Why Landlords Should Take a Blend-and-Extend Approach

Rent collections have been the focus for landlords, but it isn’t the only lease provision that owners should be considering. Richard Rizika of Beta recommends a blend-and-extend approach to create efficiencies in operations that will ultimately help landlords get through the pandemic.

“Rent is of primary value but it is not the only lease provision that creates economic value,” Rizika, partner and co-founder of Beta, tells GlobeSt.com. “A blend and extend as well as other lease provisions that will enable greater flexibility to operate properties more efficiently long term should be evaluated. Nothing is off the table, credit enhancements, use restrictions, co tenancy, property redevelopment rights and many other provisions can but, not always, offset the value of rent.”

The first step is open communication with tenants, and landlords should be proactive in reaching out. “Transparency is essential to building trust, especially in times of crisis,” says Rizika. “Being proactive builds trust and displays character. Employees, vendors, tenants, landlords, lenders and investors are all interconnected. Each has another holding them accountable. Providing real time information enables stakeholders to make more informed decisions and communicate with their internal and external teams.”

In addition, landlords should loop both lenders and stakeholders into the discussion, particularly if reduced cash flow will result in deferred mortgage payments. “Each tenant has unique circumstances that create economic impact to its business,” adds Rizika. “Most loan documents will require that any agreements, deferrals or amendments with tenants, in particular those that modify rent or lease term, are subject to lender’s review, consent and approval. The lenders may need time to assess each property level situation and obtain internal approvals for loan modifications. Lenders are often requiring the tenant request for offer when evaluating rent forbearance. Landlord’s that listen to each tenant’s entire story and are able respond to individual requests will enhance its success rate.”

Stakeholders have largely been understanding and flexible as well. “The majority of the stakeholders have been reasonable under these circumstances. While there are certainly disagreements in the interpretation of prevailing property documents, the majority of stakeholders are working with integrity to identify thoughtful solutions.  Each has a common goal,” says Rizika. “When the tenant succeeds, the landlord succeeds.”

Overall, most landlords and tenants have worked together to create solutions. “We have witnessed tremendous creativity to enable win-win solutions to a horrific but unforeseen scenario. In this case, neither the tenant nor landlord is at fault and are aligned to fight a common enemy,” says Rizika. “They are fighting the impact of  COVID-19.”

The impact of this crisis is still being realized, and while the government has worked to provide financial assistance, more could be needed. “It is too early to gauge the level of federal financial support that will be required,” says Rizika. “The focus on the impact of the economy living under a shelter-in-place” ordinance is the first part of the recovery effort. However, we need to learn more about the economic impact of returning to “the new normal”. Setting up supply chains and rebuilding consumer confidence when returning to social gatherings will not occur overnight. Economic stimulus will likely be required through the entire process.”