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Adapting to the New Normal – The case of commercial properties

CORRESPONDENT
Trying times: Molapo Crossing has reportedly offered tenants a lease discount
All key players in the commercial property space are important. A certain level of humanity and reasonableness is expected of them. One property professional put it so poignantly when he said all the key parties should have the attitude of, “let’s share in the pain.” Most certainly, a ‘your pain is my pain’ mentality would assist in finding mutually acceptable solutions in this time of extreme distress. So every key player has to chip in with a view to easing off the pain. PAUL BATSHEDI MORE* writes

If there is one thing that landlords and tenants of commercial property have their views converging on, it is the fact that this period is one of the most distressing times in human history. Despite the fact that a lot of money has been pumped into research, there is just no hope on the horizon.

True, over one 100 reputable outfits are working day and night to find either a vaccine or an antiretroviral drug to contend with the novel coronavirus. Just in case you are wondering why it’s called corona, it is because of the crown-like spikes visible on its surface.

However professionals in the fields of epidemiology and vaccinology are not giving us reason to be jubilant. For instance, Mark Jit, a Professor of Vaccine Epidemiology at the London’s School of Hygiene and Tropical Medicine said, “the normal time for development of vaccine from the time of initial discovery to releasing it to population, is 10 to 20 years.”

Despite this, many laymen have been talking about September or October 2020. Perhaps this level of heightened optimism has been fuelled by the fact that media reports have advised that Oxford University has already started the process of testing a vaccine for COVID-19. The truth is, it might take much longer than we wish for us to be out of the woods.

Surely, worldwide, some people believe that we will have a vaccine before the turn of the year. Call it dumb hope or whatever, but they choose to call it optimism. Notwithstanding that, all appreciate that a scientific process would not be super expedited just to impress the global community and overwhelmed political leaders. Some of whom their reelection this year hinges on their performance in dealing with the trauma brought about by the virus.

Experience teaches us that success rate for vaccine trials is very low, in some cases as low as 10%, and that is on the higher end of the optimism spectrum. Add to that the fact that no vaccine has ever been approved for previous strains of coronaviruses. Just in case you are hoping that you will get away unscathed by COVID-19, let me warn you, scientists say that most of us will fall victim to at least one strain of coronavirus in our life. How about that! Before you lose yourself into a frenzy of panic, don’t worry, some strains are curable, like the common cold widely called flu in Botswana.

It is understandable that we are all craving to return to the old normal that we had deceived ourselves into thinking we had some eternal right to. We can’t wait to revive friendships, to shake hands of loved ones, to squeeze them and kiss them at will, to ‘la bise’ them and to enjoy their company unlimited by the government mandated lockdown restrictions on public gatherings. Some of us are dying for that scrumptious meal at our favourite restaurant. And the travel enthusiasts amongst us would like to board a plane, and I mean a huge plane, and enjoy looking down on the sprawling sparkling blue monolithic of some ocean! Hello! The new order is upon us. The sooner we make peace with that the better. All we need to do is to be flexible and adapt to the so-called new normal.

Life does not stop though. As the clock ticks away unrelentlessly, we need to carry on doing what is important to us. For some of us, management of commercial property is close to our hearts. And we are wondering what it is that we can do to optimise the fruits of our labour. We appreciate that real estate, the wealth spinner for property developers and investors is under harrowing assault. The coronavirus has hit property investors where it hurts most, on two of their most important limbs, income and balance sheet. Countries have also been hit, with GDP contractions projected for emerging, developing and developed economies across the globe, including China.   

From a property perspective, a number of important players are now sitting on the grandstand, and each one of them has to find a way of assisting in crafting a way to surviving the effects of coronavirus. Amongst these are the government, municipalities, financial institutions, property practitioners, landlords and tenants. It is critical for each one of these parties to recognise their role in ushering a semblance of normalcy to a rather abnormal era. For this to happen, all these players have to acknowledge that they are part of a troubled community, and they need to support each other in order to survive these trying times and inch their way to recovery.

