The April 1st Rent Payment Conundrum
By Brad Umansky, President, Progressive Real Estate Partners
It seems that the hottest topic of conversation over the past few days is what to do when a tenant’s business is adversely affected by “the virus”. Based upon conversations with landlords, tenants and property managers there is no doubt that many tenants and landlords are already thinking about how to handle the April 1st rent payment. Since we work with both, I’m writing this blog from both perspectives. Please note that whether you are a tenant or landlord, I encourage you to read the entire blog as there are overlapping ideas in each section.
It is important to recognize that we are in an interdependent economy and that there are many very financially stable tenants as well as some that are struggling and, for those in particular, this crisis will exacerbate the situation. At the same time there are many well capitalized landlords with the financial capacity to make concessions to help a tenant’s business when warranted, but there may also be less capitalized landlords who are in a similar situation as a struggling tenant.
So hopefully everyone will WORK TOGETHER as fairly as possible to minimize the economic damage that we are all observing and that many are experiencing. With these thoughts in mind, here are my recommendations.
What to Do as a Tenant
- Be Honest – One problem is that over the past decade many tenants have made it a part of their practice to ask for rent reductions and other concessions just to see if they can extract something from a landlord whether or not the request is warranted resulting in many landlords being skeptical of any request. This “dishonestly” as I see it has damaged the landlord/tenant relationship in many cases. Now is the chance to repair the relationship and honesty is critical so if you really don’t need a concession, don’t ask for one.
- Be Prepared – If you need a concession, be prepared to provide the landlord with 2019 sales reports and year-to-date 2020 sales so the landlord can review and compare the sales history. Also, if your business is independently owned, be ready to provide personal financial statements. Although your sales may be down, if you are sitting on cash or other liquid assets, you need to be ready to utilize such assets. Understand that having cash doesn’t necessarily mean the landlord won’t work with you. They recognize that you have other obligations, but being forthcoming with all the information will gain significant goodwill with most landlords.
- Full Disclosure – Be ready to tell the whole story. Is your business currently closed? If so, when did it close? Did you elect to close it or were you mandated to close it? Are you partially open? If so, what are you doing to mitigate your losses? What will a rent concession help you accomplish?
- Know Your Obligations – Recognize that you signed a binding contract that obligates you to pay a fixed rent whether your business “knocks it out of the park” OR “strikes out”. In my opinion, you should do everything possible to fulfill your contract. That being said, be prepared to be creative. Maybe you have a lease that expires in 2021. It might very well be reasonable to ask for 50% rent relief for the next 6 months if you agree to extend your lease term. Or maybe you can waive certain rights that you have relative to exclusives, rights of first refusal, or prohibiting other uses in the center. Keep in mind, leases are in-depth documents with a lot of provisions. It is not simply the rent and lease term that may be up for negotiation.
What to Do as a Landlord
- Listen to the Story – Generally speaking I believe that a tenant should pay their rent or leave BUT these are different times. Although I understand that some may be skeptical, there are many hard working independent business owners that are doing everything they can to keep their businesses afloat while also addressing their personal needs. There are also many quality corporate tenants that are simply going to be in a cash flow crunch and are going to need help from numerous parties to get them to the point where their business can recover.
- Ask for Information – Request 2019 and 2020 monthly sales reports, personal financial statements (if appropriate) and a written description of the status of their business including what they foresee is required to return to normal. For example, they may indicate that the day their business is allowed to re-open, they believe they will be fine OR they may think that even if the world starts to return to normal, it is going to take a while for their business to ramp back up.
- Request an Offer from the Tenant – Let the tenant tell you what they really need. Is it rent abatement (free rent), a rent concession (discounted rent), or rent deferral (effectively a loan).
- Communicate – Even if you need some time to think about the tenant’s proposal, make sure you get back to them as quickly as possible. This is a very stressful time and communication will be key. You wouldn’t want a situation where you were about to grant rent relief only to find out that because you waited too long they closed your location and put their resources elsewhere where the ownership was more responsive.
