With millions of U.S. stores remaining shuttered, property owners have handed out billions of dollars of rent relief.
In recent earnings calls, some landlords gave hints as to who got tentative relief and how these negotiations went down.
Simon Property Group’s David Simon alluded to the mall owner abating rent for thousands of local retailers during the second quarter. Duke Realty CEO Steven Schnur said tenants occupying less than 100,000 square feet got deferrals. Brookfield Property Partners has similarly provided relief to small stores and restaurant operators.
While few disclosed how much rent is still up for grabs, they all had one answer to investors: Deferred rent will be obtained. “We haven’t given up on Q2 collections,” Simon Property’s CEO said in the real estate investment trust’s latest earnings call.
As the pandemic continues to put a choke on revenue streams, other real estate executives dodged related questions from their investors entirely.
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The future remains uncertain for mall owners and other landlords, as well as many of the mom-and-pop stores and larger chains they rely on for income. Recently negotiated rent-relief agreements are set to expire in the third and fourth quarters, and some retailers are making just enough to pay current rent, let alone a backlog of deferred payments.
“It will be hard for some landlords to just start collecting right away without any additional action,” said Bradley Tisdahl, of the consulting firm Tenant Risk Assessment, who works with commercial landlords and brokerages including Brookfield, JLL and CBRE.
As of mid-August, national store chains had paid 77 percent of their rent, while mom-and-pop shops had paid about 69 percent, according to a report from Datex Property Solutions. Some sectors of retail, like apparel, did worse, with stores coughing up 49 percent. And that’s taking into account the rent-relief agreements many of these stores already had.
What differentiates the pandemic from other financial crises is the huge number of retailers asking their landlords for help, said attorney Casey Sobhani, head of DLA Piper’s U.S. leasing practice.
“A lot of tenants are taking the temperature of their landlords and sending rent relief request notices, when it’s obvious that they’re still able to pay rent,” he argued.
“[Some retailers are] just hoping and throwing it out there and seeing what sticks,” Sobhani added, noting that such requests run the gamut “from smaller tenants … to major Fortune 500 companies.”
Courtside view
Some retailers that have not received any relief from their landlords have been feverishly turning to the courts, contending that missed rent payments do not equate to default.
Gap has filed several lawsuits against its landlords, including Brookfield, while Victoria’s Secret sued SL Green Realty in June to rescind its Herald Square lease.
But while bigger national tenants duel it out with their landlords, smaller retailers may have more leverage given the growing fear of vacancies and their being hardest hit by the pandemic, according to industry attorneys.
“Even if the landlord replaces the tenant, how much rent can the landlord demand?” noted real estate lawyer Glenn Wright. “Better to take a hit now and keep a higher-paying tenant in the long run.”
Nonetheless, during such negotiations, retailers need to prove that they have been impacted by the pandemic but will also be able to stay in business long enough to pay off their debts.
And for many retailers, asking for rent relief can come at a cost.
RPT Realty, which owns 49 open-air shopping centers, for example, said in its second-quarter earnings call that it was able to “unlock value” on properties through such negotiations by adding new terms, removing options and altering change-of-use clauses.
American Finance Trust, whose portfolio consists of 69 percent retail, similarly said in its latest earnings call that the company extended its retail leases for 12 tenants, for an average of 36 months, in exchange for four months of rent deferrals or credits. The REIT expects to receive $29.1 million as a result of such negotiations.
Short-term relief in exchange for long-term lease changes are common, according to industry experts. In doing so, landlords can ensure that such negotiations are worth it, regardless of what the future holds.
“There’s always something,” said Marc Betesh, a former real estate attorney and CEO of Visual Lease, an accounting software provider. “Everybody would love to go back to a deal that they signed, and change it.”
Charging it forward?
Many of the attorneys interviewed for this story are advising their landlord clients to either push collections further into the future or incorporate a percentage rent structure for still struggling tenants.
However, that can be difficult as lenders become less willing to consent to agreements.
“Landlords already have enough of an incentive not to interrupt the rent stream and to make rent relief a last resort, but then lenders are almost like a double last resort,” Sobhani said.
“Obviously lenders don’t want to be in a position of … having to potentially foreclose or deal with a default,” he added, “in a market like this especially.”
Looking ahead, retail landlords are increasingly being backed into a corner, some industry attorneys maintain.
The landlords that can afford to provide additional relief may have to in order to avoid vacancies, while for others a wave of evictions and litigation could soon be on the horizon.
“The people with the wherewithal to sue are going to sue,” said Katherine Murphy, a real estate attorney with Goodwin Procter.
“We’re waiting to see,” she added. “If it’s turning out to be too much because of reduced occupancies and no foot traffic, it’s going to be another conversation, and it’s going to be a more painful one.”
Contact Sasha Jones at sasha.jones@therealdeal.com