Mainstreet businesses have heard it for years: own not only your business but also your building. For many, this possibility has felt out of reach due to a combination of business finances, lack of available buildings, and/or not knowing how to seek a loan.
We get it! Business is stressful enough without adding the responsibilities of property ownership to the mix. But 2020 has been yet another slap in the face for commercial tenants. When the dust settles, businesses that are also commercial property owners are going to bounce back quicker and stronger.
We are only halfway through 2020 and there are already three compelling reasons to think that a local business on Main Street would be better off as a property owner than as a renter.
Property Owners Received More Stimulus
In 2020, the biggest federal government news story for small businesses is the federal Paycheck Protection Program (PPP) and emergency loan funds from the Small Business Administration (SBA). In both programs, retaining employees was a primary indicator of how much a business would receive. But whether a business owns (or rents) may have affected how much stimulus they received.
It is quite common for a Main Street business to create a separate company to own the real estate and to protect the business against liabilities. That legal structure results in two sets of business financials and, therefore, two sets of requests to the PPP and SBA– but the opportunity to file for stimulus twice is not “double dipping!” This may have resulted in a business that owns receiving more stimulus support than its renting peers. Meanwhile, the renter’s landlord was able to secure stimulus dollars on the “backs” of its renters.
More Generous Deferment Options
During the first few months of Covid 19, lenders and banks were offering payment deferments for borrowers that were shuttered during the “stay at home” orders. Lenders and banks were directly telling their borrowers about these options and how to apply for payment deferral.
Do you know who was NOT getting those communications? Commercial renters. It was the expectation and obligation of commercial renters to contact their landlords and seek reconsideration of their monthly rent obligations. The commercial renters are now navigating this moment blindly, not knowing what their landlords may have been offered by banks during the health crisis.
Meanwhile, commercial tenants that also own their properties are fully armed to re-negotiate their mortgage, or seek multiple months of payment deferral while they get back open and operating. It was clear that banks did not want to foreclose on commercial properties if it could be avoided, but commercial landlords were under few obligations to make rent concessions.
I know several examples where a commercial tenant received zero rent relief while being shuttered. In some cases, the tenant has closed permanently because the loss of business revenue, coupled with ongoing monthly rent, was too much for the small business to handle. In addition, it feels like there are daily stories about the permanent closure of a beloved, neighborhood restaurant. Dig in just a smidge, and I can promise you those closed businesses are far more likely to be commercial tenants, not property owners. These tenants likely did not get adequate rent relief, and now can’t navigate their ongoing monthly obligations opposite a decrease in revenue as businesses slowly reopen.
Properly Insured During Social Unrest
To add to the uncertainty created by Covid 19, many communities erupted in social unrest and destruction of personal property after the recent murder of George Floyd by Minneapolis police. Several street-level businesses were vandalized, ranging from broken windows to full looting of their premises. As a result, we are now hearing about businesses that were not carrying sufficient property/casualty insurance. These businesses may be hoping that cities or the general public will generously fund the necessary repairs and inventory that could have been covered with sufficient business insurance. While landlords may have been lax, allowing commercial tenants to operate without providing evidence of sufficient business insurance, lenders and banks rarely allow property insurance to lapse.
We get it! Property insurance is expensive– it tends to be the fourth highest business expense after payroll, inventory, and rent/mortgage. It also feels very ethereal– a drain on cash flow without anything obvious in return. But then a crisis occurs, and insurance becomes apparant as a critical piece of protecting the business owner’s time and, many times, life savings. Yet again, property owners are more careful about retaining sufficient insurance, protecting not just the business and its contents, but also the structure itself. In addition, a property owner can refinance their loan and extract some building equity to cover these damages. Commercial tenants have no such fallback position.
Of course, the point of this article is not to demonize commercial landlords. Heck, I have spent most of my career in the role of commercial landlord, and I certainly don’t perceive myself to be evil. But I have also seen time and time again how businesses that own their own space also control their own destiny– and isn’t that a key driver for everyone who goes into small business?