- Make a Deal – I suggest avoiding giving away anything. If you are going to make a concession, there should be a tradeoff. Here are some approaches you might take:
- If you are going to abate the rent or make a rent concession make it contingent upon the tenant fulfilling the balance of their lease term without default. This way they have a greater incentive to stay current once the world improves.
- In certain circumstances, it might make sense to obtain the right to terminate the tenant’s lease. Make an agreement to allow the tenant a 50% rent discount but you have the right to terminate the lease if you find another user to take their space. This would not be a mutual termination. Only the landlord would have this right. For tenants who could easily relocate to another space if you terminated (i.e. furniture, clothing), this could be a win/win.
- Defer the rent currently and add it to an extended term. If you gave a tenant a $30,000 concession in 2020, but then increased their rent by $500/month over the 5 years that starts in 2022, this could help you especially if you plan to sell or refinance after 2022 (assuming you believe the tenant will survive).
- Avoid an agreement that goes too long, but also one that goes too short. It seems pretty obvious that this is not just going to be an April rent problem. It could easily be 4 to 6 months or longer. So instead of going through this dance repeatedly, make a deal that at least covers the next few months so that everyone, including yourself, can plan accordingly. BUT if the tenant asks for concessions for the next 18 months, then I view this as bad faith on their part and negotiating with someone who makes such an ask is usually not someone who warrants a counter offer.
- Franchisees – If dealing with a franchisee, ask what the franchisor is doing to help. If the franchisor isn’t doing anything, this could tell you that the tenant is bluffing or that the franchisor doesn’t believe in the viability of the tenant either. Also, make sure you get the same sales reports that they send to the franchisor. And, if you agree to provide assistance, make sure the franchisor knows that you helped in case the franchisee just doesn’t survive. In this case, hopefully the franchisor will try and help you find another franchisee since they know you tried to help their brand at your center.
Remember that you can only help those that want to help themselves. Some tenants are simply going to take actions like closing their store and moving their inventory out and then possibly threatening you to make a deal of their liking or they will never reopen. If a tenant does this, you should probably hire an attorney. There is likely not going to be a way to salvage this relationship. You are going to have to pick and choose your battles.
A Few Other Items
- Insurance – we have discussed with a very knowledgeable advisor whether property or liability insurance held by either the tenant or landlord may be beneficial in this situation. He indicates that with all likelihood it will not be and that most policies have language that “specifically exclude loss caused by virus or bacteria or exclude loss caused by communicable disease.”
- Federal Programs – there may be some federal and state grant and loan programs that tenants can apply for. The following is a link to the Small Business Administration’s website that provides a lot of guidance regarding Federal programs that are available. This may be helpful to both tenants and landlords. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
- Other Resources – Here is a page that provides resources in California and Los Angeles County https://laedc.org/coronavirus/
I truly hope that this blog is a valuable resource to both tenants and property owners. If we work together in good faith versus as adversaries, I am confident that good relationships, goodwill and positive outcomes will result from this very challenging situation.
Beacon Economics Sets the Record Straight on the UCR Business Center Controversy
Beacon Economics Sets the Record Straight on the UCR Business Center Controversy
By Ken Alan, Forensic Business Journalist
A series of articles reported by the Los Angeles Times in February and April stated some University of California faculty members were “Raising the alarm about a research center affiliated with UC Riverside that they say uses corporate funding for reports ‘attacking proposals to improve the lives of working Californians.’”
The articles cite an “Open letter to the UC Regents seeking investigation of UC Riverside — Beacon Economics relationship,” signed by 56 faculty members at UC Riverside, Berkeley and Davis, along with 44 graduate students. Most signatories appear to be humanities studies faculty with credentials in media studies, music, history and political science. The Times failed to question why faculty with more relevant credentials in business, economics and research appear to have only three signatures.
The story states the letter to UC Regents was circulated by UCR Professor of Media & Cultural Studies Dylan Rodriguez, whose biography can be found here: profiles.ucr.edu/app/home/profile/dylanr.
No questions were raised about how the signatures were gathered at three participating schools and why closer Southern California campuses, such as UCLA or UC Irvine, weren’t included.
