reimpose stay-at-home orders.
With so much beyond his control, he, like a lot of small business owners, wonders how much he should have to pony up. “Should we be responsible for rent when we’re forced to close by the government? Should it be on us or on the landlord? It’s nobody’s fault but whose responsibility is it?”
Aleta Williams, a chef who founded her own catering company in Chicago called Loquacious Culinary Events, only pays $700 a month to sublet a commercial kitchen she shares with the lease holder and can write off a portion of her residential rent, since she uses part of her home for her business. But given that bookings at her catering company – which relies on large gatherings – have mostly dried up, she’s been having trouble even affording that amount.
She paid April and May rents in full, she said, thanks to a short-term contract she had to provide food at a college that still had international students on campus. And she paid her June rent in full, plus half of her July rent, thanks to a few other small gigs and the PPP loan she received.
But she hasn’t paid herself since this all started and has been living off personal savings, which are dwindling. Williams said so far the building owner has told her and the person she sublets from to pay what they can.
“We’ve been fortunate. I know so many who don’t have landlords with that same compassion,” she said.
‘Let’s make a deal’
An informal survey taken at the end of June by small business advocacy group The Main Street Alliance found that nearly 60% of its members had delayed or reduced their commercial rent payments in the past four months. Nearly half said they’ve had to pay business expenses by borrowing against their home or using their personal credit cards.
In New York City, a free legal clinic set up to help small business owners during the pandemic has handled 850 cases so far. Of those, more than half have pertained to commercial leasing matters, said Akira Arroyo, the clinic’s director.
Gerry Reilly located his bar, Lizzie King’s Parlor, just a few blocks from the Barclays Center, a popular sports and entertainment arena in Brooklyn. But it’s been closed for several months and it’s unclear when it will reopen.
Since the pandemic, Reilly has transitioned his bar to takeout and now has outdoor seating, but business is a fraction of what it used to be, he said.
“When we signed the lease a huge part of the business plan was the events at Barclays. Bars rely on crowds,” Reilly said. His current rent, including taxes and utilities, comes to about $7,000 a month. He said he’s a little behind now and is trying to strike a deal with his landlord. His latest offer is to pay half his rent for the next two years.
As Reilly sees it, if he leaves his landlord won’t be able to find a new tenant quickly given the downturn and he would collect no rent for some time.
The economic strain likely will get worse before it gets better for everyone.
“That’s why we recommend landlords keep tenants at any cost,” said James Famularo, President of Meridian Retail Leasing, which brokers leases of retail and restaurant spaces in New York.
He’s seen dozens of small businesses break their leases in recent weeks. But he’s also seen all manner of deals being struck.
They include a few months of rent abatement or rent forbearance. Sometimes a business owner may agree to pay the landlord a fixed percentage (e.g. 15%) of whatever revenue her business generates in the coming months. Or a tenant signing or re-upping a lease may get six to eight months of free rent, plus another 12 months at half the normal rent.
If landlords can’t or won’t negotiate a deal, “it will be a chain reaction that trickles up,” Famularo said.
Landlords will have a hard time finding new tenants if they kick out the old ones and that will make it even tougher for them to pay the mortgages they hold on their commercial properties.
Right now, concessions are being made by many lenders, especially for borrowers whose loans were performing well before the pandemic, said Mike Flood, the senior vice president of commercial/multifamily policy at the Mortgage Bankers Association.
Typical forms of relief that landlords can receive from banks include forbearance for a few months, interest-only mortgage payments, loan restructuring or letting them tap the cash reserves they are required to keep to cover property costs, Flood said.
But until the United States gets a much better handle on the coronavirus, local economies will be hobbled. The longer recovery takes, the harder it may become for landlords to get concessions that let them offer the breaks their small business tenants need to survive.