How Landlords Can Prepare for the Federal COVID-19 Stimulus Package

Congress passed a record $2 trillion stimulus package, with the President promising to sign it into law. We are taking this opportunity to provide our initial thoughts on what the legislation does specifically for commercial real estate companies and their tenants. While we have not had the benefit of reviewing the 800 plus page legislation in detail, our initial reaction is based on the following high-level elements of the stimulus package: 1) the creation of a $500 billion loan facility to ailing industries; and 2) the creation of a roughly $350 billion Small Business Administration (SBA) loan facility. Other components of the proposed bill offer further support to individuals, healthcare organizations, and states and municipalities, all of which aim to stabilize the destructive economic impact from COVID-19, but the two loan facilities offer the brightest spots for commercial landlords. Let’s break them down.

The $500 Billion Loan Facility Keeps Major Industries Solvent

Companies in industries facing the first economic symptoms of COVID-19 are positioned to access loans at the federal government’s discretion. Without editorializing too much, this puts the federal government in a position to play favorites, and $500 billion is likely not going to be enough to go around, so it is fair to assume there will be some winners and some losers. For the winners, they will have access to much needed liquidity to bridge financial shortfalls. This is great news for landlords, who will continue to receive rent payments on time. For companies not chosen for federal relief, there may not be much of a future. Landlords should remain abreast of these federal loans among their tenant base, as it will almost certainly be a matter of public record as to what companies tap into these borrowings.

The $350 Billion SBA Facility Will Allow Many Tenants to Remain in Place

The $350 billion SBA facility should offer significant leeway to companies with less than 500 employees to borrow up to 250% of their monthly payroll, rent, mortgage, and utility bills. The program would be administered by the SBA approved lenders, which could grow from about 1,800 nationally approved lenders to include all U.S. based banks to ensure the program has adequate reach. The process is aimed to be simple with rapid approval. Some blind spots remain, but companies would be eligible assuming they retain staff for a fixed period (it also applies to companies that laid off or furloughed employees that are then rehired). While the cap for any individual company (or location) is at $10 million, this may not yet be enough to support the vast ecosystem of small business in the U.S. Encourage your tenants to access this capital early so they are at the front of the line. This will only serve to help landlords.

So What Should Landlords Do Now?

It is important not to make any firm decisions yet. TRA has compiled a series of steps, outlined below, that should guide you in your planning and tenant management.

1. Don’t make any final decisions yet with any tenant. It’s still too early in the process. And be sure you never negotiate against yourself.
2. Evaluate existing leases and look specifically at force majeure clauses and business interruption insurance, with a keen eye toward pandemic language or interpretations.
3. Determine how much rent forbearance your asset can afford based on its own loan obligations? Unless a property loan is federally backed, it will likely not be eligible for forbearance in this time, which means property level cash flows need to come in, or cash needs to be brought in to cover any pending interest payments.
4. Request at least two years of tenant financial statements for any tenant requesting rent relief and communicate to them that this is the first step in the process. Ask for monthly financial statements through March 2020 to determine how much access to capital the company has.
5. Prepare a communication strategy for your tenants highlighting the importance of requesting federal aid and highlight the programs available to them.
6. Be critical of all rent relief requests that come in and apply a uniform standard of review for upcoming rent relief. Be prepared for unconventional requests from tenants, including partnerships and revenue sharing agreements. But remember to be generous with tenants that bring synergistic value to your properties, especially amenity tenants and smaller, independent companies.

At TRA, we are here to support you through this fluid market.We are defining strategies for our clients to employ for all tenant types and asset classes.Reach out if you would like to discuss.