A question was posed during the last ED Publications webcom: How are Club Owners dealing with Landlords? As a CCIM Candidate and a commercial Real Estate Broker since 1992, let me give you the current thinking from major commercial analysts. Your Club building is either a freestanding building or it is a leased part of a larger building. Take a deep breath, it’s better than it might look at first glance.
First off, there two classes of Adult Club users: those who have Mortgages on their Building (or Club), and those who have Leases on their Club building. Either one presents separate considerations for how the Owner/Operator needs to approach this Covid clusterfuck
Mortgages: Is your mortgage a private, i.e. Owner Financed, agreement or is it through a bank or other regulated institution? To tease it apart even more: Have you financed some portion of the “business” value in the purchase, as opposed to a purely Real Estate mortgage?
There are two key considerations on how to approach your Mortgagee (whether your private Owner Financer or that Lender): The length of time that you have had a relationship with that other party, and of course the actual wording of your mortgage documents.
Because every mortgage document is individually agreed to, every single one is going to have different results: NOW is a VERY GOOD TIME to pull out that original, signed agreement and go over the major controlling clauses that may be in there, and at this point if you have any shivers when rereading them touch base with your attorney so you understand exactly what you signed, what you agreed to when you were in that hurry to get into that building. There can be acceleration clauses that upon a failure to pay in a timely manner, the mortgagee can automatically demand all payments and future payments, right fucking now. And there are rights of reentry, upon triggering events, such as failure to make a payment, besides of course, foreclosure proceedings.
A public lender is going to be much less interested in initiating any legal action. There is just too much on the average bank officer’s plate right now to initiate legal proceeding if you are already in default or anticipate being so next month, but you have got to get in front of those payments now.
Do you have at least a “good” relationship with your private Mortgagee, your Owner Financer? If so, and based on your history, you should be in decent good shape going forward.
COMMUNICATE, COMMUNICATE, COMMUNICATE: Right now this is your most effective tool to help yourself and your Club! .
- Approach your Lender (or Seller) to consider a deferral of payment(s) to be added to the back of the note.
- If this is not acceptable, propose INTEREST ONLY payments till we get out of this crap or some negotiated reasonable time in the future.
- In both cases above, understand that the Mortgagee looks at you as a string of payments, and you need to keep that payment track record as strong as possible.
- Both the first and this one, GET IT IN WRITING!!!-even is it is no more than a writing of an email…Do NOT make the mistake that a verbal agreement or phone conversation will stand up if there is a problem, and if you have any uneasy feelings, get your attorney to write up these MODIFICATIONS to your note. Agreements on Real Estate have to be in WRITING to be VALID.
Landlord and Tenants: Leases: Where is a copy of our lease? Get it, read it. Is it up to date? Are you complying with ALL the terms of the lease? Are you leasing a building on a holdover status where you have continued on after the term has ended, and you and your Landlord are just going on from the last WRITTEN payment amounts? Did you know that Landlord can kick you out regardless of your payment history on 30 days’ notice? What kind of a lease do you have? Is it a base lease (where LL pays all insurances and taxes on the building) or a double or triple “net” lease where the Tenant gets stuck paying as an “additional rent payment”, the property taxes, or the building (property) insurance and/or liability insurance or common area maintenance (CAM charges).
Landlords fall into two groups: individual or corporate commercial. Again, I ask, what is the status of your relationship with that Landlord? An individual Landlord may be looking at that lease like an annuity, and in that case, you have really got to be able to keep that Landlord as whole as possible.
- If you have an individual or private Landlord, you might need to have a conversation to determine if he or she has a note with a Lender or bank…is your rent payment allocated to a specific need of the Landlord?
Your basic options to ask your Landlord: Forgiveness? Deferral? Reduction?
- Forgiveness: You have a wonderful Landlord, and you need to keep that relationship forever!
- Deferral: Payments to be caught up at some future time, which may or may not also have an interest or penalty attached. In essence, an extension of the lease on the back end.
- Reduction for a set period of time.
(Because there are so many cash points in a lease (taxes, insurance, maintenance), you very well might need to drill into those individual component, and work out separated steps on each aspect.)
Anything you do, you need to have in writing in some form. BRING YOUR ATTORNEY INTO THIS WHEN YOU HAVE THE TERMS OF THE AGREEMENT HAMMERED OUT. GET IT IN WRITING!!!
The bottom line: the vast majority of Landlords DO NOT WANT to lose you as Tenant: it is just too hard in any given time to replace you as a proven entity. The legalities and cost of evicting you may be prohibitive, and it is also the consensus that courts are going to be reluctant to enforce an eviction due to government fiat. On the other hand, if you do have an adversarial, hostile relationship with your Landlord-akin to stepping into an MMA ring-you may be so fucked if Landlord has a picture of you on a bullseye in his office.
Insurance and Property Taxes and License Fees: Since you are closed, are you not getting a reduction, a rebate, a credit from your Insurance Company since you are not incurring any Liability, and your use of the Building is obviously diminished? If Allstate is reducing premiums on drivers…then how about you? Obviously, whoever is paying the insurance needs to examine this cost.
Generally we all see property taxes usually hit later in the year, but you might want to think about getting ready to ask for a reduction in your property taxes since you were prevented from the use of that building by government fiat….Just something to think about…
…and by extension, If you have a Liquor License, and your state (or local) government closed your doors, it can sure be argued that the government might owe you a rebate or credit or mitigation of your fees….
In summation, the general commercial real estate industry is looking at the covid clusterfuck as a temporary interruption of the flows of rent payments, and making appropriate adjustments. You need to step into either you Landlord’s shoes, or your private Mortgagee’s shoes to see where you both have common ground to help each other.
Read your documents, consult with your attorney, get it in writing, but most importantly communicate now if you haven’t been already.
Communicate, Cooperate…now go wash your hands!