Boulder County-area commercial landlords Prepare to ‘get serious’ regarding unpaid rents
Eighteenth-century Irish statesman and philosopher Edmund Burke once opined that “Our patience will achieve more than our force.” But for commercial landlords in the region, how long can patience last with tenants who are behind on rent because their revenue has been decimated by pandemic-related shutdowns and restrictions?
How long before some force will be needed?
From the smallest to the largest commercial landlord — and the banks that hold the mortgages on their properties — that question is beginning to be heard six months into the COVID-19 crisis.
“There are rumblings starting now about the current state of affairs,” said Jim Ditzel, managing partner at Niwot-based Summit Commercial Brokers. “The impact is in progress.”
That impact can be keenly felt for a firm the size of Summit, which has just 10 commercial tenants. But it’s also top of mind at Boulder-based Tebo Properties, one of Colorado’s largest commercial real-estate firms, which holds more than 900 leases.
“The tenants that literally have ignored us or failed to make an effort for several months in a row, we’re thinking of giving them demand notices that they need to pay their rent,” said owner Stephen Tebo. “If they respond and do what they’re capable of doing, we have no problem. But when they simply ignore us, we need to do something to get their attention.”
Taking such action isn’t easy in the midst of the coronavirus pandemic, which has created a whole new world for commercial leasing. Industrial and distribution companies are thriving in their rented spaces because many homebound consumers are choosing online shopping over visiting brick-and-mortar stores. But demand for leased office space has plummeted as businesses realize how efficiently their employees can work from home, and retail has been especially hard-hit because of government-ordered closures or capacity restrictions.
Landlords, knowing that their tenants have lost revenue through no fault of their own, have taken some extraordinary steps to help. Some have offered concessions such as reduced rent, cutbacks in square footage or the return of security deposits. With their own bills to pay, they’ve also asked their bankers for restructured loans or other assistance.
Those banks, in turn, also have tried to show understanding — but some also are building their loan-loss reserves and seeking information from commercial real estate landlords to determine potential problem loans in advance.
“We took an active role from the beginning,” said John Creighton, president of Longmont-based High Plains Bank. “We started reaching out to our landlord CRE owners in late March and April. We pre-approved most of them for 90-day deferrals if they needed that to work with their tenants. Most of them did not take us up on that offer, but we’ve been in close communication with them throughout.
“We made a choice in December to increase our reserve for loan loss,” he said, “and the reason we did that is that we were 10 years into an up economy, and we’re paranoid bankers. We weren’t predicting COVID, but we just thought, ‘We’ve had a good earnings year, we’ve got the ability to increase loan-loss, so let’s do it.’ We actually feel like we’ve been reserved enough at this point, and we don’t feel like we have to increase that above what we’ve already done.”
But banks and landlords alike have been forced to begin foreclosure proceedings or other legal actions. A Comfort Inn and Suites in Johnstown is at risk of foreclosure after lender FirstBank said it was behind on its remaining loan of just under
$6.4 million. Lender Pine Financial Group is foreclosing on property owned by a commercial real estate broker in Broomfield. And Ten Eleven Pearl
LLC, the landlord for Swedish outdoor retailer Fjallraven’s Boulder store, sued the brand in late August, accusing the company of not paying rent from Aprilthrough August. It wants $127,381 in damages and is asking Boulder District Court to repossess the 3,830-square-foot property.
Loans through the federal Payroll Protection Program, run by the Small Business Administration, helped some businesses stay afloat for a while, but it’s uncertain whether that incentive plan will be renewed.
“If they got their PPP check, we’re working with them to try to get a small percentage of the PPP checks,” Tebo said. “But several of these that got the PPP still didn’t give us a dime.”
Because many of the PPP borrowers are the tenants in commercial buildings, said David Wright, community bank president at ANB Bank, “we feel it’s very important for the PPP forgiveness process to get ironed out with SBA because that will impact small-business owners who are the tenants in larger commercial buildings. There’s a lot in play right now.”
Wright emphasized that the PPP program was targeted primarily toward payroll.
