Five Takeaways from the BBA Webinar on the State of Retail and Hospitality During COVID
On November 13th, the Boston Bar Association hosted Uncharted Territory: Challenges Facing Retail, Hospitality Sectors and their Landlords. The live webinar featured Richard Heller, Senior Vice President and General Counsel of Legal Sea Foods, Joseph Wang, a partner in Boston-based Sherin and Lodgen LLP’s Hospitality Practice Group and Vanessa Moody, a Director in Goulston & Storrs’s Real Estate group with a practice focused on advising real estate developers in leasing and bankruptcy matters. The event took the form of a series of question-and-answers in which the speakers shared their respective tenant- and landlord-oriented experiences grappling with the COVID-19 pandemic, which has drastically and perhaps permanently altered the retail and hospitality sectors of the American economy.
Here are five takeaways from the webinar:
- The Challenge of Fixed Costs. As we enter our second bout of COVID-impacted New England winter weather, and with it, a virus resurgence that is orders of magnitude worse than what we faced in March and April, the retail and hospitality sectors are expecting local and state governments to enforce new restrictions that will negatively impact bottom lines while tenants and landlords remain on the hook for hard costs. Heller provided an example from his experience in the restaurant industry: monthly rent often makes up the largest single part of a restaurant’s fixed costs, but government restrictions reducing table capacity to 10 or 25 percent put a firm cap on profitability. As outdoor dining largely shuts down for the winter season (which, in Boston, could last until May), this will further limit table turnover and have adverse collateral effects if customers feel uncomfortable dining indoors, to the extent that indoor dining even remains an option throughout the entirety of the winter. Moody noted that landlords also have fixed costs in the form of debt that must be serviced even as tenants default on rent payments and are unable to meet percentage rent thresholds.
- A Year of Uncertainty. Not only have government restrictions ebbed and flowed over the past eight months, but people’s understanding of the virus and reactions to it are ever-changing. As Heller pointed out, it is easy to forget that in March and early April, none but the most prescient commentators expected the virus to spread largely unchecked into 2021 (and President Trump predicted a vaccine by Easter). Businesses and developers are forced to develop and implement strategies when each day brings new hopes (vaccine trials showing 90-95% efficacy) and new fears (daily caseloads approaching 200,000 new cases). Further, in the absence of a nationally coordinated response, businesses and developers must navigate a fluid situation on a locality-by-locality basis. Beyond the lack of regulatory predictability, businesses are juggling a workforce largely paid by the hour or by gratuities, where remote working is an impossibility. Many workers have already decided—and many more may still—that their jobs are not worth the risk of exposure to themselves and their loved ones. As the days get chillier, businesses must also divine whether customers will even feel comfortable shopping and eating indoors when online shopping and meal delivery are increasingly seamless. Uncertainty heaped upon uncertainty has resulted in a form of “COVID fatigue” for many business owners, who may decide staying open simply isn’t worth the risk and anxiety.
- Municipal Flexibility. While PPP funds have long gone dry, past governmental restrictions have inflicted financial pain and future restrictions loom, local governments have also been adaptable in facilitating solutions for struggling shops and restaurants. In dense urban areas, cities have given over municipal sidewalk and street space to provide for outdoor dining and shopping, and liquor boards have removed the red tape that previously curtailed outdoor alcohol consumption. This newfound municipal flexibility may be a catalyst for more permanent changes in the retail landscape. Developers have long sought ways to activate exterior spaces, and municipalities now have a touchpoint demonstrating that this activation may not have the negative consequences they feared for so long.
- Creative Approaches to Rent Relief. When asked about where she is seeing creative solutions among landlords and tenants, Vanessa Moody said that most creativity is centered around the negotiation of rent relief agreements, where tenants and landlords must balance landlords’ preference not to permanently surrender rental income in the form of abatements against the back-end challenges that rent deferral poses for tenants. Oftentimes this balance is struck by the temporary conversion to the payment of percentage rent in lieu of certain monthly rental charges. Whatever the structure of the rent relief, there is also creativity in negotiating the type of consideration provided to landlords in exchange for such relief, which may include an extension of the lease term and/or the tenant’s relinquishment (to some extent) of certain negotiated rights under the lease, such as gross sales-based termination rights or co-tenancy rent reduction/termination rights.
- Cooperation Stands Out. During a presidential election year marked by embittered partisanship and polarization, the fact that many tenants, landlords and even lenders have worked together to protect their related interests is remarkable. Heller commented that many landlords understand the state of the industry and want to protect their tenants’ businesses, and as a result, have been collaborative and cooperative. Where landlords have been more aggressive in reclaiming store spaces upon tenant defaults (perhaps a filter-down effect of lender constraints), the result is often empty storefronts with few prospective tenants willing to fill them. On the premise that some rent today or tomorrow is better than no rent at all, many landlords’ lenders are doing their part by approving COVID-related rent relief agreements. In the absence of longer-term systematic federal action or relief measures, the various players in the retail and hospitality sectors realize that surviving the challenges imposed by the pandemic requires some level of collaboration and burden-sharing.