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How a Landlord of Neighborhood Malls Deals with the Lockdown Crisis his Tenants Face

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Via Wolf Street

“Our Retail Marshall Plan”

By Wolf Richter for WOLF STREET:

There are now lockdowns in place in many cities and counties in the US. Since Tuesday, the five most populous counties of the San Francisco Bay Area are in lockdown. Some types of stores are still open as “essential businesses,” including grocery stores, hardware stores, auto parts and repair shops, dry-cleaners, pharmacies, gas stations, and other “essential” stores. Restaurants had to close their dining rooms but can sell meals for take-out and delivery. All other stores had to close.

For the stores that have been closed, that means zero revenues. But many expenses, including rent, are continuing to pile up. It doesn’t take long for this math to doom a business in the already tough retail environment.

And for a landlord, this is not the ideal time to find another tenant to fill another vacancy – or a sudden avalanche of vacancies. Landlords need the cash flow from their properties to pay for interest and other expenses. The priorities of tenants and landlords merge in this crisis. Both are trying to get through it somehow and need each other.

These businesses range from big national chain operations – some of them already in bankruptcy court – to small mom-and-pop retailers and service providers. The brick-and-mortar retailers among them (those that sell goods, not services) were already heavily pressured from two sides, ecommerce and high rents.

And now comes the order to shut down operations for at least a few weeks. For example, the Bay Area lockdown is scheduled to last through “at least” April 7 and can be extended.

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Some counties and cities are putting in place measures to help these businesses get through this phase. But what can a mall landlord do to get through this crisis, and get their tenants through this crisis, to where, at the other end of this crisis, business can continue?

I have known John McNellis for a few years and consider him a friend. He is a real estate developer in Palo Alto, a landlord of neighborhood shopping centers and other commercial properties, and an often hilarious writer. You may have seen his articles on WOLF STREET. Here is what he is doing as landlord of neighborhood malls in order to deal with the crisis, and as you will see, even he has run out of humor in writing about the crisis:

“Our Retail Marshall Plan,” by John McNellis, for The Registry:

Because we’ve been in the neighborhood shopping center business for decades, not only our tenants but also our competitors have begun asking us what, if anything, we’re going to do to help our small businesses in this plague year. As of today, March 17th, all of our tenants in the greater Bay Area (save supermarkets, banks and a few others) have been shut down for several weeks by government order.

Here is what we’re doing:

We are forgiving all rent and other charges (so-called NNN expenses) for the month of April for our mom & pop tenants that have been forced to close, regardless of their business type or when they may reopen. That is to say, even if a tenant reopened on April 3rd, rent for the month would still be forgiven.

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We will treat tenants that are mom & pop franchisees of national companies (e.g. Subway) slightly differently. Because our financial resources are a light-year from infinite, we will need the big guys to help us help their franchisees. Thus, we will forgive our franchisee-tenants’ rents up to that same one-month, but only on a dollar-for-dollar basis with credits granted to them by their parent company; i.e. if Subway gives our tenant a $2,000 franchise fee credit, we will give it a $2,000 rent credit.

We will give the same one-month credit to our mom & pop restaurant tenants outside the Bay Area even if they never shut down. But, as to our other small business uses that remain open, we will consider a rent credit on a case-by-case basis. Some tenants are suffering terribly, while others (e.g. cigarettes and alcohol) appear to be thriving.

If a given tenant needs more than one month’s help, we will consider that on an individual basis, likely tying any additional help with a concession from the tenant (e.g. exercising an option, extending the lease term, or perhaps a downstream rent increase).

Many of our national credit tenants are also suffering in this plague year, and we completely sympathize with their plight. They, however, will weather the storm. Also, they are highly sophisticated and understand that our lenders will not be forgiving any of our interest payments and that we are simply unable to offer rent breaks to credit tenants.

We trust and hope that our world will have substantially returned to normalcy by May 1st, even if it takes months to fully recover. By John McNellis, for The Registry

The eeriness of the whole lockdown situation may leave permanent marks on consumers and business-decision makers. Read…  Lockdown in San Francisco, Silicon Valley & the East Bay: We’re to “Shelter in Place.” What it Means Now & Long Term

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