Rent, loans pose small business challenge
The single biggest threat to closed small businesses is rent. This obligation can deplete cash reserves in a matter of weeks or months, leaving no funds to rehire and restock.
Landlords and tenants must both take the long view. Temporary accommodations are possible, if both parties are willing.
One useful online resource is the Open for Small Business Initiative, which has partnered with 2017 Economic Sciences Nobel Laureate Richard Thaler to simplify the process of renegotiating leases. It provides a simple template for temporary amendments, which can be negotiated without the expense of lawyers.
Solutions may range from rent reductions to full or partial deferral during closures. Normal rent would ideally resume after a 30-day grace period, allowing reopened businesses to generate income. Deferred amounts could be paid back over amortization periods ranging from six months to the remaining lifetime of the lease.
For tenants, this new debt could be a heavy cloud in the months to come. Thus, terms should be sufficiently flexible for businesses to avoid bankruptcy during the unknown economic climate expected for the remainder of the year. Some landlords may offer to extend the lifetime of lease by the number of months in default during COVID-19.
It is only fair that landlords also take cost-cutting measures that can form a basis for rent reduction, such as interest-only mortgage payments and trims to overhead.
A worthy goal for the upcoming legislative special session could be to amend the Uniform Landlord-Tenant Act, giving the New Mexico Supreme Court the authority to prohibit commercial evictions that stem from the inability of tenants to make rent due to COVID-19 restrictions. This action, similar to the moratorium on March 24 for residential evictions during the public health emergency, could give recalcitrant landlords pause and a reason to come to the negotiating table.
Legal opinions are also needed on whether personal guarantor clauses, which protect landlords for the term of the lease, will be upheld in the courts if business failure is demonstrably linked to government measures during COVID-19.
The next challenge faced by the small business owner is how to acquire and use federal disaster funding to survive the downturn.
The first dose of reality is this: The Paycheck Protection Program is not about saving businesses. It is about restoring a business’ workforce for just eight weeks.
In the PPP program, the forgivable portion of rent and other fixed costs cannot exceed 25% of the total converted to a grant. Moreover, the total amount forgiven is prorated based upon the extent to which your business can restore payroll to a defined pre-disaster period.
The U.S. Treasury and Small Business Administration have not released adequate guidelines at this point, leaving small businesses to use their best judgment in interpreting the provisions of Section 1106 of the CARES Act. Businesses should consult immediately with a CPA