COVID-19 and commercial property owners: Here’s how to mitigate risk

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Commercial property owners are facing increasing uncertainty amidst the COVID-19 pandemic. Following the closure of non-essential businesses, there is understandable concern about whether tenants will have the income necessary to pay rent. And while the Canadian government is introducing new measures to assist both tenants and property owners, it remains to be seen whether such benefits will prevent commercial landlords from feeling the pinch.

The business landscape is changing beneath our feet, and as leaders in the Canadian real estate space, the team at Zeifmans is prepared to support our clients through this trying time. Let’s begin by taking a look at what we know so far.

Current outlook
According to numbers released by CIBC[1], during the month of April, approximately 85% of Canadian tenants paid rent in part of in full. The numbers vary across the country, with 90% of tenants in British Columbia paying rent, and 70% in Alberta. According to surveys conducted by landlord companies, close to 75% paid in full, 10% paid half, and 15% did not pay.

When it comes to retail real estate owners, and in particular those with largely indoor mall portfolios, the numbers have not been so promising[2]. H&R REIT, which owns properties in Alberta and Ontario reported collecting 56% of retail rent, and only 40% from mall tenants during the month of April. Oxford Properties Group, which owns malls including Yorkdale and Square One reported collecting only 20% of total mall rent.

The Canadian Federation of Independent Business[3] has been conducting surveys since the crisis began, and has been reporting findings on a weekly basis. As of April 15th, nearly 11,000 businesses had reported:

– 50% of businesses were partially open, 28% were fully closed, and 21% were fully open
– 22% of businesses stated that gross sales revenues had declined by 100%, and 19% said revenues had declined by 76 – 99%
– 50% of businesses were certain that their operation would survive the pandemic, and 44% were uncertain their operation would survive.
– 77% of businesses stated that cash flow was their #1 concern, including the payment of rent
– 68% of businesses stated that they had qualified for government assistance

While it remains to be seen how the numbers play out in the coming months, it’s wise for commercial property owners to remain aware of the tools at their disposal throughout the pandemic.

Payment arrangements
Individual commercial property owners and corporations have provided their tenants with a variety of options during this time. As an example, Minto Apartments REIT released a statement[4] communicating that they will not be implementing previously planned rent increases during the months of April, May, or June. They also had set in place a rent deferral payment program for struggling tenants, though by mid-April only 1% of tenants had opted into the program.

Deferral and abatement
Landlords should consider whether rent should be fully abated (forgiven) or deferred. This decision should be made based on the individual relationship between tenant and landlord. If the rent is to be deferred, thought should be given to the date that rent will be due, and how it should be paid. Payment could come in a lump sum, or could be added to future payments for the duration of the lease. The term of the lease could be extended to accommodate payments. Similarly, depending on the ongoing operating expenses of the landlord, it should be considered whether partial payment should be sought in the interim, as opposed to a full abatement or deferral.

Security deposits
Another option is to agree to immediately apply the tenant’s security deposit to the next rent payment due. The tenant would then need to replenish the security deposit. This option does carry some risk given that if the tenant does not repay the deposit and later defaults, the landlord is left without a security deposit.

Ontario-Canada Emergency Commercial Rent Assistance Program (OCECRA)
The government has recently announced that the Canada Mortgage and Housing Corporation (CMHC) will be administering rent assistance for small businesses until September 30th. Support will be retroactive to April 1. The program will provide forgivable loans to commercial property owners who qualify, and will cover 50% of 3 monthly rent payments payable by small business tenants. Support will be granted provided that the landlord agrees to reduce the tenants’ rent to 75% for the three corresponding months in a rent forgiveness agreement. Under the agreement, the landlord would not be able to evict the tenant while the agreement is in place. The small business tenant would then cover the remaining 25%.

The OCECRA applies only to qualifying small businesses:

– Less than $50k in gross rental payments
– Non-essential small business that has temporarily closed or is experiencing 70%+ drop in revenue
– Charities and non-profits

Given how recently the program was introduced, the details are ongoing, including the start date.

HST and director liability
For HST purposes, commercial rent is payable by the tenant on the earlier of the day the rent is due, and the day it is paid. If rent is owing and not collected, the landlord is still required to remit HST to the CRA. If the debt is deemed uncollectable, only then can the landlord claim a corresponding input tax credit on an HST filing. This can cause a serious cash flow issue for property owners during the COVID crisis.

Landlords do have options though. In offering tenants a rent deferral option, the arrangement postpones the date on which the HST is payable, so that landlords do not have to remit HST not collected during the originally agreed upon time frame. To remain in compliance in the event of a later audit, documentation must be properly prepared. Lease agreements must stipulate that the rent owing has now been deferred and that thus there is no HST consequence. To ensure that this is correctly worded, we recommend that landlords consult a professional advisor.

It is worth noting that in this case, tenants will not be eligible to claim an input tax credit for the HST payable until the new date based on the deferral agreement. Directors of corporation should be aware that they could be liable for HST debts of the corporation, if the corporation can’t pay the debts.

Your trusted advisors
During this unprecedented time, the team at Zeifmans remains 100% operational, and available to assist our clients in navigating the strategic pivots necessary to emerge successful. To learn more about your options as a commercial property owner during the COVID-19 pandemic, reach out to our team of real estate professionals.

Supplemental insights

Crisis management tips for the COVID-19 pandemic

COVID-19 – Government benefits, subsidy and loan programs

Hitting it out of the (Development) park – Issues for emerging real estate players

Zeifmans’ Quarterly 3 – Commercial Real Estate Edition

[1] NOW Toronto, “85% of Canadian Tenants Paid April Rent”, https://nowtoronto.com/lifestyle/real-estate/april-rent-paid-canada-coronavirus/

[2] Financial Post, “Retail REITS, Especially Mall Owners are Getting Hit Hard as Some Tenants Stop Paying Rent”, https://business.financialpost.com/real-estate/property-post/retail-reits-especially-mall-owners-are-getting-hit-hard-by-poor-rent-collections

[3] CFIB, “COVID-19: State of Small Business”, https://www.cfib-fcei.ca/sites/default/files/2020-04/COVID-19-survey-results-April-15.pdf

[4] Minto Apartments, “Minto Apartment REIT Provides Operations Update Related to COVID-19”, https://www.mintoapartments.com/news/minto-apartment-reit-provides-operations-update-related-to-covid-19