Hi Friends. Robert Band, your business finance expert here. I’m sure you feel, as I do, that although rent expense is a fixed cost, if your sales are falling due to Corona Virus, then your rent should fall also. How else can you maintain your bottom line from substantial losses. The pain should be felt equally by everyone. So, if you, the tenant have falling revenues, your landlord should take a similar cut in its rent income.
Here’s a view from the landlord’s eyes before this virus. If their occupancy was high before the virus, which likely was the case, then they’re probably generating a lot of free cash flow, which is what’s left after paying the maintenance and other property expenses and their mortgage. A great property, for example, might give the landlord cash flow equal to one-third of their rent income. It’s not uncommon for maintenance and other operating expenses to account for 1/3 of rent income and their mortgage to account for another third of rent income, leaving 1/3 as free cash flow to the landlord. So, if the landlord cut your rent by 1/3, it would lower their cash flow, but they likely could still maintain the property and pay their mortgage. If their rent drops by a large enough percentage, say 50%, then they may not be able to pay their mortgage. But if that happens, their mortgage lender should work out something that accommodates the landlord’s revised cash flow until it returns to pre-virus levels. The mortgage lender would experience a revenue drop, but that’s how everyone up the chain shares the pain equally.
So how do you lower you rent? Rent equals price per square foot times your square footage, so, either you cut your rent rate or cut your square feet. The first thing you should do is ask your lawyer to highlight clauses in your lease that may give you an out if you want to vacate or downsize your space. That will prime you with rights you may exercise if your landlord won’t cut your rent.
By the way, your lawyer isn’t immune to cutting their bill rates either. So, if your revenues have plunged, you should ask them to cut their hourly rate entirely or at least by the same percentage as your revenues are falling and if they don’t, well, that will tell you a lot. They shouldn’t profiteer off your misfortune.
Once you’re armed with your rights or lack thereof in your lease, meet with your landlord face to face. Show them your P&L before Corona and a projection of the future so they can see your revenue decrease. If your revenue is forecast to drop say 30%, ask for rent concession of 30%. If they won’t cut your rent, ask for free rent for six months to give you time to rebound. The landlord may want to extend your lease by the same number of months of free rent which would be alright. The most important thing is to get their cooperation to cut your rent NOW so you can survive.
Get creative and negotiate something that works for you during this cash flow crisis. For example, offer to show your landlord monthly financials showing your drop in revenues in return for a similar percentage drop in rent and do that until revenues return to pre-virus levels. That way you and your landlord are sharing the pain equally.
You may need to default on your lease, and I’ll leave it to your lawyer to advise you on the ramifications of doing so and to how the courts might view these circumstances. What I want to impress upon you is to not take fixed expenses lying down. They should be cut along with your variable expenses. Everyone should feel the pain equally. Just get to breakeven asap.
Finally, I want to talk about using your line of credit during these times. The most important thing to do is get to breakeven right away so you’re not losing money. To finance losses on your line of credit is risky, because you must pay it back in full during the year. Lines of credit are for short term spikes in purchases, like building inventory ahead of Cyber Monday. You borrow today, buy that inventory, sell it, and repay the line from those sales. Although losing money during the Corona virus is hopefully short-term, which is what lines of credit are for, losses are better financed from shareholders’ capital, not lines of credit. Remember, all loans including lines of credit, are debts that must be repaid after you recover. Will you want to use valuable capital later to finance today’s losses? I doubt it. That’s why it’s better just to get to breakeven asap and avoid losses altogether.
Friends, I want to make this offer to you. If you need an experienced CFO consultant to talk to right now and help you balance your budget as revenues plummet, I will extend to you a complimentary call with me. It’s my way of using my expertise to help people in need and I’m happy to do it. I’ll listen to you, look at your P&L and offer the same creative advice I give to my clients. Just go to Robertband.com where you’ll find my contact information and schedule your call with me.
This is Robert Band, your business finance expert. Would you like better financial management that leads to better results? Then let me put the right pieces in place for you. Remember, one tip could be worth millions and profits today, through the compounding of interest, become fortunes tomorrow. So, don’t let them fall through the cracks.