This article will help you as a business owner of a commercial income property on how to mitigate and power through a major catastrophic event or disaster like a hurricane, earthquake, flood, fire or other natural or man made disaster that should befall your income property.
How can I overcome a major hit on my commercial property?
Before the event:
Plan well ahead before any major disaster - Some of the best things you can do to mitigate a disaster on your property are done months or years prior.
Insurance - Make sure your policies are up to date and paid. Also make sure you have flood or earthquake insurance if you are in a geographic area that warrants the additional protection. If you don't have triple net leases that pass the insurance expenses directly to your tenants, then you may want to convert all future new leases and renewals to this format so when there are insurance increases that it does not directly affect your pocket book as an owner and that the additional expense can be passed to the tenant as additional CAM - Common Area Maintenance Expense. Finally, you may want to require that all tenants have their own separate insurance policies to cover the contents of their businesses.
Lease hold improvements - Make sure that all your leases specify that all tenant improvements to the building both inside and outside of their spaces are the property of the landlord. This will guarantee that the landlord's overall insurance policy inclusive of flood or earthquake insurance can cover the damages caused by a catastrophe or disaster.
Eminent Disaster Plan - If there is a warning of a potential disaster, as in a hurricane, tornado or even a pre-tremor of an earthquake, it is critical that the landlord have a disaster protocol in place to help tenants prepare for the worst case scenario. In example if there is a flood on its way, the landlord needs to communicate with all the tenants and adivse them on how best to prepare their spaces in advance of a known incoming direct strike. You'd be surprised on how stupid some tenants can be with doing little to no preparation for an oncoming event. The landlord or their agents must take command and make sure each individual tenant is doing all that they can do to protect their computers, data, furnishings, essential equipment, and more. The more a tenant can do to prepare the better off all will be later.
Superior Design - If as a landlord you are developing a building from the ground up and are working with an architect, it is in your best interest to be on top of installing superior drainage, building the building higher up if in a flood zone and building it stronger if in an earthquake zone. If the cost is reasonable to add some safety measures to a new build, it might be worth it to you as a landlord in the long run.
Contingency Fund - As a landlord, you are best served to have a large position of cash or even liquid assets available to you in case of an emergency. If a crisis does occur at one of your income properties, you will likely be the one that needs to fund and front money immediately to get the clean up and re-build process moving along again. If you are caught short on funds and are unable to do this, you will likely lose tenants and be penalized severely on rent cash inflows.
During the Event:
During the disaster - While the disaster is taking place and shortly afterwards, you as the landlord or your agent property managers need to be available and communicative with each tenant.
Communication Accessibility - Make sure you have multiple forms of contact modes for each of your tenants available at your disposal. Always have cell phone numbers, home phone numbers, more than one email address, and even contact information of tenants spouses. It is a critical key that you are in touch, show concern and convey a generalized plan moving forward for how to mitigate both the short term and long term repercussions of the disaster. As the building owner, you are the leader and if you want there to be any chance of a quick clean up, quick re-build and retention of the tenant in the long term, it will be up to you to shine through this crisis and show yourself as a strong leader and problem solver. If you are hands off and disconnected, you can count on losing a lot of future rent and that your vacancy rates will skyrocket as a result. Your best bet as a landlord is to fight for your existing tenants since they are your quickest path for you getting back on track to receiving regular rent inflow streams from your property assets.
Ballpark Damage Assessment - As soon as possible, you need to find out how bad of a hit your property took. You will not know the full details likely for days or even weeks to come, but it is important for you as the property owner to have a good ball park idea on where things are at. Once you know this, you can come up with a game plan on how to proceed and for how much money and your time you will need to set aside on how to mitigate your way through things. If is not a total complete loss and there is a reasonable time line to get things rolling again in the short term, then you need to know this damage assessment information sooner than later so that you can get moving as fast as you can to get your tenanats back up and running.
Insurance Companies - As soon as humanly possible, get in touch with the insurance companies. Make sure their claims inspectors are on the ball and coming out sooner than later.
Documentation - Set up Google editable cloud drives for each tenant and have them start photographing and documenting every last damaged item in their spaces. The more upfront work that can be done on this, the faster your claims and eventual reimbursement will reach back to you.
Be a Politician - Don't over promise to tenants your ability to compensate them for their losses. You won't really know exactly how much until the damage claims are made and how easy going the insurance company will be. However, in the short term with the tenants, you still need to present an optimistic outlook and let them know that you are going to fight for them and get as much as possible.
Accept the loss - The sooner you accept the loss, the sooner you can move forward. In example, if you had planned as a landlord to go on a 3 week European vacation or had planned to break ground on your second home in Florida, you may now have to re-adjust your plans. Although, in general having real estate holdings with these kind of income properties is usually a safe and strong asset, there are unfortunately these kinds of bumps in the road. When disaster strikes, you just need to accept the loss, adjust financial plans accordingly and not let it completely devastate you. Commercial real estate and income property ownership is a long-game and you just have to learn to not let short term surprise losses affect you that much.
Aftermath of the Event:
How to proceed in the long term after you know all the details of the disaster - You as the landlord have some critical decisions to make after all the details are known.
Tenant's business health and desire to rebuild - You as the landlord will need to go through your tenant roster and assess the desirability factor of each one in wanting to keep moving forward again. Some folks get back on the horse and ride again and others may decide to call it quits. You will need to communicate with each tenant and find out if they are wanting to re-open or if they have had it. Some tenants you will know their answers immediately, others may hem and haw. Just be patient with the tenants and let them get over the inital shock. You will eventually know the status of each tenant's desire to close or re-open. On tenants leaning toward completely giving up, you need to let them know that you are ready, able and willing to work with them financially on helping them move towards a re-opening. You may not be able to give them the full details right off the bat of just what you are willing to do, but it can be very helpful to at least tell a catastrophe victimized tenant that you are there for them and that you are confident a financial solution can be worked out. Your words of re-assurance and encouragement may just be what they need to consider giving it another shot.
