Five things to focus on when negotiating with your real estate lender

As businesses continue adjusting to the uncertainties brought about by the coronavirus pandemic, one mantra is proving the short-term plan for many businesses, regardless of their size or sector - ‘cash is king’. For many businesses, rent deferrals would be a critical boost to their medium-term prospects, as owners strive to keep as much liquidity in the business as possible.

The Government has announced that for the remainder of 2020, no landlord of a commercial property can evict a tenant for non-payment of rent. Consequently, there has been a significant drop in the amount of rent collected on each quarter day this year. The amount of rent collected by landlords on the first quarter day vary greatly and are reflective of the relative struggles of tenants, as landlords with significant retail portfolios were likely to be more impacted by non-payment of rent. 48 per cent of commercial rents in the UK were collected by landlords in the week after 24 June rent quarter day, according to updated figures from Re-Leased. Perhaps surprisingly considering that the June quarter day followed three months of lockdown, this figure is identical to the collection total at the same stage after the first quarter rent day back in March.

It is important to note that the non-eviction measures announced by the Government are not a ‘rent holiday’. Rent due to landlords will still need to be paid in due course. With that in mind, tenants will need to negotiate with landlords as soon as is practical, in order to manage both parties’ best interests and avoid potential legal disputes.

Landlords will need to negotiate with their lenders in order to mitigate the knock-on effects of collecting less rent than originally forecasted. Simply put, most landlords will be experiencing a cash shortfall, which make meeting both interest and capital repayments increasingly difficult.

When negotiating with lenders on a real estate asset or portfolio, here are five key points to focus on.

1. Capital repayment holiday. Some lenders are offering business customers a capital repayment holiday, which would be a welcome boost to cash flows. Landlords should seek the deferral of cash payments wherever possible, so this would be a welcome measure.

2. Interest roll-up. Similarly, with capital repayments, deferral of interest payments would have a positive and significant boost to cash flow. 

3. Waiving covenant tests. When preparing to negotiate with lenders regarding loan covenants, the ‘fully funded covenant case’ needs to be well defined. Breaching loan covenants can trigger serious financial penalties for landlords, which makes avoiding breaches a key focus for lender negotiations. A covenant “waiver” for a period can also be pursued if relief doesn’t involve ‘new’ money. 

4. Loan term extensions. For loans that are set to expire in the near future, lenders may consider extending loan terms. Granting extensions allows for more time to raise cash and spreads out payments for longer, further alleviating short-term cash concerns.

5. Additional Working Capital. Where the medium-term viability of the credit quality can still be demonstrated, a new or increased short term facility may also be available, either as part of the CBILS/CLBILS scheme or on a standalone basis.

Across our debt advisory, corporate finance and restructuring advisory teams, RSM has built considerable expertise in assisting clients negotiate with lenders. We are here to help you in all aspects of your engagement with lenders, from strategic review and tactical discussions to financial analysis and presentation of the credit case.

For more information, please contact Howard Freedman

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