Archives for April 2020

How COVID-19 Is Changing the Office Tenant-Landlord Relationship

April 20, 2020 by CARNM

Landlords seek cover versus COVID-19 amidst some difficult office sector realities.

The pandemic may bring office tenants and landlords together. GlobeSt.com reached out to sector experts at Colliers International—EVP Larry Bank and Stephen Newbold, national director of office research—to discuss the lack of legal remedies versus defaulting tenants and other key office market contingencies during the unprecedented times of the coronavirus.
“Ideally, both the landlord and the tenant would work together to reach an agreement, thereby avoiding legalities,” said Bank. “Neither party has taken any adverse action to put themselves in this position. Given the circumstances, there should be an air of cooperation with the rent forbearances and workouts.”
The fact that most major cities do not provide “self-help” relief to landlords means due eviction process is required, but rulings against defaulting tenants are hard to come by when courts are closed. When they open the normal case backlog of four to five months might be doubled.
“That is a considerable time to go without the tenant paying rent,” Bank added, “thus encouraging the landlord to look for other, more cost-effective solutions, including some sort of deference or even abatement, especially with credit tenants. Ultimately, landlords are in business to lease space. If there are increases in the number of defaults and/or tenants increase the level of remote work, then the prospects of replacing the tenant are diminished.”
COVID-19 affects different industries in different ways obviously, with the impact reflected in the health of office markets and their tenants based on susceptibility and the local economy composition. Healthcare, biotech and pharmaceutical markets may be less impacted, while office markets tied to trade/port activity or with a major travel and hospitality tenant base could struggle. Social by nature, one segment of the office market faces especially tough questions.
“The core coworking model is being challenged as clients, many of whom are on short-term agreements of as little as 30 to 60 days, cease to use such facilities,” said Newbold. “The greatest impact is likely to be on shared, rather than dedicated, space.”
Smart landlords know that whatever the “new normal” will look like in the office sector it will come after a great deal of reevaluation by tenants, which will have become much more proficient with remote working. Facing limited legal remedies and a shifting spatial paradigm by occupiers, proactive office owners are likely to choose stronger together and redouble their relationship-building efforts.
“The most lasting impact of the pandemic on the office sector could come from firms reassessing their space needs and the flexibility of their lease agreements,” Newbold concluded.
Source: “How COVID-19 Is Changing the Office Tenant-Landlord Relationship“

A Playbook for Managing Distressed Assets in the Wake of COVID-19

April 20, 2020 by CARNM

While these are uncertain and volatile times, many commercial real estate businesses should be able to maintain operations and continue to provide valuable contributions to the economy.

The COVID-19 pandemic has caused the day-to-day operations for commercial real estate professionals to become upended in the last 30 days, and will continue to account for additional disruption, at least for the short term. The unprecedented uncertainty and volatility as a result of his have led thousands of professionals in our industry—many of whom have only experienced the high growth market of the last decade—to now see their business plans and potential livelihood in jeopardy.
Don’t panic.

While these are uncertain and volatile times, many commercial real estate businesses should be able to maintain operations and continue to provide valuable contributions to the economy, so long as stakeholders act judiciously in the near term.
Extreme economic volatility has hit our industry before. By executing transactions and restructurings using transparent and consistent methodologies for asset valuation, history has demonstrated that owners, lenders and investors have been able to weather economic storms and maintain—and in some cases expand—their portfolios.
In coordination with capable, experienced advisors, asset owners and capital providers that now find themselves in distress should be able to withstand a disruption of revenues and identify a stable path forward by following this step-by-step playbook:

