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With many businesses closed, landlords worry about missed rent payments

Business has ground to a halt at the Delavan Station retail building on Main Street in Buffalo and the site's manager is worried.

"They're all closed," said Robert Marcus, who manages the building at 1832 Main St., across from Canisius College. "Nobody's got money, so rents are coming to a standstill."

Most of the tenants are retail, including a hair salon, a nail salon, a barber shop and a dance studio. On Wednesday, Marcus, a broker and vice president of Colby Development, received a letter from another tenant, a national insurance company, stating that it would suspend paying rent and wanted to renegotiate the lease. Yet the owner still has a mortgage on the building, so he's applying for a two-month deferral from Evans Bank.

"That’s not going to solve the problem, though, I can tell you that," he said. "It depends how long before we open. We may be closed for another month or two. And when tenants come back, they’re not going to have money right away."

With most businesses in Western New York shut down or working remotely under orders from the governor, commercial landlords are getting worried about whether their tenants will be able to keep paying their rent and they're starting to ask for help.

Local landlords who own commercial properties say they are getting more inquiries from bars, restaurants, retail stores and other businesses that rent space in their buildings. Some such as stores and restaurants are completely closed and not generating any revenues, while others are doing just a fraction of their usual activity, with a big decline in their income.

The tenants are asking for leniency on their rent, hoping the building owners will give them a break as both sides navigate an unprecedented global health crisis that has left the economy on the verge of a recession.

Landlords and real estate brokers say tenants are asking to let them pay late or defer payments until next year or the end of their lease terms, covering at least a month or more. Some want to make only partial payments right now, with more to come over time. Others are offering to sign lease extensions or expansions in exchange for reduced rent. And others are asking for forgiveness, or to be let out of their leases altogether.

"We’ve seen several different approaches, though the overwhelming majority are simply requests to defer rent," said Eric Recoon, vice president of leasing at Benderson Development Co., which owns more than 700 properties with more than 2,300 tenants in New York and other states. "It's unimaginably crazy right now."

"We're keeping the lines of communication open, understanding what the situation is, and trying to resolve pretty much on a case-by-case basis," said Amy Nagy, director of development for Sinatra & Co. Real Estate. "Everybody's concerned and watching market conditions very carefully."

Landlords rely on rent payments to cover their expenses, as well as to provide them some profit to make a living. But that's being threatened as the occupants of those buildings, without their own salaries and sales revenue, struggle to pay.

"You can imagine if someone’s not able to pay for 90 days, what that’s going to do," said Paul Lamparelli, a construction company owner who also co-owns a few small retail plazas, mixed-use buildings and restaurants in Buffalo and surrounding suburbs.

It's already a major crisis for residential tenants in apartment buildings across the country. According to a new report released Wednesday morning by the National Multifamily Housing Council, 31 percent of households failed to pay their April rent through April 5. That's based on data from 13.4 million apartments nationwide.

That's nearly one-third of all apartment tenants, up from 19 percent who didn't pay on time for the prior month, by March 5, and 18 percent that had paid on time by the same point a year ago. A similar report by Apartment List said one in four renters did not pay their full April rent, and 45 percent were able to get landlords to agree to reduced or deferred payments.

The state responded with directives or agreements to protect apartment residents and homeowners. But those protections and aid don't help other commercial property owners and commercial tenants. And unlike with apartment tenants, there's a much wider range of individual circumstances involved, and no one-size-fits-all solution.

"They’re in the same boat. Everybody wants to stay afloat," said David Schiller of Pyramid Brokerage Co. "These big question marks are what’s facing everybody, landlords and tenants. And everybody’s got to work toward a solution, and those solutions will be remembered when Covid is over."

Some tenants around the country have even been trying to nullify leases or pressure their landlords for concessions, citing typical lease clauses such as "act of God" or "force majeure," or referencing their "impossibility of performance" or inability to benefit from "quiet enjoyment" of their space. But according to Chicago law firm Massey & Gail LLP and Kroll Bond Ratings Agency, there's little legal precedent for it, not all leases contain such provisions, they may not apply for rent payments, and not all of the provisions specifically reference epidemics or pandemics.

"It's very serious," said William Paladino, CEO of Ellicott Development Co., the biggest commercial property owner in Buffalo. "Every situation is different, every property is different. This is difficult on everyone involved through no fault of anyone involved and it will continue to change weekly as we have seen."

That's especially true on the retail side. Already, national companies such as Cheesecake Factory, Mattress Firm, Subway, H&M, Pier 1, Modell's and WeWork have said they cannot afford to pay April rent and are negotiating with landlords.

"We have many different types of businesses within our shopping centers and not everyone is impacted the same," Benderson's Recoon said. "Our primary focus is on the local and family-owned tenants."

That's why landlords and tenants are counting on the new federal Payment Protection Program, part of the stimulus law and administered through the Small Business Administration.

It's designed to provide up to $350 billion in loans to small businesses to help them pay expenses such as employee salaries, paid sick or medical leave, insurance premiums, and mortgage, rent and utility bills. Loans used for payroll, mortgage and rent will be forgiven, with the federal government picking up the debt.

"This is a great way to avoid deferred rent expense," said Danielle Shainbrown, co-president and chief business officer for McGuire Development Co.

Paula Blanchard, an agent at Hanna Commercial Real Estate, said most of her tenant clients are applying for help under the stimulus, citing both the Payment Protection Act as well as low-interest disaster relief loans or traditional SBA-guaranteed loans. Then they'll talk to their landlords "to work out some mutually acceptable arrangement," she added.

"Probably everything is on the table at this point," Blanchard said.

Nicholas J. Malagisi, a managing director at brokerage Sperry Van Ness Commercial Realty, said he's been working with the owner and eight tenants of the former Pilot Complex at 3860 Broadway. Two are national tenants, so Malagisi said he wasn't concerned with them. Two others are logistics firms that "are working overtime to fill orders." Another is a Home Depot franchise carpet installer, who isn't currently working but has 200 orders on backlog.

For the other three, he encouraged the owner to defer the next three months' rent and tack it onto the end of the lease, with interest. Two of the three tenants already accepted, he said.

And that's typical. "Our role is to help our partners as much as we are able, and our end goal is to keep everyone’s business viable," Shainbrown said.

But building owners also still have their own finances to consider. They still have to pay their own mortgages or other loans - if they have them - as well as monthly property and casualty insurance premiums, utility and telecommunications bills, maintenance and repair needs, and the salaries of the employees who work at the buildings. Property management is one of the essential businesses under Gov. Andrew Cuomo's "New York on Pause" executive orders.

"We have a large and dedicated staff of employees who we want to reassure as we await a return to normalcy, all while upholding our own contractual, legal and financial obligations," Recoon said. "It's unimaginably crazy right now."

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