Bankruptcy and Restructuring for Real Estate Asset Classes: COVID-19 Impacts
December 07, 2020
Darren Griffith, a Director in the Real Estate Services Group and Tony Calascibetta, a Partner in EisnerAmper’s Bankruptcy & Restructuring Group discuss an important facet of the potential impact of COVID-19 on Real Estate: Bankruptcy.
DG: The very relevant topic of bankruptcy and restructuring within real estate companies. It's truly an interesting topic, obviously, because of COVID-19 and how many companies have begun to feel the pinch on their businesses. Many tenants have begun to use bankruptcy as a negotiation tool to renegotiate those leases of theirs with their landlords, whether they're doing well or not doing well. Tony, can you give the listeners a bit of insight about your background and what your thoughts are on this topic?
AC: Definitely. For certain industries like retail, bankruptcy has historically been used as a strategy to get rid of locations that are unprofitable. Normally during a bankruptcy proceeding, the company in bankruptcy will either reject or assume its leases. What is different today is due to the continuing decline in retail and the need for actual store locations, companies in bankruptcy are not just assuming certain leases, but are renegotiating their terms, including shortening the remaining lease period and the monthly rental charges. The threat of bankruptcy is also a strategy used to renegotiate lease terms. Landlords are being put in a position of evaluating whether to renegotiate leases or risk losing a tenant and having to face the dark.
DG: Obviously, each landlord individually has to gauge the risk on what's better for their center in that case. Tony, I guess that leads to the next question. How do you find that the effects or the impact of the different classes of ownership groups for the different asset classes and different ownership group sizes, whether it's a large ownership group or a small ownership?
AC: Well, in today's environment, all classes of ownership groups are being affected by COVID-19. The groups that have the ability to repurpose their properties or have the financial backing will be able to offset, to some extent, the negative impact caused by COVID-19 and whether the storm. On the other hand, the single asset real estate entity will possibly be affected the most if numerous tenants do not pay or their ability to repurpose the property are limited.
DG: No, I, agree with you 110%. Obviously, if you have a single asset, you just have one tenant there so it's an all or nothing if the tenant chooses to not pay rent or can't pay rent. Two of the harder industries or the sectors that have been hit are hospitality and restaurants. Can you give some perspective on how those tenants can proceed as they try to move forward in this new normal?
AC: Sure. Simply, will not be easy. Fears of contact and limited operating space due to social distancing requirements, along with the additional costs to sanitize will make it hard for businesses in these industries to make a profit. It is more of a question of staying relevant and minimizing losses until the world gets back to the new normal. For restaurants who previously did very little takeout or delivery, they will need to transition to this type of increased consumer dining.
DG: Of course. Yeah, I think this is a time for not only the hospitality and restaurant industries to make some level of adjustments, I think, as I'm sure you know Tony, everybody needs to make an adjustment at this point. Now that we're coming down to the end, tony, do you have any parting words that might be able to help them in whatever situation they might be in?
AC: Yes. I think very simply everyone needs to be flexible and communicate if you're a landlord or a tenant. If you are a landlord, having a viable tenant at the end of this turbulent period is the goal. If you are a tenant, having a continual viable business is the goal. Communication and being flexible is the key.
DG: Great. That's perfect. From a lot of the other landlords that I have been speaking to, whether it's on the residential side or retail side, I think one of the good things that may or may not have come out of this was that people are communicating a lot more and understanding people's situations. They're being a little bit more flexible with each other, both on the landlord side, as well as the tenant side. Thank you again, Tony, for all of your insights into the real estate trend. I want to thank everybody else for listening to Breaking Ground Real Estate Insights from EisnerAmper. Please join us for our next podcast and visit eisneramper.com/RE for more real estate news.