None of the articles explain why this petition was sent directly to UC Regents without first going through proper channels at UCR. “If there was some true complaint about the quality of our research, there is a system within UC Riverside to deal with that,” said Dr. Christopher Thornberg, principal at Beacon Economics. “There is an administrative office that handles complaints. And if they really thought that our research was substandard, they could and should have gone through that particular office. They didn’t. They went on this petition campaign. Most of the conversation is about how our answers are morally incorrect. And that’s a really slippery slope.”
The letter to UC Regents and ensuing negative press resulted in the UCR School of Business and Beacon Economics severing their partnership after seven years. “Obviously, the relationship between UC Riverside and Beacon was mutually beneficial. The school got a lot out of it,” said Thornberg. “UC Riverside is a fantastic institution. It is a reflection of what UC was built to be. Technically speaking, the center belongs to the school. It would be hard for me to see them continuing it. One of the biggest problems with these kind of centers is you have to have a motivated leader.”
Most of the controversy seems to stem from an August 2022 Beacon-UCR Research Report entitled “How Increases in Worker Compensation Could Affect Limited-Service Restaurant Prices.” In their letter to UCR Regents, the petitioners stated, “Beacon asserts that legislation allowing fast-food workers a say in setting their pay would mean fast-food price hikes of up to 20 percent or more. Fast-food companies are spending tens of millions of dollars to promote the findings of this report — which they funded. They are trying to convince voters that empowering fast-food workers — most of them women and most of them Latino, Black, or Asian — means a 20 percent ‘food tax.’”
“I’ve always been comfortable working with both sides as long as they’re comfortable with the fact that I’m going to give them the best answer I can on the basis of theory and data, not on the basis of some opinion of what’s morally correct,” said Thornberg. “For a very long time, we have dodged the culture wars. Not this time.”
The report clearly discloses that “This research was supported by the International Franchise Association.” Beacon Economics has prepared studies for both corporations and unions in the past. “We’re never going to sell answers. We’re never going to cozy up to one side or the other. Anybody who engages us in a contract will have to accept the results we come up with. It’s as simple as that. That is a rule we have gone by. I’ve had the opportunity of working, yes, with unions and with business organizations, with chambers and the United Way.”
Most of the conclusions presented in the report can be deduced by common sense, such as this summary statement: “If worker wages in the limited-service restaurant industry are raised, there is little doubt that workers who keep their jobs will be better off. But the change is not costless. Any increase in worker compensation will bring about an increase in prices for consumers, which could hurt lower income households who are already struggling with current inflation in food prices. It will also cause the industry to shrink, with fewer establishments and jobs.”
The report goes on to conclude, “Compensation increases in the 20% to 60% range will cause prices … to increase between 7% and 22%.” The petitioners argue other studies show “about a half percentage point menu price increase for every 10 percent rise in the minimum wage.” Whatever the real number, minimum wage hikes usually mean higher menu prices and fewer employee hours, according to Harri, a workplace management software company that works with more than 4,000 restaurants. Anyone who has visited a big box department store or fast food restaurant recently knows that self-serve kiosks are already displacing human workers to reduce labor costs.
“This entire episode truly saddens us. In a university environment, academic freedom and debate should be a cherished and protected norm, as should well-conducted empirical research, even if the conclusions of that research conflict with certain ideologies,” wrote Thornberg in an email to clients and business associates. “The ending of this partnership and the excellent work CEFD has done over the past decade for the community is not a win for the University, Beacon Economics or the Inland Empire region as a whole.”
The LA Times story also failed to fact check the letter’s claim that “Thornberg’s name doesn’t appear in school faculty or other directories.” Christopher Thornberg’s listing can be readily found in the UCR Profiles directory under “Affiliate – Research Associate” at profiles.ucr.edu/app/home/search;name=thornberg;org=;title=;phone=;affiliation=Affiliate
“When [UCR] first invited me to do the center, they asked me to come on campus and be a full-time faculty member and run the center. I was what they call an ‘unpaid faculty member.’ So I was basically nominated and approved by the business school to get a faculty position as an adjunct professor. But I wasn’t paid,” said Thornberg.