Understand the Capital Structure and Participants—Whether you are an owner, lender or investor, you must re-examine the capital structure of each asset before proposing any transaction or restructure. This includes determining the control parties and their motivations, rights and consents. Before any party can act on next steps. the same factors should be outlined and understood for other loan participants and warehouse lenders connected to the asset.
Reassess and Confirm Your Goals—Focus on the big picture by reviewing your original goals for each asset and consider how those goals may be affected by current volatility. Confirm which goals are no longer achievable or need to be adjusted so you can proceed with a realistic plan.
Define Your Needs—Break down short-term vs long-term challenges for each asset and for your business plan. Establish your best and worst-case scenarios. Quantify cash needs and the overall impact of possible solutions on projected ROI for each investment asset.
Contact the Lender or Borrower—Once you have completed a comprehensive assessment of your asset, the stakeholders, their rights and motivations, reviewed your goals and quantified your needs, you will be ready to call the lender or borrower (depending on your particular connection to the distressed asset). To avoid a contentious relationship that could result in default, borrowers and lenders must develop/solidify a healthy, positive dialogue that acknowledges and confirms each counterparty’s financial situation, concerns and short- and long-term goals. This action focuses on optimizing the alignment of all interests.
Develop a Stabilization and Exit Strategy—While some assets may suffer long term value degradation, it is more likely that most will experience a temporary dislocation that will require an immediate focus on funding carrying costs. Investigate alternative uses and creative solutions to support the distressed asset. Also, explore short-term funding sources, including common and preferred equity.
Review Financial Obligations—Review all major contracts, including vendor, management, labor and franchise; as well as loan document provisions, such as major covenants, recourse obligations, cash controls and consents required for changes to the capital structure or operations.
Propose a Resolution Plan—Following this research, propose a solution to stakeholders with detailed scenarios for how these changes may affect the asset’s value and liquidity. Before proposing a solution, you must be able to demonstrate how the outcome is consistent with your revised goals for the asset. Keep in mind that thoughtful plans that are well-researched and supported are most likely to get the attention of and garner a reasonable reaction from relevant stakeholders.
Implement Your Plan—Once a course of action has been identified for each asset, begin negotiating relief from vendors. Recognize that the best plans will falter without proper tools and realistic expectations. Owners, lenders, and investors should honestly assess whether they have the bandwidth and skillset to properly address the situation. The parties should consider engaging advisors, like Crescit Capital Strategies, who understand, as a principal, what you are experiencing and have extensive experience executing transactions during turbulent economic conditions.

From the late Great Recession to the Russian debt crises to the S&L loan scandal, many commercial real estate industry professionals have struggled but ultimately weathered what felt like insurmountable conditions. With the right team and outlook, the business obstacles owners, lenders and investors face due to the COVID-19 market dislocation can be solved and may, in fact, present opportunities for future growth.
Source: “A Playbook for Managing Distressed Assets in the Wake of COVID-19”

One Property Manager Finds Success Transforming Amenities Into Virtual Offerings

April 19, 2020 by CARNM

Office owners are devising creative solutions for the remote worker and Accesso has converted its tenant amenity/wellness program into a virtual service to bring the same offerings from offices into tenants’ homes.

