10 Post-Coronavirus Rent Relief Strategies for Silicon Valley Office Tenants

Putting out fires and trying to survive the evolving situation…

Many clients are intensely focused on shoring up cash reserves, cutting expenses, and trying to maintain operations as best they can while pivoting to work-from-home.

For the past three months, Silicon Valley has been scrambling to react to the COVID-19 crisis.

Now that we’ve “flattened the curve” and begun getting #backtowork, there are new headwinds… and it’s a long list…

• A 2nd wave of coronavirus
• Unemployment rapidly approaching levels not seen since the Great Depression
• A spike in defaults
• Low consumer confidence
• Civil unrest
• An uncertain election year
• New laws
• Government mandates + policies that contradict one another
• A slower than expected economic recovery as the world adapts to the pandemic

We’re not out of the woods yet and who knows how long it’s going to take to get there…

I’m here to help and I’ve compiled a list of 10 Office Rent Relief Strategies to help you weather all that 2020 is throwing at us.

10 Rent Relief Strategies

1) Rent Reduction: This can be for a portion or all of the term left on your lease and can be in the form of base rent, operating expenses, or both.

To date, Silicon Valley office landlords have been less inclined to provide rent reductions, opting for rent deferrals instead, when warranted.

2) Rent Deferral: Rent payments are deferred to a later time that you’re required to repay either as a lump sum or by increasing future rental payments.

Another variation of rent deferral could be applied to operating expenses as a cap or a set base for a short or extended period of time.

3) Rent Abatement: If you’re way past due on rent payments… your landlord may agree to forgive (a portion or all) past due rent – if your company remains current thereafter.

Pay attention to the fine print though – it could become due & payable at a later date with additional penalties + fees.

For example, if it gets defined as a “concession” with clawback clauses in the lease then this could be triggered by a future default on the lease.

4) Loan Conversion: Rather than abating past due rent, your landlord may agree to convert the past due rent into a loan payable over time. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.

However, you’ll still be required to continue paying current rent. 

5) Equity Conversion: In the spirit of Silicon Valley, where entrepreneurship and startups are engrained in the identity of our region, this is a creative option similar to a loan conversion.

However, rather than securing a loan to cover lease obligations with your landlord, you’d offer equity commensurate to the lease concessions received. 

6) Lease Renewal: If your lease is expiring in the next 6-18 months and you plan on renewing your lease… it’s an opportune time to begin lease renewal conversations with your landlord.

There’s a lot of concessions that can be negotiated to help the short and long-term viability of your company, especially during these uncertain times.

7) Blend & Extend: If you already planned on renewing your lease, but your lease doesn’t expire for some time, then starting those conversations early could serve as a win-win solution.

You could secure short-term relief today while achieving long-term goals. There’s also potential to secure additional capital through a tenant improvement allowance in exchange for an extended lease term commitment.

8) Sublease/Assignment: If you still have significant term left on your lease you could transfer your rental rights to a third-party. There’s some flexibility here (within the limits of our existing lease).

For example, you could sublease/assign only a portion of the space while you continue to work… or the entire space for a specified term (or until the end of your lease).

9) Early Termination: Although rare, if your landlord is open to it… this can be negotiated outright.

But given the current environment… there’s a low likelihood of backfilling  space with a new tenant. Even in stronger markets early terminations are tough to come by and many times the terms may not be worth your while.

A more effective approach is to secure a new tenant through marketing your space for sublease. This strategy produces greater incentive for landlords to consider terminating your lease while giving you more leverage to negotiate favorable termination terms.

10) Sale-Leaseback: While not technically a rent relief strategy, this would provide relief from real estate ownership obligations while freeing up capital that can be re-allocated to your business without interrupting business operations.

You’d have to own the real estate, which you could then sell and lease all, or a portion of it back from the investor.

Office Rent Relief Considerations

It’s important to note that many strategies for restructuring leases have  potential for creating significant tax consequences – consult your tax advisors.

Additionally, many landlords will do their due diligence prior to engaging in rent relief negotiations…

Refer to my COVID-19 Playbook For Silicon Valley Office Tenants Negotiating Rent Relief for recommendations on how to prepare for rent relief negotiations, or better yet give me a call. 

Keep in mind landlords are “for-profit” companies – so they’ll likely want something in return for offering rent relief concessions. Here’s a few areas within your lease to consider that may be of value to your landlord:

• Guarantees
• Estoppels
• Assignment/Subletting
• Rights to Recapture
• Relocation Rights
• Security Deposit/Letters of Credit
• Options
• Confidentiality

Concluding Thoughts

At the end of the day, there’s no guarantee these strategies will work for you… Everyone’s situation is different.

If you have a unique real estate issue on your hands, then you’re faced with a decision about what to do next…

If you’re unsure of your options or where to start… you’re not alone.

You need an expert advisor in your corner.

A strategic partner who can help you navigate real estate issue and negotiate on your behalf.

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Until next time…