4 Essential Questions Landlords Should be Asking
We previously wrote an article that addressed the four questions investors should ask themselves to oversee the investment itself. Monitoring investments allows landlords to spot red flags early, providing them with the time needed to divulge and possibly implement a back-up plan before any significant damage occurs. Many investors have expressed fears of investing in the current market or worry about their investments. To minimize the risks involved with a net lease investment amid COVID-19, and to better prepare for the future, here are the crucial questions every investor should know the answer to and why.
Question #1: What is the financial strength of your tenant?
An investor should look at the tenant’s credit, current financials, and prior years’ financials, especially if the tenant has requested a concession on rent. For a corporate lease that traditionally franchises, investigate if the group has the financial capacity to weather this downturn. Given that most of the value in the investment is that the tenant successfully operates the property, the answer to this question should be top of mind to make sure that doors remain open.
Question #2: How is the location doing? How has it performed in the past?
If an investor owns a store that has previously been critical to the tenant’s success, or is located in a highly competitive market, they will fair well through the economic downturn and see the quickest return to normalcy in regard to rent collections. These are the stores that the tenant will do anything and everything to keep in operation. Alternatively, investors that own a property or properties in the bottom 25% of the tenant’s stores are at the most risk of losing their tenant, potentially for good. These are the landlords who will hold the fewest cards when at the negotiating table with their tenant to reinforce their lease. The tenant also must start making decisions about which stores to keep open and which ones to close. This might result in vacant space as the pandemic will accelerate the timeline for the tenant to vacate the location.
Question #3: Is your tenant taking any steps to weather this crisis? Do they have a plan in place to reopen?
With the shutdown of retail brick-and-mortar stores, shelter-in-place orders, and mass layoffs, most tenant revenues are near non-existent. Therefore, tenants will have to rely on the cash stores, plus any additional sources of capital or aid from the CARES act to survive. With the amount of capital at the tenant’s disposal being fixed and limited, the tenant should engage in ways to defer costs to a later date. This includes asking landlords for a temporary reduction in their rent and an additional creative rent structure. If tenants can defer a portion of their annual rent expense, it may be the difference needed to get them through this economic shock. Landlords should understand that keeping their tenant viable and able to pay rent will result in added value to their property, rather than forcing tenants to complete rent that they cannot afford or enforcing default. As many states announce plans to reopen businesses, it is essential to also make sure tenants have a plan in place including, sufficient employees, a comfortable and clean consumer and employee environment, and social distancing guidelines.
Question #4: Do you have a viable back-up strategy if the tenant cannot make it at their location?
Despite analysts stating that this is going to be a short, v-shaped shock to the economy with a quick rebound, there’s going to be long-lasting effects that ripple through the market. These effects include countless smaller, or over-extended, operators going bankrupt. When businesses reopen, consumer habits and behaviors will most likely be different, which could cause additional pain to tenants who do not survive the short-term. It is essential to have a plan in place to fill potential vacancies that will result from COVID-19.
Given that our understanding of COVID-19 is ever-changing, landlords and owners should continue taking time to gather information, feedback, and ask questions to make sure risks are addressed, and strategies and business continuity plans are in place for the reopening of America.
Matthews™ is committed to keeping the commercial real estate community informed and continuing to offer our services during these market changes. With updates and challenges released daily, please contact a Matthews™ specialized agent for guidance during this uncertain time, and for more insights on COVID-19 and CRE, visit our dedicated coronavirus website.
The Centers for Disease Control and Prevention is offering information and updates on the novel coronavirus (COVID-19) outbreak, the World Health Organization is tracking the number and location of confirmed cases of the virus and Building Owners and Managers Association International has provided the following emergency preparedness guidelines for commercial and residential property managers and landlords.