An unfortunate view would be for one or more of these players to bury their head in the sand and callously push their agenda with very little or no regard to the rest of the players. The overarching goal should be to stimulate consumption, revive investment and heal the economy. We are now going to discuss how the various players can come to the party and play their role effectively. To some extent, all the players discussed are already playing their role as articulated below.

 The government and municipalities

The government is best placed to drive the agenda for survival and recovery. A menu of options available to the government is worthy of consideration. In periods like this, one of the first casualties is normally consumption. Consumption has to be stimulated in several ways, key amongst which is to come up with well-thought-out and sustainable fiscal stimulus packages. Riding on its central bank, the government has to improve liquidity through quantitative easing mechanisms and even pursue reduction in interest rates.

It also has to play a leading role in engaging finance houses with a view to pushing for a mortgage moratorium. This will help landlords in dealing with the brutal consequences of interruption on their income stream. Perhaps another moratorium that would be welcome would target evictions and litigations that are likely to be occasioned by failure to pay full or partial rental.

We have long made peace with the fact the government will lose revenue from four key sources; reduced uptake of diamonds, tourism, SACU and the private sector (owing to reduced taxable profits). In view of all this, it is a tall order to demand that the government should waive some taxes for a time. This might not be easy primarily due to the fact that the Government partly relies on taxes to meet its important obligations. Now, a fiscal deficit is beckoning. This means that the government has to find ways of lessening the burden on the fiscus while leading in driving economic activity and growth. In this regard, hard as it might be, some element of tax relief would be welcome.

In the wider interest of reviving the economy, and by extension helping landlords and tenants to get back on their feet, it would be necessary to review all NDP sanctioned projects for this financial year, and shelve some of the infrastructure projects. This is all the more important in view of the fact that securing external funding for implementing infrastructural projects under COVID-19 conditions would be a herculean task.

Add to that the recent decision by the European Union (EU) to add Botswana to the list of countries posing a high risk to money laundering and funding of terrorism. Much as some may view EU’s decision to be unjustifiable, pedantry and perhaps even irrational, for now, the bottom line is, it is what it is. While at a political level the government is expected to devise a well-crafted and effective lobbying strategy for engaging the EU, technocrats have to go back to the drawing board and diligently reprioritise projects. This would ordinarily mean that a huge chunk of funding saved from putting some projects on abeyance could be channelled toward stabilising the country’s liquidity position, stimulating economic activity and funding all necessary health costs.

While it’s flattering to have foreign reserves, this might be the moment to consider drawing from those reserves with a view to breathing life into the national economy. In any case, reduced global economic activity means that it is possible to see these reserves shrinking in value in the next few months. Of course the extent to which a drawdown on reserves can be implemented would largely depend on contractually binding terms for investing such funds.

The government also has to approach external organisations for help. For instance, of the US$1 trillion mobilised by International Monetary Fund (IMF) with a view to helping countries deal with the effect of COVID-19, US$50 billion has been reserved for assisting emerging and developing economies. That amount is a miniscule fraction of what all these economies need. For instance, it is estimated that the total amount required by Africa alone, just for curbing the spread of the virus and meeting the cost of all medical treatments hovers around US$130 billion. Obviously this means that proactive countries are already busy working on convincing business cases for them to have a bite on IMF’s pie.

The IMF is not a philanthropic outfit, and will not offer African countries this money on a per capita basis. Each country has to court and convince the IMF. We believe that our technocrats are already working on this. This is all the more important given the drastic drop on the Treasury’s coffers likely to be occasioned by restrictions on international travel. It had been envisaged that tourism would contribute over 10% to the country’s GDP in 2020. It is now public knowledge that the current picture is far from rosy.

