Cash Flow is Key: How to use Real Estate to Survive the Pandemic
The stock market has hit new highs and business sentiment is positive, but we still have a long winter ahead of us and some businesses may not survive.
In the past few weeks Moderna, Pfizer & AstraZeneca have announced promising results for three different possible Covid-19 vaccines. It will take some time to roll out these vaccines and have life return to normal, but the process is likely to begin as early as this month and by late spring of 2021 we may see wide-spread access to a vaccine.
The stock market has hit new highs and business sentiment is positive, but we still have a long winter ahead of us and some businesses may not survive. Cash flow is going to be the key concern for many businesses and anything to help conserve cash or raise additional funds will be key to survival. Here are a few real estate related ideas that can help businesses cash-flow until they can resume their normal business model.
If the business is currently in a lease, one quick way of lowering costs is to ask the landlord for a rent reduction. Chances are the landlord won't agree unless the business offers something in return. An enticing option for the landlord may be to extend the term of the lease, so the landlord knows the tenant is committed to staying. A longer lease term may be more beneficial to a landlord than a higher rent for the next 6 months. In the great recession, many landlords used the ‘blend & extend’ option to lower tenant’s rental rates in exchange for longer lease terms.
Other options include offering higher payments at the end of the lease term in exchange for a discounted current rent. Percentage rents may also be a possibility. This is when a landlord gets a lower base rental rate but also gets a share of the sales of the business. This nets the landlord less income while business is curtailed due to covid-19 limitations, but the prospect of greater returns when business returns to normal.
This is a great option for cash-strapped businesses that own their real estate. The business can take advantage of investors searching for yield in a low-interest environment by selling the property at a low cap rate. This equates to a high sale price and allows the seller to utilize 100% of the asset’s available value as opposed to just 70-75% available through traditional bank debt. Sale-leasebacks are typically 10-15 year leases which means the seller retains the right to use the real estate for their business for a long time into the future.
While many employees are working from home, businesses often have underutilized space in their premises. Consider subleasing some of this extra space for a different use. For example, office demand may be low right now, but a conference room or office could be leased by an individual looking for photo studio space, a video chat room, or a student who needs access to high-speed internet. For those who own their space, they could consider converting existing space to a high demand use such as residential or manufacturing.
Buy a Building
It may seem counter-intuitive, but there are certain ways that buying a building may be less expensive than leasing right now. With interest rates at record lows, many mortgage payments are lower than lease payments, which would increase a business’ cash flow. The trick is going to be finding a building that can be purchased with little or no down payment. This may be possible through a land contract or the owner taking a note for the down-payment portion of the purchase price.
By utilizing some of these techniques a business may be able to increase its cash position. This may be the difference between surviving until the Pandemic ends and going out of business before then. As we start to see the light at the end of the tunnel, now is the time to set a road map to successfully remain in business until these difficult times pass.