It was 5 p.m. on the Friday before April 1 when John Pepper finally picked up the phone to speak with one of his restaurant chain’s landlords. Pepper, the co-founder and former CEO of Boston-based Boloco, hadn’t wanted to answer the call.
Luckily, it was good news — the landlord would be forgiving Boloco’s rent from March 15 through May 31.
“She is no longer a ‘landlord,’” Pepper wrote on Twitter. “She and her incredible organization are a partner.”
April 1 arrived last week, and with it, a huge amount of uncertainty regarding how commercial tenants and landlords are handling rent payments amid the coronavirus pandemic that has shuttered businesses across the globe.
Many landlords are loath to discuss whether they’re asking tenants to pay in full. Several of Boston’s biggest property owners and managers wouldn’t respond to questions about the situation. On the other side, tenants have reported mixed reactions from landlords. Some businesses are being offered 50% off rent for the next three months, others are receiving full deferral of rent for the next three months, and still others are seeing rent forgiven for now, but having it tacked onto the end of a lease term.
Amid such confusion, there’s the $2.2 trillion federal relief package — and with it, the $349 billion Paycheck Protection Program — but there are still big questions about when and how small businesses can tap into those funds.
And in the meantime, some landlords either cannot — or will not — offers deals on rent payments.
“I’ve heard those stories: ‘I have no choice, I have to pay my lender. You have to pay me or I’ll breach my covenant, or I won’t be able to pay my own mortgage,’” Pepper said in an interview with the Business Journal. “The lenders really have to work with the landlords right now, or the lender will be responsible for a lot of businesses closing. When a landlord says, ‘You have to pay me,’ and there’s no money from which to be paid, nothing works. All the dominoes fall.”
‘Behind the tidal wave’
Retail, hospitality and restaurant tenants were the first to feel the brunt of the shutdowns, but the office market is also taking a hit, said Michael Scott, co-managing partner of law firm Nutter in Boston.
Businesses with more cash on hand than those in retail or food and beverage typically are in a better position to be able to pay rent. For example, Boston-based STAG Industrial, a real estate investment trust that owns and operates a 91.4 million-square-foot portfolio of mostly industrial assets, says “less than 5% of tenants have requested rent relief” amid the coronavirus pandemic. The real estate investment trust says it’s engaging in “ongoing discussions to understand financial situation and impact” with its 414 tenants, who are primarily in single-user industrial properties, according to its most recent annual report.
Boston-based real estate firm Hudson Group is taking steps to ease the economic burden its tenants are feeling amid the pandemic — including forgiving April rent in some cases, says company principal Noam Ron.
Hudson Group is a midsize firm with a portfolio comprising several smaller retail tenants and several residential buildings — including Radian at 120 Kingston St. in Boston, which has restaurant Stillwater on its ground floor. Ron says the firm’s size means that, while it can be flexible on rent, it’s not a giant corporation that can absorb several months of losses.
“If all we’re doing is chipping away at these things, we’re behind the tidal wave that’s coming this summer. And that’s pretty scary,” Ron said. “We’re talking about flattening the curve now, as we should be. But the curve of the stimulus and the curve of our economic response is going to be flat unless we deal with it now.”
Forbearance
Landlords are only a part of the equation, Ron says. Often, it’s not up to a landlord to decide whether a rent payment is due; they need to work out arrangements with their lenders to pay their mortgages.
“The word of the day when it comes to debt is ‘forbearance,’” said Josh Bowman, an attorney who chairs the hospitality group at law firm Sherin and Lodgen LLP in Boston. “A lot of landlords have already gone to their lenders, and a lot of their lenders have already proactively sought out their borrowers, and they’ve already started to modify loan terms so landlords don’t have to pay their debt in April. It’s all a big, connected chain.”
There are typically two types of lenders, Bowman says: a balance sheet lender, which holds a loan on its own balance sheet and doesn’t sell to anyone else, and a commercial mortgage-backed securities lender, which sells a loan to a trust owned by bond holders and Wall Street investors.
Many local balance-sheet lenders are already taking steps to work out forbearance agreements to allow borrowers to temporarily defer on its debt service payment.
But it’s a different story with commercial mortgage-backed securities. A Business Journals analysis of the national commercial real estate market has identified 4,600 properties securing $30 billion in CMBS debt coming due in the next six months. Many of the borrowers in those loans will want to seek workouts — or modifications to the terms — in coming weeks, but it’s a complex process.
“If you have a CMBS loan, there are no workouts going on yet,” Bowman said. “It takes much longer for a CMBS lender to get into a workout, because they have to first refer the loan to a special servicer. The master servicer — which is the person who normally just collects the money on the loan — has no power to do any kind of workout.”
The International Council of Shopping Centers, one of the largest real-estate industry groups in the world, on March 31 formally requested the federal government to require lenders — including holders of commercial mortgage backed securities — to temporarily forbear on debt obligations for retailers.
“The long-term strength of the shopping center industry is critical to the economic, civic and social viability of communities across the nation,” wrote Tom McGee, the ICSC president and CEO, in the March 31 letter. “Our entire industry is at risk if action to support it is not taken.”
A downside of placemaking
For years, Boston developers have touted the benefits of placemaking — creating places where people want to be, and experiences that people want to have, as a way to draw in consumers to spend money in person and not online. As a result, nearly every new development in the city has had some form of restaurant or retail space on its ground floor.
With those spaces nearly all closed now, it affects the rest of the office or residential space, said Wil Catlin, managing partner of Boston Realty Advisors.
“That retail gets dark, the window gets broken, it’s dark, you don’t feel good going into the building. You’re going to remember that landlord, and did the landlord do the right thing?” he said.
Catlin and Jason Weissman, the firm’s senior partner, say that many landlords are working with tenants on a case-by-case basis, trying to be mindful of long-term relationships.
Tenants worry that, without immediate significant help, Bostonians could return to a city where nearly every ground floor tenant is boarded up, or like New York’s Upper East Side, where many vacancies end up getting filled with a Duane Reade pharmacy or a bank, said Josh Childs, who opened Trina’s Starlite Lounge in Somerville and Audubon in Boston.
“This is what is the vibrancy of the city is in the first place. Do we want to be become a corporate strip area, or do we want to have interesting places that reflect the diversity of the community?” Childs said. “We will get through this, and at the end of it, the people who have worked together and thoughtfully trying to make it a better situation for everyone will be not only remembered for doing so, but also remunerated economically. That, I think, will be the success of this down the road.”