Leases would normally prescribe that landlords have to pay property taxes. These are rates that are payable to various municipalities. Waiving of these taxes would be in order. Or at the very least, municipalities in conjunction with the Government should consider a dispensation for a reasonable concession. Although in the short term, property values would not normally tumble on the back of opportunistic disruptors like pandemics, in the medium to long term, sustained cessation of rental revenue could impair capital values of properties. This would in turn affect appreciation of the total capital value of property portfolios owned by landlords, and ultimately lead to the denting of

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Financial institutions

Banks and finance houses cannot be expected to waive payment of principal. This is solely because impairment of capital value will not happen in a whiff. For this trying period, the best that banks can do would be to defer payment of principal. However, just as landlords may need to consider forfeiting their right to part of rental due, it would be in order for banks to consider helping landlords carry part of the burden of loss. This suggests a moratorium on payment of principal and interest.

There is an opportunity here for landlords to approach finance houses with a view to restructuring their loans. Finance houses may consider waving full or partial interest for the period that landlords have difficulty in servicing loans owing to COVID-19 complications. And where loans are not restructured, finance houses should lean toward amortising payment of unpaid principal.

My considered view though is, just as finance houses gladly partook in the ‘windfall’ brought about by the good old times prior to the virus, unflattering as it is, they should also be willing to share in the tribulation brought about by the virus. Perhaps property developers and landlords with massive clout might consider amending their loan agreements to factor in reasonable concessions in their favour in the event of force majeure (FM) events involving epidemics and pandemics in the future. Of course, while financiers may welcome this, it is more than likely that such a concession would come at a cost to the property owner.

Landlords, tenants and property practitioners

While the situation is quite fluid for landlords and tenants the bad news is that the status quo might continue for a prolonged period. Parties should appreciate that the flattening of the curve which would ordinarily inform the government’s decision to repeal lockdown is not synonymous with a humungous downturn in infections. All it means is that the spread of the virus should be curbed to ward off possibility of reaching a quantum that can overwhelm the system and render healthcare not only ineffective but also inefficient.

Having that in mind, there is always a possibility of a second wave of infections. Once again the government would have to contend with the overarching moral issue which would call for a delicate trade-off between saving lives and protecting the national economy. We don’t need to scratch our head to determine what our Government would decide. A directive on the second government mandated shutdown would be issued. Simply informed by the fact that while the national economy can be revived over time, a deliberate ‘genocidal’ activity cannot be reversed.  

Left to its devices, the coronavirus can deal a heavy blow on the relationship between landlords and tenants. This would be readily discernible in cases where either one or both parties succumb to greed. If the business of tenants has been affected by the Government mandated shutdown, it would be absurd for landlords to act as if they are living in another planet, totally oblivious of what is happening on planet earth. It is the revenue derived from business operations that tenants use to meet their rental obligations. Where the source of such income is wholly or partially interrupted, it is incumbent upon landlords to recognise that and behave in a reasonable manner.

Landlords have to be alive to the situation on the ground and determine what they can do to alleviate the stress faced by tenants. A few options are available to them. They can choose to be considerate and propose a partial or full abatement of rental for a time, or they could decide to defer rental payments that are due. This would be important where the FM clause on the lease is silent on rental concessions in the event of epidemics or pandemics, or unambiguously spells out that no FM event would result in abatement of rental. Clearly, for tenants who were not in arrears prior to COVID-19 era, cessation of rental revenue as a consequence of the lockdown was not occasioned by their failure to manage their businesses properly. It is therefore important for the parties to meet as equals in a conducive environment to discuss this and find mutually acceptable solutions. 

In the event that landlords defer rental payment, they should know that the rationale for this is to avoid causing undue hardship to tenants. Hence, it would be in order for them to consider amortising deferred rentals over a reasonable time frame, taking into account the date on which tenants resumed full scale business operations and when they started treading the route to recovery. It would not be helpful for such amortisation to kick-in when tenants are still struggling to steady their wobbly feet on the survival curve.

Tenants with a compromised covenant strength, whose profiles do not give them the clout to engage landlords meaningfully, probably because of occupying a small footage in a multi-tenanted property might find value in clubbing together with other similarly positioned tenants and approaching landlords as a solid unit. However, this is not recommended.