With everyone currently working from home, the need to keep employees engaged is more crucial than ever. Office owners and managers are devising increasingly creative solutions to stay on top of this mandate, providing a variety of virtual amenities that are designed specifically for the remote worker.
During this time, these services are in high demand and growing, and office operators are becoming keen on including new optionality as tenants continue to stay home. Accesso, an investment manager and operator of multi-tenant office buildings, has converted its tenant amenity and wellness program, Accesso Club, into a virtual service to bring the same quality-of-life improvements from its office buildings into tenants’ homes.
Accesso Club is an exclusive amenities program offered to all of the firm’s tenants and employees, and a core part of how it differentiates its office properties. One of Accesso’s core values is promoting and enhancing a sense of community, so Accesso Club is a key part of uniting its family of tenants.
The program focuses on individuals’ health and wellness, and promotes a healthy work-life balance by providing employees opportunities to enjoy fitness classes, tenant lounges, co-working spaces, conference facilities, concierge services and discounted tickets for various events. Tenants have the ability to unwind after a long day at the office or utilize a space to enhance productivity. Additionally, Accesso Club is offered throughout the portfolio, so tenants have the ability to utilize these services in all the cities in which it operates.
The Accesso virtual program includes an app featuring wellness coach classes which offer live and on-demand yoga, meditation and fitness. People are also seeking escape in other ways: in lieu of weekend activities and get-togethers, many are binging on Netflix, hosting video conference calls with friends or catching up on reading. Accesso Club’s virtual program seeks to bring a feeling of daily normalcy back into the fold, with virtual access to museums, art exhibitions, concerts and other activities to foster family time and make isolation more tolerable.
“Given the impact the coronavirus has had on property owners throughout the world and how much our tenants have come to rely on Accesso Club to help them stay physically and mentally fit, we knew we needed to get creative when the shutdown went national,” Claudio Dombey, founding and managing partner of investor relations for Accesso tells GlobeSt.com. “Therefore, we made most of the wellness classes and seminars Accesso Club offers available online. For instance, the wellness coach app offers both live and on-demand classes for yoga, meditation, fitness, mental health, stretching and more, giving tenants new ways to stay engaged and active while working from home. On the virtual Accesso Club page, we give tenants access to a compilation of live virtual concerts from across the world, categorized by date and genre, as well as a host of museum experiences that can be enjoyed remotely. Additionally, there are virtual family activities such as Cirque Du Soleil, national parks, the Georgia Aquarium, Access Mars and much more.”
The unique programming offered via Accesso Club includes quality activities that improve tenants’ health and well-being. And, the virtual version of the program builds on that concept.
“By going virtual, we’re able to bring some of the events that we had hosted on-site prior to the onset of the pandemic into people’s homes,” Dombey tells GlobeSt.com. “We also added several virtual programs to entertain our tenants until we can go back to our regular programming at our buildings. The comprehensive suite of virtual amenities and experiences offered through Accesso Club is different from other tenant amenity programs because of its distinctiveness, intuitiveness and variety. The activities we’re offering go beyond the typical live fitness classes or newsletter updates, though we have also increased the frequency and scope of our newsletters to keep tenants informed throughout this period. Our programming offers new ways to spend time with family, stay healthy and self-entertain as we all navigate this uncertain time.”
Environmental, social and governance initiatives have never been more critical, and the current health crisis has shined a spotlight on the important role wellness plays in the office sector, Dombey says.
“Prior to the COVID-19 outbreak, we began utilizing the patented Blue Box cleaning process for HVAC systems across the majority of our portfolio,” he tells GlobeSt.com. “This process ensures our buildings are circulating the highest-quality air and lowers the risk of spreading infectious diseases. We believe air quality and proper ventilation will factor heavily into ESG strategies for the built environment post-COVID-19, and we plan to roll this cleaning process out to the rest of our portfolio to maximize tenants’ peace of mind as the federal government considers reopening sections of the economy. In addition to improving the health and safety of our tenants, we also recognize the need to support those in the communities we serve, so we are doing things to help like sponsoring an online donation drive that supports food banks and other related charities in the markets we serve.”
Source: “One Property Manager Finds Success Transforming Amenities Into Virtual Offerings“

Attorney: Rent Relief Should Be Based on Market Value

April 17, 2020 by CARNM

The landlord is not committing good money to an ultimately failed outcome, says Crosbie Gliner Schiffman Southard & Swanson’s Sean Southard.

As landlords develop rent relief plans, they should make sure that they understand the market value first. Crosbie Gliner Schiffman Southard & Swanson real estate attorney Sean Southard says that the landlord should evaluate relief requests based on that value.
“The landlord must have a sound understanding of the value of the subject premises in the particular marketplace,” Southard, a partner at the firm, tells GlobeSt.com. “If landlords create a uniform system to evaluate tenants’ requests for relief and determine the need is bona fide, then landlords may have a strong self-interest in facilitating a successful restructure—one in which the landlord is not committing good money to an ultimately failed outcome.”
The valuation determination should be made alongside seasoned market professionals. “Some landlords form an internal committee of leasing agents, property managers and financial analysts as part of this evaluation system,” explains Southard. “The criteria can include credit checks, assessment of inventory levels and review of tenant’s business plan.”
In addition, landlords could approach tenant relief requests as a new lease proposal, and run the analysis that way. “Other landlords may have a policy of treating a request for rent relief no differently than a new tenant proposal, and therefore require the tenant to deliver information such as a business plan, personal and business financial information, and gross sales reports,” says Southard. “Often, when faced with such information requirements, tenants without a bona fide request will simply drop their request.”
This process should be consistent and analytical, including understanding how the tenant is funded, if they are creditworthy and the likelihood of bankruptcy. “Landlords should have a uniform method and system in place for determining if a tenant’s request is bona fide and sufficient to actually assist the tenant in returning to health,” says Southard. “Landlords must know the tenant and its business, both financially and otherwise. If the tenant has multiple locations, the landlord will need to know how the relief requested by the tenant relates to the tenant’s larger plan to keep itself viable. The take away here is that landlords must be able to evaluate a tenant’s business and its longer-term prospects.”
Resource: “Attorney: Rent Relief Should Be Based on Market Value”