“At a minimum, 60 percent of that PPP money needed to go toward payroll,” he said. “I know some of the tenants Mr. Tebo has that he referred over to us for those loans that did receive an SBA PPP loan did need to use that money for payroll to get through that period of time. That obviously doesn’t negate the fact that they’ve got a contractual obligation to their landlord, but that was our approach to try to assist as many tenants that we could in facilitating their immediate needs during the COVID process.”
The program “was also designed and rolled out when people thought we’d be back to normal in June,” added Frankie Cole, ANB’S regional president for Northern Colorado. “Obviously, that didn’t happen.”
“We have an incredible relationship with our banks,”
Tebo said. “But as far as the tenants go, we’re literally in the middle of writing letters to everyone, saying, ‘We haven’t heard from you in a while. Please give us a call and let us know what we need to do to work with you, etc., etc.’ And if we’re not getting any response from those, in a week or two we’ll give them a demand letter saying they need to do something within three days to again try to get their attention.
“Anybody that is working with us and committing with us and making an effort, we are still continuing to work with, putting no pressure on, just saying, ‘We understand we’re all in this together, let us know how we can work with you.’ But if they’re ignoring us, we’re going to have to get serious with some of them.
“We’re not working with lawyers and collections agencies yet,” he said, “but sometime this month we’re going to have to because we’ve got some tenants that haven’t paid rent in four or five months. They have the right to go to court and defend their position, but I don’t think any judge is going to be very tolerant of someone that hasn’t even made an effort to pay rent in four months.”
Tebo said his firm’s biggest challenge is dealing with space leased by franchises based outside the area.
“Especially the national chains are not paying their rent,” he said. “Some of the national chains are the worst because it’s hard to get anybody to talk to. The local people, as a general rule, we’re able to find somebody to talk to and work through it.”
Tebo cautioned against overstating the issue of delinquent tenants. “Of our 900 commercial tenants, we’re having problems with less than 30, so that’s 3 percent.” Before the pandemic, he said, that figure was six or eight, because “we’re lucky that we have a good relationship with most of the tenants.”
Mark Changaris, an attorney with Boulder-based Berg Hill Greenleaf and Ruscitti LLP who specializes in commercial clients, confirmed that “we’re starting to see more delinquencies and more enforcement actions from landlords. It’s still relatively early, but we’re starting to see a little uptick in that activity.”
“We wouldn’t be able to waive payments for the foreseeable future,” ANB’S Cole said, “but what we are very much working hard to do is be in contact with our borrowers and figure out plans that are reasonable to help them through this time frame. The question of how long there’s so much uncertainty right now. We don’t know how long the current economic condition is going to be what it is. It’s probably going to be different next month and the month after that, so it’s day by day.
“We have all sorts of different projections, like ‘If this, then what?’ But there’s so many different variables right now that it’s not really worth a whole lot, and then you layer on what Congress may or may not do and the situation with PPP loans.”
ANB still is lending actively, she said. “I can’t speak for other banks, but we have a relatively low loan-to-deposit ratio compared to some of our competitors, which has positioned us nicely from a liquidity and equity standpoint. The opposite of that is that the bank is liquid. We have a strong financial profile.”
At High Plains Bank, Creighton is banking on reality, understanding and optimism.
“If you have a tenant that is not allowed to open by no fault of their own so therefore they have no revenue, it’s not going to be possible for them to maintain the rent payments after the stimulus dollars run out,” he said. “And that has a trickledown. If you are a landlord that has your own mortgage, you can’t indefinitely suspend payment. I think landlords, from what we’ve seen, are trying hard to work with their tenants, so everyone’s trying hard, but at some point you can’t do that indefinitely. I don’t think we’re at that breaking point yet because of the stimulus dollars, but the first two quarters of next year — depending what kind of business you are and what kind of tenants you have — could be challenging.”
Overall, Changaris predicted, the strength of the market will see banks, landlords and most tenants through the current crisis. “While there’s uncertainty in terms of what the future may look like,” he said, “I don’t think the fundamentals are in such a position that we’re looking at anything cataclysmic.”