And it should be an absolute last resort. Purely because each tenant has a lease which governs its relationship with the landlord. That is a bilateral relationship, not a multilateral one. So, in the first instance, it would make sense for parties to push for one-on-one interventions. Creative and enterprising negotiation skills have to come to the fore, as opposed to the unacceptable winner takes all cowboy disposition. For this reason, a meaningful dialogue has to take place between landlords and tenants. This should not be postponed. It is one of those immediate just dos.

A few weeks ago, trending in the news was a story about one KFC franchisee in South Africa who had made it very clear to all his landlords that for the total period of the lockdown they would not be entitled to rental payment. Of course that attitude enraged the landlords who obviously considered the franchisee as a self-centred charlatan. Really and truly, they did not need to remind him that they too had monthly expenses to take care of.

Amongst these are servicing of mortgages, payment of various contractors for outsourced services, remuneration of property managers and internal staff. The view generated by some that businesses cannot be empathetic is absolute nonsense, purely because none of those businesses are running on auto-pilot. Behind all of them, there is a human face created with the noble quality of compassion.

Where one or both parties are represented by property practitioners, these professionals should appreciate that their role is to facilitate the fostering of good relations between landlords and tenants, not to frustrate dialogue and burn bridges. In any case their skills might be invoked for helping landlords in the one instance, and in a totally different setting, they might be engaged by tenants.

In all cases, a win-win solution is therefore desirable. Of course, each party would do well to sharpen their negotiation skills in readiness for their meeting. Good preparation would be important. It would be frustrating if any of the parties entered the negotiating arena without having bothered to check their qualification for any Government programmes instituted to usher relief. 

Preparation should start with both parties assessing what they are entitled to. The landlords may have insurance cover for loss of rental, and they should check if it covers them in the event of epidemics and pandemics. If it does, they should put through a claim. On the other hand, the tenants may have an insurance policy covering business interruption.

If so, they too should assess what they are entitled to. In the event that both parties do not have such policies, this would be the opportune time to consider securing them. However, before appending their signature, they should have the policy thoroughly scrutinised by legal advisers with a penchant for detail. Even the fine print should be read. Insurance policies with a lot of unfavourable exclusions might not be very helpful.   

It is essential for landlords and tenants to objectively assess all their line item costs, and strategise on what they can do to exert a downward pressure on their monetary burdens. This would among other things entail objective engagement of internal staff, some of the suppliers and entities to whom some business activities have been hived off to.

Landlords and tenants must recognise that if they were to rigidly hold to their selfish position, they could end up ruining great business relationships. This could well result in the unnecessary creation of vacancies that could have been avoided. The bottom line is that vacant properties are not always worth the brick and mortar ploughed into them. And most certainly they are an irritating pain to landlords.

All parties would do well to take to heart the words attributed to Adam Smith, a Scottish economist and philosopher of the 18th century. In a paper entitled, “The Theory of Moral Sentiments, the ‘Father of Modern Economics” as he was affectionately called, penned the following words: “And hence it is, that to feel much for others and little for ourselves, that to restrain our selfishness and to indulge our benevolent affections, constitute the perfection of human nature..………Upon many occasions, to act with the most propriety, requires no more than that common and ordinary degree of sensibility or self-command which the most worthless of mankind are possest of, and sometimes even that degree is not necessary.” Of course where our decisions have financial implications, it would be in order for us to tread the path of balancing our interests with those of parties with whom we are enjoying a mutually beneficial relationship. 

Conclusion

All key players in the commercial property space have been considered. All of them are important. A certain level of humanity and reasonableness is expected of them. One property professional put it so poignantly when he said, all the key parties should have the attitude of, “Let’s share in the pain.” Most certainly, ‘your pain is my pain’ mentality would assist in finding mutually acceptable solutions in this time of extreme distress. So every key player has to chip in with a view to easing off the pain.     

*Paul Batshedi More is a property specialist and motivational speaker

PAUL BATSHEDI MORE*



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