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The commercial rent moratoriums were set to expire. They didn't. What comes next? And how should you get ready?
On June 11, 2021, California Governor Newsom issued Executive Order N-08-21 . Paragraph 61 extended the ability of local jurisdictions to restrict commercial evictions through September 30, 2021. The Los Angeles County Board of Supervisors voted last Tuesday to extend the moratorium on evictions of commercial tenants through the end of January 2022. The question we ask is, what happens when the rent moratoriums finally do run out?
We have conducted research on how tenants have reacted to these rent moratoriums. In many instances, large tenants and those financially able, have continued to pay their rent. On the other hand, there are presumably thousands of tenants who either stopped paying their rent entirely when the moratoriums began back in March 2020 or who at a minimum have missed several months of rent.
In any case, it begs the question, when the moratoriums end and landlords demand that the back rent either be paid or tacked on to the end of the lease, what will happen? There are two important factors here, the current ability of tenants to resume paying rent and additionally the ability and willingness to have the unpaid rent tacked on to the end of the lease term.
We believe that there will be a substantial number of tenants who either elect not to pay their back rent or are unable to begin paying the required current rent necessitating either a bankruptcy, an assignment for the benefit of creditors, or an out of court restructuring with the consent of the landlord. While we can’t predict the number of defaults, we have gathered enough evidence to conclude that a material number of businesses will need to liquidate or restructure.
Depending on the number of companies unable to pay their rent, there will be landlords unable to pay their own obligations to their lenders and creditors. How much of a snowball effect this will have is impossible to determine at this time, but we believe it will be painful and substantial.
Further playing into this will be the willingness and interest of employees to go back to the office. Companies will face greater pressure to file bankruptcy or commence an assignment for the benefit of creditors if they aren’t even using the space they are being required to pay for.
Here is the bottom line. Anticipating where the Puck is going, we believe we will experience a material number of both bankruptcy filings and assignment for the benefit of creditors commenced within a relatively short period of time after the moratoriums expire. Those tenants that don’t see a practical way to eventually pay off their back rent would be wise to come up with a restructuring plan NOW rather than later.
We believe landlords that have multiple tenants will be reluctant to grant consensual concessions because when other tenants hear about the concessions, they too will demand rent reductions and forgiveness of past rent and there won’t be any practical way for the landlords to push back. The conservative and therefore prudent course for landlords to take will be to demand payment and force the tenants to either pay or file bankruptcy or commence an assignment for the benefit of creditors.
Sit tight. It will be an interesting time.
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Kristina Serafim is a managing director at Verizon Ventures. In this episode, Jim delves into her background as an engineer, the companies she co-founded and guided to successful exits, and Kristina's insights into investing in state of the art technology like 5G and vertical AI.