Retail Lease Concessions Are Increasing Quickly

Lease concessions for existing retail tenants have evolved since the onset of the pandemic. Once hopeful landlords offering lease deferrals to retail tenants have now been more flexible in increasing concessions as the pandemic wears on. In some cases this includes conditional rent abatement for tenants and new lease deals.

“In my experience, in the early days of the stay-at-home order in March and April, rent concessions took the form of limited rent deferrals of base rent only,” Chris Rizza, a partner at Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “Tenants were still expected to pay their triple net lease charges ad landlords would generally agree to defer one or two months of base rent and have the tenant pay the deferred base rent back without interest over a six to 12-month window of time at some point in the future.”

As the pandemic has progressed, these concessions have slowly changed. First in early May, triple-net lease charges started to go. “In early May, those deferrals started to involve NNN charges,” says Rizza. “By late May and into June, the deferrals started turning into conditional abatements, if the tenant defaulted, then they would have to pay back the abated amount of rent, but if the tenant did not default for a certain period of time, the rent would eventually be forgiven.”

Now, landlords have taken a new step and started to renegotiate lease terms. “We are now into July and I am starting to see for certain qualified tenants in lieu rent or alternate rent deals where the tenant pays a certain percentage of its gross sales to the landlord in lieu of all or a portion of tenant’s base rent and NNN charges for several months of the term,” says Rizza.

The pandemic is not likely to end soon, and both owners and tenants are finding ways to get through the dislocation. “Landlords and tenants are realizing that they are in this together for the foreseeable future and are agreeing on certain arrangements to help share the risk and fallout from the pandemic,” says Rizza. “Landlords are understanding the significant impact the pandemic has had on retailers being able to generate enough revenue to pay their rent, and, conversely, retailers are understanding the obligations that landlords have to their lenders.  I’m hopeful that lenders also understand the toll this pandemic is taking on landlords and will follow suit and cooperate with landlords in working out concessions on their loans.”

These deals are happening across the market. Most tenants are looking for some way to cope with the financial burdens and loss of income. “I would say nearly every single tenant (new and existing) is asking for concessions to alleviate some of the sting from the economic fallout caused by the pandemic,” says Rizza. “There aren’t many new leases getting completed during this time, so concessions are largely taking place via amendments to existing leases.  In my experience, landlords and tenants are generally working together to weather this storm, but any concessions have to make economic sense for both sides.  Landlords often ask for (and receive) reciprocal concessions from the tenant, such as a release of claims related to COVID-19, waiver of co-tenancy requirements, and waiver of gross sale termination rights, just to name a few.”