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Retail According to Darwin
5 MIN READ•September 24, 2020
When the pandemic began, we faced several difficult decisions, starting with analyzing and trying to foresee how to support our tenants with discounts and/or relief without this meaning our death as managers or operators. How long will this last? Who to support? For how long? In exchange for what? What does this support mean for my income? These are undoubtedly some of the questions that all of us who operate commercial properties have asked ourselves.
Almost all commercial properties have suffered as a result of COVID. A crisis of this magnitude or the disastrous effects and destruction of value that it would cause, could not be anticipated. What has become clear is that those who have been best spared from this situation are those who have had some or even all of the conditions mentioned below:
- Moderate leverage
- Optimal expenditure level
- Excellent operations team
- Good relationship and communication with tenants
- Balanced tenant mix
- Low arrears / bad debt
One of the main problems that owners and operators face is that discounts or rent reliefs end with us. We are at the end of the line, so we as landlords cannot ask for help or discounts or expect to receive them from anyone because there is no one to ask to. For those who are leveraged and requested their bank for relief, they received a deferment of payment of their debt for a few months, but will not receive anything else. The problem is that all the help given is a loss for us. However in order to survive, practically all of us have given some kind of relief and by doing so we are improving our chances of subsisting in the long term and have generated goodwill from our tenants, which is undoubtedly of great value.
Visualizing this as a short-term crisis can have catastrophic consequences. For instance in Mexico, if we want to force a tenant to pay the rent when it was closed due to contingency and it sticks to the civil code, we could not only be left without a tenant, but also without cash flow and without legal possession of the retail space and impeded to lease it to a new tenant for several months or even years. In the current environment it is almost impossible to think of leasing an empty space to a new tenant without a significant discount and even more, given the pause in growth and expansion of most chains, we would almost certainly have an empty space for a long period. It is better to have an old known tenant in, and more so if this client has had a good history of paying his dues and there has been good communication. In a lawsuit scenario, we could perhaps win the legal battle and force that client to pay, but almost certainly at the end of the contract he would choose not to renew as a result of having felt aggrieved, and that brings us back to the scenario of the empty space that costs us more, doesn’t generate cash flow and will be hard to lease.
The most recommendable thing and what has given us the best results, has been to understand each particular situation and the support that each client needs, which means creating tailor-made solutions. We must understand very well what the particular needs are and find solutions that work for both parties. This support does not always have to be discounts and understanding that this crisis caused a cash flow issue, the support can be in the form of deferrals, percentage of sales based rents, among others, and in exchange obtain higher percentage on sales calculations or term extensions in the contracts among others. What should prevail at all times is the will to reach an agreement and empathy for the situation of both the tenant and the landlord.
If either one "smells blood" and abuses that position, there will surely be an issue that favors no one, so if a landlord over-stresses a client and as a consequence the client shuts down, the landlord will also end up on the losing side. If a tenant abuses its scale or volume of operation and demands more from the landlord, this will surely be reflected in the conditions of renewal or in a long legal fight. We must not forget that most leases do not contemplate temporary situations like pandemics and that the support or discounts granted, are totally at the discretion of the landlords that are trying to support their tenants.
We, as operators, managers and owners, must focus on generating cash flow and returns to our investors, so that the negative effect is minimal. We must at all times find ways to help our tenants flourish, and with them find solutions that work for both parties. We as landlords, should try to help tenants who are having a hard time to get through this stage of closures and low sales, and our tenants should try to support us in return, and be able to present options that will allow us to recover in the future, the lost or sacrificed cash flow that resulted from the support granted.
Many more changes and challenges will come in this ever changing industry including resizing, coexistence with e-commerce, new brands, property repurposing, alternative use of commercial properties, etc. and we will undoubtedly have time to analyze other scenarios in another occasion. For the time being, we must move fast and remember that it is not the strongest, but the one who best and more rapidly adapts who will thrive.
This is an article written by GRI Club member Alejandro Luna, CEO of CONQUER. Any views or opinions expressed belong solely to the original author of the article and do not necessarily represent the views and opinions of the GRI Club
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