Beacon Economics will continue to operate in the Inland Empire without the affiliation of UC Riverside. “We’ll probably look for another partner at some point,” said Thornberg. “I’ve got nothing but support from our clients. All of our work that was being run through the university has been converted over to Beacon work. The only thing that’s really changing in terms of our efforts in the Inland Empire is the logo on the top of the page.”
Dr. Christopher Thornberg will be presenting on May 19th for the San Bernardino Council of Governments in Lake Arrowhead.
Thoughts on Financial Literacy Explained through the Experiences of a New, Immigrant Small Business Owner
By Josaline Cuesta, California Program Director, Small Business Majority & IEBJ Content Contributor
Women entrepreneurs have driven new business growth and job creation for the past two decades. And despite having to navigate a shecession in 2020, women persisted. However, despite their persistence, this community continues to face unique challenges in accessing capital and connecting with the right financial networks. As such, Small Business Majority has partnered with the Women’s Economic Ventures and FOUND/LA on a Back to Basics Cohort Series developed by women and geared towards better supporting women business owners to grow and thrive in the face of financial challenges.
During Financial Literacy Month, we implore women entrepreneurs to check out this interactive cohort series that will give small employers the tools they need to take charge and understand their finances.
Alma Beaty is a real-life example of an entrepreneur working to take charge of her financial future, overcome barriers and pursue her American dream. Alma is based in the southern California area and owns “Relat-Able” – an online boutique with merchandise geared toward supporting: life stages, living with disability/disabilities, hanging out with family/friends, overcoming adversity, dating, you know, Relat-Able life stuff. Alma is not a seasoned business owner with staff. She started her business two years ago, but found the courage to go public in December 2022. She is a self-employed immigrant who is also deaf. But, like many innovative entrepreneurs, she had an idea(s) and strived to see it to fruition, working through the nuances of accessing and managing capital with limited resources. Through five short questions, Alma shares advice on what she has done to strengthen her financial wellness.
Why is financial literacy important for small business owners? “It teaches us to not only make wise decisions on what we spend/invest in (regardless of the industry we are in), but it also helps us to calculate our wins and losses. Thereby helping us see whether or not a business is profitable.”
What have you done recently to strengthen your long-term financial plan? “I have been allowing myself to get into the habit of making spreadsheets. It felt weird at first, like in a mature-responsible kind of way. But in a fun and positive way as well.”
Which do you find easiest to obtain and manage? Business credit cards or small business loans from a traditional bank? “If we can be responsible with it, and we should, business credit cards will quickly increase our business credit and make it much easier for banks and lenders if we ever need to apply for a business loan. But ask me again six months from now. My answer may change depending on how much I have in the bank.”
What was the most significant financial mistake you made when just starting? “Spending so much money on things to get Relat-Able started only to realize I didn’t need all the stuff I bought later. And hiring graphic designers, only to realize these are things I could do myself. But despite realizing later that I could do graphic designing on my own, I didn’t regret hiring these designers. If anything, it taught me the importance of patience. And if I were ever to hire a graphic designer(s) again (and I will), it would be done with intention.”
Have you found the “Back to Basics” series helpful? Can you share another “go-to” financial literacy resource? “I find the Back to Basics series to be extremely helpful! I can’t say this enough. Being able to sit at a table (virtually) and have access to a sign language interpreter with other women to learn about financial literacy taught by women is the kind of empowHERment we (women and young girls) will always need. In honor of Women’s History Month, I would love to give a shout-out to my other go-to financial literacy resources. Such as: Melody Hobson, Dash Kennedy, and Tori Dunlap.
Will The U.S. Economy Fall Into Recession In 2023?
Will The U.S. Economy Fall Into Recession In 2023? Only If The Fed Intensifies Current Tightening Policies; Consumers To Make Up For Weakness In Other Parts Of The Economy
California On The Verge Of Recovering All Jobs Lost Since Pandemic; Investors Buying Up Larger Share Of Homes In The Inland Empire
The U.S. economy has little chance of falling into a recession this year or next unless the Federal Reserve raises interest rates more than they are currently projecting, according to a new forecast released yesterday at the 13th annual Inland Empire Economic Forecast Conference, hosted by the UC Riverside School of Business.
