Businesses face eviction.
Businesses in jeopardy without same protection offered to residents as bills for leased space come due
Bud and Amanda Allen, owners of the Budrix motorcycle repair shop near Austin, count themselves lucky. Their business is considered essential, so they’ve been able stay open even as orders meant to slow the spread of the novel coronavirus shut the doors of mom-and-pop shops across the nation.
But customers have been few and far between, so few that the couple weren’t able to pay in full when April 1 rolled around. With the pandemic keeping motorcyclists at home — even during prime spring weather — the Allens and Budrix are facing the prospect of eviction when they can’t pay all their rent on May 1.
“It’s been a rough go,” said Bud Allen.
As if business owners such as the Allens didn’t have enough to worry about with work and customers drying up, many are facing evictions as the coronavirus brings the economy to a standstill. While the $2 trillion coronavirus relief act provided a 120-day moratorium on evictions from homes with federally backed mortgages and the Texas Supreme Court suspended the processing of residential evictions until April 30, businesses have yet to be extended the same broad protections.
Excluding grocery stores, retailers in strip malls have been able to pay only an average of 20 to 40 percent of April’s rents, according to preliminary data from the commercial real estate firm CBRE.
“Retailers of every size are in existential danger,” Matthew Shay, president of the National Retail Federation, said in a letter to the National Governors Association and U.S. Conference of Mayors. “We believe an emergency forbearance and rent abatement program is necessary to preserve retailers’ ability to recover from the widespread store closures that have been mandated by state and local governments.”
In Texas, no such protections have been put in place statewide. Eviction relief for commercial tenants varies county by county. Harris and Travis counties have suspended all eviction proceedings, including commercial, until April 30.
But lawyers say the suspension is far from a lasting solution. They expect a backlog of evictions once courts reopen.
“The eviction proceeding — putting that on hold is a Band-Aid,” said Laura Hannusch, a real estate partner in the Houston office of the law firm Pillsbury Winthrop Shaw Pittman. “It’s not going to make the problem go away.”
The problem extends beyond commercial tenants. If they cannot pay rent in full, landlords with large loans may have to ask for relief from their lenders; some may eventually default. That in turn could put lenders and investors who buy debt in the form of mortgagebacked securities in jeopardy.
The credit rating agency Fitch Ratings expects defaults on commercial mortgage-backed securities to spike in 2020 as a result of the pandemic. (Fitch is owned by the Hearst Corp., the parent company of the Houston Chronicle.)
“Without ensuring the stability of our tenant base, the repayment of up to $1 trillion of secured and unsecured debt underlying the shopping center industry will be at risk,” said the International Council of Shopping Centers, a trade group, in a statement.
The group called on Gov. Greg Abbott to order
regulated banks to offer forbearance on commercial loan obligations as a way to relieve landlords.
“It’s both a huge issue short run and long run for the entire commercial real estate industry ecosystem,” said Jeff Davis, managing director of the financial advisory firm Mercer Capital.
Addendum to leases
At the end of March, as
April’s rent due date loomed and it became clear many businesses would not be able to pay, a group of economists at the University of Chicago began thinking about how to make it easier to renegotiate leases.
“Millions of people trying to renegotiate with their landlords at the same time seemed like an unprecedented act,” said Jeff Severts, the executive director for the University of Chicago’s Center for Radical Innovation for Social Change. “The whole idea that everyone would have to renegotiate their lease at the same time seemed like it could overwhelm the legal system.”
Severts worked with Nobel Prize-winning economist Richard Thaler and “Freakonomics” co-author Steven Levitt, among others, to create a free onepage, lease addendum to allow landlords and tenants to agree on how much to reduce rent by for three months, what fraction of that reduction will be deferred until later in the lease and what fraction would be forgiven.
The form, posted on the
Center for RISC’s website, attracted thousands of views within days — proof, Severts said, of how widespread the issue is.
Coming to terms
Each negotiation is different because businesses have been affected to varying degrees and landlords have varying obligations to their own lenders. Real estate professionals recommend commercial tenants start conversations with their landlords early to negotiate new lease terms.
David Littwitz, a commercial real estate broker whose company, Littwitz Investments, specializes in restaurants, said tenants should reach out to landlords and provide detailed information on the steps they are taking to adapt to changing markets, survive the pandemic and ultimately return to profitability.
The plan, Littwitz said, should include sales figures and specific actions, such as rolling out curbside pickup or applying for the Paycheck Protection Program, part of the $2.2 trillion stimulus package meant to help businesses cover payroll and rent.
The program quickly ran out of funds, but completing an application could better position small businesses to receive loans when more funds are released, according to the bank BBVA. Congress last week approved another $320 billion for the program.
“Show them that you’re doing everything to save yourself
and that you’re worthy to having a landlord work with you,” he said. “What I tell my clients right now is, ‘It’s a two-way street. They need you as badly as you need them.’ ”
But not all tenants and landlords will be able to reach an agreement, acknowledged Adam J. Weaver, a senior associate at the law firm Pillsbury Winthrop. “I think the amount of eviction proceedings could be high,” he said.
Sometimes a landlord’s finances do not allow such flexibility. That’s what the Allens — married military veterans who met volunteering after Hurricane Irma — say they’ve encountered as they try to keep their motorcycle repair business afloat.
Staying positive
Bud Allen said the business from which he is subletting shop space fell behind on its own rent, complicating his situation. Three days after reaching a verbal agreement to pay partial rent, he received an ultimatum: Pay in full or be evicted.
He’s hoping he can stay long enough to obtain a Veterans Affairs loan, which does not require a down payment, to buy a building where they can live over the shop as a way to lower their living and business costs. He's found a building and a lender but had to push back the closing date to scrape together money to cover closing costs.
“I think all the timing’s going to work out,” he said. “I think it will. We’re remaining positive.”