Wednesday Lease Deadline Looms For Retail

There’s $454 billion earmarked for retailers in the vast series of COVID-19 relief legislation passed last week. But none of it will arrive in time for the April rent and lease deadline staring retailers right in the bank account come Wednesday.

Almost 630,000 outlets in the U.S. have been forced to close, according to the Financial Times. With the National Retail Federation (NRF) saying that $430 billion in industry revenues could disappear in Q2, the issue turns to how many retailers can remain open. One industry consultant has predicted that 30 nationally known U.S. retail companies could file for bankruptcy protection this year, led by department stores and mall-based clothing chains.

This sentiment is not unanimous. “I expect to see an uptick, (in bankruptcies) as companies that were on the edge have greater risk of falling off the edge quicker, but I don’t believe it will be the Armageddon that everyone thinks,” said Perry Mandarino, head of restructuring and co-head of investment banking at B. Riley FBR.

But the truly vulnerable are the small and medium-sized businesses (SMBs) that will now have to wait for last week’s funds to be dispersed. There is relief in that series of bills, passed in response to the coronavirus pandemic. According to the NRF, the most important is the Paycheck Protection Program, which provides $350 billion to support loans through a new Paycheck Protection Program for employers with 500 employees or fewer. The size of the loans would equal 250 percent of an employer’s average monthly payroll. Covered payroll costs include salary, wages and payment of cash tips as well as employee group healthcare benefits. The legislation also includes $500 billion for loans for both direct and indirect lending that could be accessed by retailers.

The Wednesday deadline will still depend on informal discussions and legal negotiations between retailers and their leaseholders.

“At the end of the day it’s still up to the discretion of the landlord,” said Eric Su, partner at Crowell & Moring LLP. “But it’s not too late to have a conversation with your landlord if you haven’t already, just as there’s no telling how long this crisis will go on. Don’t forget that landlords need tenants right now. Even a partial payment helps. This is uncharted territory.”

The Brookings Institute, a Washington-based think tank that focuses on economic issues, has floated the idea of profit-sharing leases, which usually take the form of a base rent that switches to a percentage of gross annual revenue after a breakpoint (for example, $15/square foot per month, or 5 percent of gross revenue, whichever is higher). And if it’s any consolation, retail rents will almost certainly drop in the short term. Many analysts say they could actually drop substantially.

“The overall health of the economy and rental rates will have a large impact on property values both in the short and long term,” Chris Rizza, of Crosbie Gliner Schiffman Southard & Swanson, told GlobeSt.com. “Rental rates and property values in the short term can be expected to dip. Tenants may start approaching landlords and request a temporary reprieve from paying rent as customers may steer clear of shopping centers during an epidemic event, causing a severe dip in sales and impacting a tenant’s bottom-line.”

Rizza said landlords should create tenant relief options, either temporarily or permanently, to keep occupancy up in the wake of the coronavirus pandemic. “Rather than have the tenant potentially default on its payment obligations and result in a store closing, which could have negative impacts on the rest of the shopping center, a landlord may elect to assist the tenant with temporary or permanent rent relief options,” he said.