10 Post-Coronavirus Rent Relief Strategies for Silicon Valley Office Tenants
June 29th, 2020
For the past three months, Silicon Valley companies have been scrambling to react to the COVID-19 crisis, putting out fires and trying to survive the evolving situation. Resulting in an intense focus on cash reserves, cutting expenses, and trying to maintain business operations as best they can while pivoting to a work from home structure.
Now that we have “flattened the curve” and begun gradually reopening businesses, there are new compounding headwinds to worry about… and it’s a long list… including 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 and policies that contradict one another all coupled with a slower than expected economic recovery as the world adapts to the pandemic.
To sum it up, we’re not out of the woods yet and who knows how long it will take to get there. Either way, I’m here to help and have compiled a list of 10 office rent relief strategies that could be a helpful resource for you and your company in weathering all that 2020 is throwing at us.
Silicon Valley Office 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: This is different from a rent reduction in the sense that rental obligations are deferred to a later time, but would require you, as the tenant, to repay that rent either in a lump sum or by increasing subsequent rental payments. Another variation of rent deferral could be to cap or set a base on operating expenses for a short or extended period of time.
3) Rent Abatement: If you are significantly past due on rent payments, your landlord may agree to forgive a certain amount of the past due rent if your company remains current thereafter. However, pay attention to the fine print as this can be considered a concession that could become due and payable at a later date, and in some cases, with additional penalties and fees if there are any clawback clauses associated with it. For example, a clawback could be triggered by a future default by your company 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. However, you would still be required to continue to pay the current rent. The loan is then evidenced by a promissory note that is cross-defaulted with the lease.
5) Equity Conversion: In the spirit of Silicon Valley, where entrepreneurship and start-ups are fundamental to 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 would offer equity commensurate to the lease concessions received.
6) Lease Renewal: If you already planned on renewing your lease and your lease expiration is within 1.5 years, then this is an opportune time to begin lease renewal conversations with your landlord. There are many concessions that can be negotiated that could help both 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 and potentially, additional capital via a tenant improvement allowance in exchange for an extended lease term commitment.
8) Sublease/Assignment: In the event that you still have term left on your lease and only require a portion, or none of your office space, then this is a strategy where you can transfer your rental rights to a third party for a specified period of time within the limits of your lease agreement. You can either sublease/assign a portion of the space while you continue to work, or sublease/assign the entire space until the end of your lease agreement, or until your return. However, you’ll want to have a clear understanding of your sublease/assignment rights which are specified in your lease.
9) Early Termination: This can be negotiated outright if your landlord is even open to it… but with the low likelihood of backfilling the space, given the current environment, this could be a tough hurdle to overcome and the terms may not be worth your while. A more effective way to accomplish this would be to attract a new tenant through marketing the space for sublease. Doing so could produce an incentive for your landlord to consider terminating your lease while giving yourself greater leverage to negotiate more 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 would 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 is important to note that many strategies for restructuring leases have the potential of creating significant tax consequences, therefore, both landlord and tenant should consult with their tax advisors.
Additionally, you’ll want to be prepared in advance of making these rent relief requests, as 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, or better yet give me a call and I can provide customized solutions for you.
Keep in mind that landlords are for-profit companies and their business is real estate, therefore, they will likely want something in return for offering rent relief concessions. The following are areas to consider in your lease that you may be indifferent to, but may be valued by your landlord, such as:
- Rights to Recapture
- Relocation Rights
- Security Deposit/Letters of Credit
At the end of the day, there is no guarantee that these strategies will work for you. After all, everyone’s situation is different. I would recommend discussing your situation with a commercial real estate broker who knows the market and has the experience to not only develop, but execute a custom real estate strategy that produces the solutions consistent with your business plan while supporting the long term viability of your company. When the time arises I would love to be a resource in your success story, should you have any questions feel free to contact me to reserve an initial consultation.
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Until next time…