“Although there are signs of stress in parts of the economy, the wealth created by the excessive fiscal stimulus enacted in 2020 and 2021 continues to drive a consumer consumption binge that will propel the economy forward,” said Christopher Thornberg, Director of the UCR Center for Economic Forecasting & Development and one of the forecast authors. “The only possible thing that could tip things downward in the near-term is if the Fed applies even more aggressive quantitative tightening to control inflation than they’re now projecting.”
If the Fed stamps out inflation in the near-term by forcefully reducing its balance sheet, it will drive up interest rates, cool financial markets sharply, and possibly create a modest recession next year led by consumer cutbacks, according to the new outlook. However, in the longer term, if Fed action is inadequate, the United States may be looking at several years of very weak growth, with consumers in a relatively poor financial position at the end.
“This is now a balancing act,” said Thornberg. “Functionally speaking, policymakers went from maximum acceleration – the stimulus – to maximum braking – tightening by the Fed – over a single year, something that would create turbulence in even the healthiest economy.”
Although the new forecast is predicting economic growth to continue in the nation, California, and the Inland Empire in the short run, albeit at a slower pace (“we’ve cooled from white-hot to red-hot”), in the longer term, the major economic wildcard comes from the growing Federal deficit. According to the new forecast, much will depend on how long bond markets are willing to tolerate the excessive level of today’s U.S. government debt.
In California, the state is on the brink of a milestone: recovering all the jobs it lost during the pandemic-driven downturn and mass retirement. While many states have already reached full recovery, as of this writing, California still has a 47,300 job deficit. However, it’s increasingly likely that the state’s job count will be above water by the end of this year, according to the forecast.
- In the United States, inflation is moderating and may have peaked, but it won’t decelerate rapidly. Expect price growth and interest rates to remain elevated in the near term.
- Consumer spending now accounts for the highest share of U.S. GDP since 2006. This consumption is also apparent in the rapidly growing U.S. trade deficit, which accounts for the largest a share of GDP since the runup to the Great Recession.
- There is a massive amount of equity in the current U.S. housing market driven by a decade of low mortgage debt accumulation. The industry also has very low inventories of existing homes for sale and vacancy rates are still at a record low level. This is not a market that is due for a collapse—at least not yet.
- The major problem for new housing is the ultra-low mortgage rates homeowners currently enjoy. Anyone who sells now will have to go from a sub-3 rate to something in the 5+ category. That is not a move most homeowners make—unless they have to. The ‘move-up’ market is all but frozen.
- California’s employment recovery has been uneven, with inland communities faring better than coastal areas. The Inland Empire has 5% more jobs today than it had prior to the pandemic, while at the other end of the spectrum, there are still 3% fewer jobs in Ventura County.
- California’s labor force contracted during the pandemic and employers have struggled to find workers, especially in coastal communities. The primary reason behind the labor force changes is population growth. From 2019 to 2022, population grew in inland communities and declined in coastal communities, driven by affordability.
- After two years in which California’s housing market went gangbusters, and home prices increased an average 43%, the rising interest rate environment, in addition to stretched prices, has led to a major slowdown in 2022. A price crash in the market is nowhere in sight, although a slowdown in price growth is expected.
- The share of homes purchased by investors in the Inland Empire is at record highs. This parallels the nationwide interest by private equity in purchasing large swaths of residential real estate. This forecast expects the share of homes purchased by investors in the region to increase.
- Current sale price cuts for homes in the Inland Empire are more of a reality check than a price decline warranting concern. The rate of bidding wars has only dipped to levels seen in the early part of 2020.
- The Inland Empire has experienced a tremendous boom in Transport and Logistics employment (16.6% of all jobs in the region are now in this sector). The Information sector has also grown, but lags other employment categories, highlighting the relative underrepresentation of knowledge workers in the region. This forecast expects employment in the Inland Empire to continue expanding, although at a tapered pace.
The 13th annual Inland Empire Economic Forecast Conference was held on October 5th. A copy of the forecast book can be downloaded in its entirety here.
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