Additional Suggestions from NAI Affinity Regarding Governor Polis’s April 30, 2020 Executive Order

By May 4, 2020News


Date:  May 5, 2020

To:  Our valued clients, customers, and investors

Re:  Governor Polis’s April 30, 2020 Executive Order Regarding Evictions


Colorado Governor Jared Polis’s April 30, 2020 Executive Order regarding the rights of landlords and tenants and evictions has prompted much discussion amongst owners of commercial properties.  Below is some additional commentary and a few suggestions that some commercial landlords may find helpful. 

Please note that due to Fair Housing and other considerations, this is NOT intended to be applicable to residential lease scenarios.  You should also note that NAI Affinity is a commercial real estate brokerage company, not a law firm.  Neither NAI Affinity nor its brokers or employees are qualified to give legal advice; always engage proper legal counsel prior to modifying or entering into a new lease.

 

  1. Commercial property landlords are seeing considerable delinquency.  The amount of delinquency varies based upon the location, property type, asset class, and rent roll.  We have heard of some cases of class B/C retail centers where delinquency is as much a 80%.  In the case of some class A industrial and office buildings, we have also seen examples with no delinquency.  Delinquencies are very property specific.
  2. We believe it is going to be very difficult to lease space to new tenants over the next 60+ days, without considerable concessions.  Many economists are predicting a 14 to 20 month recession (which began Feb. 1, 2020).  While leasing conditions may improve for landlords after this initial acute phase passes, once businesses can properly reopen, we anticipate market rents for most properties will be lower for a TBD period of time (well-located class A industrial distribution product is a more probable exception).  In some retail examples, rents could be as much as 20 -30% lower, depending on location and property class.  Concessions beyond lower rent may also be required.
  3. Per paragraph S of Section II of the Gov.’s D 2020 051 executive order, dated April 30, 2020, the Gov. has directed “all landlords of rental properties to notify tenants in writing of federal protections against eviction and foreclosures at each property, including those provided by Sec. 4024 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law No. 116-136.”  According to this same executive order, through the end of May, landlords’ ability to pursue evictions will be limited to circumstances where a tenant “poses an imminent and serious threat to another individual or causes significant damage to property.”  Paragraph T of the same also notes that DORA is to work with property owners and landlords to create model repayment agreements that allow tenants additional time to repay rent.  Also of note, paragraph P notes that “Landlords and lenders are prohibited from charging any late fees or penalties for any breach of the terms of a lease or rental agreement due to nonpayment for the duration of this Executive Order” – this limitation may also prohibit landlords from charging interest on late payments incurred during the term of the executive order.  We recommend confirming this with counsel.
  4. Landlords who have existing tenants who are not paying rent are limited in their options through the month of May.  If a tenant is desirable but, is suffering from a temporary hardship, we advise landlords to work with tenants to enter into agreements to temporarily reduce rent, while offering terms for repayment.  Commonly negotiated terms include extending leases and/or applying security deposits to current rent due.  Reasonable amortization of deferred rent payments, over many months, is also common in order to allow landlords to recuperate some or potentially all of the lost rent, while not hitting tenants with a large one-time insurmountable rent bill as they attempt to jumpstart their business.  We believe including an interest rate or late fees in any amortization calculations is problematic and probably prohibited, according to the Governor’s Executive Order.
  5. If necessary, some bank lenders may be willing to enter into temporary forbearance agreements with landlords.  We have seen examples of some best-in-class regional banks offering forbearance for up to 90 days, followed by interest only payments for a period of time thereafter.  The terms of repayment need to be carefully considered in order to minimize the potential for a future default.  Thus far, we are not seeing too many examples of CMBS lenders working with property owners.  We anticipate that this will begin to change in some instances, with strong professional landlords who have sizable portfolios.  We are predicting that CMBS lenders will be less likely to work with smaller, one-off landlords, and/or those who were previously distressed or over-leveraged, if they should find themselves in default without the ability to promptly cure.  Such borrowers are likely at greater risk of foreclosure.
  6. While circumstances vary amongst commercial properties and specific spaces, if landlords have existing vacancies, we are generally recommending that landlords cut short-term deals with qualified new commercial tenants who will not violate any covenants and zoning restrictions, or who otherwise would not directly compete with or degrade the overall mix of tenants.   If it is possible to frontload discounts, we recommend doing so in order to maximize the value of the property after short-term rent concessions expire.  In cases where new tenants are to be paying lower rent than the balance of the rent roll, we recommend keeping these leases to 24 to 36 months or less, without giving tenants options to renew.  From a practical perspective, landlords and tenants can always negotiate extensions in the future, presumably under different economic conditions.  Should such option rights become necessary to attract a particular tenant, landlords will want to carefully consider how they grow rent to market (if the lease rate is low) and what practical and enforceable mechanisms can be employed to grow rent to market (note: landlords and tenants rarely agree on what “market rent” is in the future and multiple broker opinions of value and/or appraisals can prove costly – consider if the rent due is large enough to warrant such approaches).

 

Of course, this information is intended to be helpful, but does not constitute legal advice.  Furthermore, it may not be applicable in all situations.  Please feel free to contact NAI Affinity if we can be of further assistance – we are here to help!  We will also recommend legal counsel as appropriate.

 

Be well!

 

Ryan J. Schaefer
Chief Executive Officer
NAI Affinity

ryans@affinityrepartners.com

 

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