Private And Public Measures To Combat Pandemic Risk In Commercial Real Estate
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As we ponder the fate of business enterprises going forward, I believe in order to relieve the public’s concerns, ensuring the safety of properties is paramount. It is possible that as businesses open and optimism builds, another outbreak could create a similar experience to what we’ve seen with the Covid-19 pandemic.
Among my functions in real estate is to procure tenants for real property. This is always a challenge. You have to present a lease transaction that has a great likelihood of success for the duration of the lease term.
We have all quickly adapted to changing social norms, and we have an abundance of clean hands to show for it. So if a pandemic should happen again, we might not be caught so unawares next time. In the meantime, we are in unknown territory now that tenants are navigating new and ongoing safety protocols with some confusion as to where the authority for these protocols lies. It is a combination of authority on local, state and federal levels. What often develops out of confusion is a commonsense mindset. But this could invite more problems if businesses and consumers have different ideas of common sense.
The legal minds have considered all the angles as they related to this issue up to this point. In commercial real estate, tenants, owners and managers should keep a few considerations in mind.
Abatement Of Rent And Abandonment Of Leases
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Many businesses faced and continue to face threats to their liquidity and profitability. This has led to many difficult choices. Among these decisions is whether to pay some rent or no rent. It has seemed as though a different tug of war happens every day on the individual business level. Retail leaders across the country are choosing to fight to stay viable through store hour cuts, curbside service and outright close stores, or to abandon their physical location altogether. None of this bodes well for anyone.
The property owner must preserve and quantify any rights they may have by virtue of the lease, and the same applies to the tenant. No one is saying to be inflexible, but know where you stand. Get counsel here.
All things considered, the stall we see in some commercial markets is not surprising. Real estate as an investment vehicle needs an income stream for the various methods of investments to work. Absent that, a strong assurance from the government to backstop liability for events like pandemics can help shore up investments.
After the September 11, 2001 terrorist attack, it became apparent that in order to have a real estate market, we needed surety in risk exposure. Enter the Terrorism Risk Insurance Program (TRIA). This government backstop insured losses in the event of a terrorist attack and allowed private insurers to provide affordable coverage. Today, terrorism insurance is often a necessity for commercial real estate financing.
Some would say that this pandemic is a once-in-100-year event, and it will pass. Currently, case surges are occurring around the world, with new strains of the virus emerging. I don’t see any private insurers taking on the pandemic risk alone or at all in my work. This behavior is partially why the government created the TRIA insurance program. High-risk properties were the focus of terrorism insurance; in this case, all properties are potential targets.
Ahead of any potential legislation, there is some action at the level of commercial tenant-landlord negotiations. For those entering into a new lease agreement, it is possible to have your legal counsel insert language in your lease that handles any business stoppages related to the pandemic and defines what counts as a pandemic-related halt in business.
Some of these clauses are coming into current leases that are being renegotiated and to new leases. An example of a pandemic-related clause includes a business such as a restaurant or a salon paying rent in proportion to the rate of operation. If a salon is only allowed to operate at half capacity, its clause might say it is allowed to pay half the rent until operating conditions adjust.
In order to make sense of your particular situation, you must first review your lease with appropriate legal counsel. Know your rights so you have a basis for negotiating or pursuing legal action. This applies to landlords and tenants.
In terms of government action, one way to shore up commercial real estate would be to institute a universal tax on leases and properties. Similar to the rural telecom tax used to foster communication services in remote areas, a lease tax could foster tenant-landlord survival in areas hit harder by the pandemic. This could also be augmented by other types of coverage that may develop after the government provides assurance in the form of legislation. I believe there is no other way to move past the current negotiations at the individual tenant-landlord level, but only time will tell what innovations emerge to serve commercial tenants, landlords and managers.
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