Space marketability and desirability - Do your own assessment of each tenant space and treat it as though it were a now vacant space. Is the space still viable and desirable for another tenant to immediately come in or is it one that is not so much? Rate the demand of each space from a 1-10. If the demand is low and it will likely take months or years for another new tenant to come along, you will need to bend over backwards to accomodate the existing tenant to stay including possibly supplementing them with large sums of money to re-build, even monies that may not be re-imbursed to you from insurance.
Insurance Reimbursements - Be a tiger when dealing with the insurance companies. They will try to give you as little as possible if you let them. Don't let them beat you down on damage claims that you know to be reasonable and fair. The more money you recover, the better off you and your tenants will be.
FEMA or SBA Disaster Relief assistance or loans - As the landlord, you can certainly seek out assistance from government agencies and also encourage your tenants to the same. However,....... you have to treat getting any assistance more as icing on the cake and definitely don't bank on getting anything. It would be great if you got an SBA disaster relief loan at 4% APR for 30 years fixed, but funding isn't always available, especially if their money is dried up and Congress won't approve any more. Just try to be the glass if half empty on getting free government money or on receiving too good to be true loan money. If it works out then great. If it doesn't work out, then you at least tried. Don't factor this government aid into your business equation in order to get your plaza back up and running and your tenants paying you again your much needed rent.
Ultra Worst Case Scenario - If the building is completely gone or totally destroyed with no hope to re-build it within the near term future (as in years), then you may as the landlord have to prepared for the very worst case scenario of losing all your tenants and resetting from zero for if and when you decide to re-build your incoming producing property. You will likely opt to forgoe legal proceedings on most tenants who don't fulfill their lease contracts since they are likley wiped out and the stress of chasing after broken people legally isn't exactly good for you as a landlord either. You may at this point in the worst case scenario, just give up yourself and sell out what is left, or decide to give it another shot. It will depend on how you feel about the longterm viability of rebuilding and how mentally strong you are to take on the daunting task of starting a new. If it is a really good location with endless potential and tenant demand, despite having endured a catastrophic event, you might want to strongly consider leaning towards a plaza re-build. If the plaza was struggling with high tenant turnover, high vacancies and a modest profit income stream then it might be a no brainer to just cut your further losses, dump what is left, get what you can from the insurance money, recover any long term lease money from richer national tenants and then move on and don't look back.
Negotiate with your bank - Whether you need more money to rebuild your plaza or if you are temporily encumbered with being upside down on mortgage payments with no inflows to cover them, you will be best served to talk to your bank about options. You can ask for a loan fore-bearance where payments due to the bank are temporarily suspended until you get back on your feet again. You can also talk to them about doing a re-fi to get you the extra money you need if you choose to rebuild. No matter what the situation is, it is probably a good idea to seek council and advice from your local bank representative. You may also have to consider switching to a new bank that is going to be typically more hungry for your business than your current one (that already has you.) Line up your options quickly for whatever financing you may need to accomplish your goals and game plan. God bless and more power to you if you have no loan and have 100% equity, you are definitely in a small blessed minority.
Talk to your CPA about your potential tax losses- Get in touch with your CPA to find what they are going to need from you to file for a large tax loss associated with the catastrophic event that caused you monetary damages. It is likely you will be receving a personal income tax refund as a result and every dollar of that refund money will be helpful to you to keep your income producing assets more viable. Your CPA can also give you more insight and advice on loan relief money and potential grants from the government that you yourself may not even had known existed.
Negotiate for Tenants to Stay and Move Quickly on this - If the plaza is still viable, you will ultimately be best off to keep your existing tenants and not have to have to try and find new ones. As the landlord, it will be your job moving forward to find out what amount of money it will take to re-build your tenant's space, projecting how much of that will likely be re-imbursed by the insurance company and how much will most likely come out of your pocket. If you have to start a new with an another tenant, you will be out the time that it takes to find a new tenant and out the build out dollars that the new space takes. (The new build out is usually paid for 50% by the landlord.) Time is of the essence, so the sooner you have a tenant in your rental space paying you rent again, the better off you will be. The last thing you want is to have tenants breaking their leases and having the space sit vacant for months or possibly years with no income streams. If you offer the tenant nothing and shove the disaster entirely on them to pay for, then it is very likely they will leave, especially if they have been nearly wiped out financially themselves. Some tenants may not even have the ability to rebuild with out the landlord's help. It really does suck that you may have to foot a good part of the bill to restore a tenant's space back to operating condition, but if you do the math, it make suck more to have to have the space go vacant, especially in a disaster strewn area that may be a while before things come back to normal overall in general as it is. Put on your best negotiations hat with each disaster affected tenant and hope for the best, but don't beat yourself up as a landlord too much if you ended up having to pour more money in for the rebuild than you had really wanted or even thought was fair. If you do have to make huge monetary concessions and even front the money, just make sure you're not chasing good money after bad. Hopefully the choices you make in the short term equate to good solid financial decisions in the long run.
Conclusion: No one in business likes disasters. However, the sooner you can assess and mitigate the situation the better off all will be. Be prepared to be flexible and not be persnickety about tenant lease language when a catastrophe befalls your commercial income property. Put on your best leadership hat and sharpen up your negotiating skills. Hang in there and get right on things, don't give up and fight till the very end to get things back on track!
P.S. This article is a work in progress and may have some future updates. Please don't hesitate to leave us comments or suggestions on anything we may have forgotten in writing about this delicate topic.
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Very helpful article!