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Small businesses, facing a markedly different world than the one they faced at the height of the COVID-19 pandemic, are getting hammered by rising rents and demands for back rent payments. Rising inflation, employee shortages, rent increases and federal pandemic relief funding running dry have all contributed to 40% of small businesses in the US not making the rent in August 2022, according to Alignable – up from 33% in March. Another 45% of small businesses said that their rent has increased since 2021.
This has become an urgent crisis for Main Street businesses in virtually every industry that operates out of physical locations. Small agricultural businesses, independent restaurants, nonprofits, automotive dealerships, and the travel/lodging industry have been hit the hardest, with 50% of agricultural companies and 46% of restaurants missing their rent payments in August 2022.
What can Small Businesses do?
If your small business has missed a rent payment or if you are struggling to figure out how you’re going to meet your next rent payment, your options obviously aren’t great. There are, however, some steps you can take to try to help ease your situation.
Kapitus spoke to Stephen Cameron, president and founder of Level On Demand, a real estate services company that provides small businesses with real estate services such as contract reviews and property analysis. Cameron, a 20-year veteran of the commercial real estate market, shared his advice on how to deal with the current rent crisis.
#1 Know Your Landlord’s Situation
Before you try to negotiate with your landlord on missed or late rent payments, it’s important to first research whether the landlord is even allowed to compromise. Commercial real estate spaces are often owned by investment funds such as hedge funds or private equity firms, or even by pension funds or family offices.
Hedge funds and private equity firms often require their landlords to enforce lease agreements to the letter with no room for negotiation, while a family office or pension fund will see some payment as better than nothing. If this is the case, you may want to consider moving your business to another space altogether.
#2 Read Your Lease Carefully!
If you informed your landlord that you’re going to be late on your next rent payment, it’s important to
read your original lease agreement, as most agreements do contain a grace period to make the payment on time. Often, these grace periods are three- to five days, and sometimes can even be up to 15 days.
“The more important part of the lease to check is how many days you – as a tenant – have before you’re in default,” said Cameron. “This is much harder to recover from than just making a late payment.
Cameron also stressed the importance of notifying your landlord in writing if you know you’re going to be late with rent, let them know you’re going to make that payment and see if it’s possible to negotiate late fees, as many landlords would rather avoid going through the hassle of looking for a new tenant.
“If you have missed your payment deadline and any grace period, in most cases it is to your advantage to make written contact with your landlord as soon as possible,” said Cameron. “Sometimes it’s easy to forget that, in many cases, landlords are not large corporations, but just people who have a mortgage to pay and just want everything to work out with minimal problems.”
#3 Can You Negotiate Late Fees?
Negotiating late fees often depends on the goodwill of your landlord, because those fees are usually spelt out in your lease agreement. According to Cameron, these fees can range from 5% to 15% of one month’s rent, and a tenant won’t be in good standing with the rent until the full rent and late fees are paid. Cameron warned that “This is a commercial space, not a house; the eviction process is not as friendly here.”
He also emphasized that it’s important to negotiate late fees and a grace period before you sign a lease. “For anyone contemplating signing a new lease right now, who may be concerned they will need a longer grace period, there are options,” he said. “Especially in the case of new, seasonal or sales-dependent businesses, negotiating with a landlord to get a few ‘freebies’ or months per year in which rent can be paid late without a penalty or fee is not out of the question. Just be prepared for a landlord to ask for something in return.”
#4 How do you Negotiate Your Lease?
If you are looking for a lower rent but don’t want to move, one strategy you may want to consider is negotiating a new lease with your landlord.
This isn’t going to be easy because landlords, like small businesses, felt the brunt of the economic impact of the pandemic. Many small businesses could not pay rent for months during the height of COVID, and many more still owe back rent.
Before you attempt to negotiate, Cameron suggests trying to gauge whether your landlord is in good shape or hurting financially before you negotiate a new lease.
“There are a lot of motivations, financial and otherwise, in play these days, so asking for a reduction in rent or to keep it at its previous rate is very common right now,” he said. “I’m seeing tenants across the country having more success negotiating down their base rental rates in exchange for increases on their variable expenses, such as common area maintenance, utility reimbursements, etc.”
#5 Consider a WFH Arrangement or Shared Space
Obviously, a working from home arrangement isn’t an option for businesses such as independent
restaurants and small construction companies. However, if your business operates out of an office, working from home or even moving to a cheaper, shared space through companies such as Industrious or Regus can be a much more cost-effective option for you, as it has become for many companies since the beginning of the pandemic.
“For smaller or more agile companies, having a dedicated mailing address may be enough,” said Cameron. “I’ve seen many of these companies supplement their occasional need for dedicated space by having company retreats at larger Airbnb homes or even reserving hotel-style conference rooms.”
#6 Is it Worth Buying Your Property?
If you believe you can save enough for a down payment and can afford to wait until interest rates come down again, there are definite advantages to purchasing the space in which your business is housed outright. The biggest being that (depending on the purchase arrangement with your bank) your monthly payments will be fixed and never increase, and you’ll never have to beg for an extension or negotiate a lease with a landlord again. Not only will your property become an investment, but purchasing the property can also reap tax and depreciation benefits of ownership.
There are also disadvantages of ownership, however. For one thing, it takes away your ability to easily move locations. Second, just as you are responsible for maintaining your house, you will be responsible for maintaining your business property, which can be costly. If you need a new roof or wish to re-landscape the space, you will be responsible for paying for that.
“Ultimately, the choice for a small- to medium-sized business between remaining a tenant or purchasing a property should be looked at objectively,” Cameron warned. “I’ve seen many business owners absolutely fall in love with a space that was perfect for their business but had no real value to anyone else. When it came time to move the business and find a new tenant, there were none to be found.”
#7 If you Have to Move…
As we are living in uncertain economic times, moving your business and finding a cheaper location won’t
be easy, but if you’re unable to reach an agreement with your current landlord, you may not have a choice.
If your business relies on local customers, you’re probably going to need a space in the same neighborhood in which you currently operate. Since you’d be seeking a space that is ideally cheaper than the one you’re moving from, you may have to consider making due with a smaller space since the commercial rent market is fluctuating right now.
As previously mentioned, if you do move to a new space, carefully negotiate your lease with your new landlord.
Carefully Consider Your Options!
Being late on or missing your rent payment is never ideal and comes with few easy answers. The worst thing you can do, however, is to just ignore the situation. You should realize that you do have a few options, the first being to make sure you keep your landlord in the loop as to what’s going on. Carefully try to renegotiate, and in case that fails, it’s crucial to have a backup plan.