Editor’s note: The opinions expressed in this commentary are the author’s alone. Tyler Enders is co-founder of Made in KC, a brick-and-mortar and online retailer of locally made goods with locations downtown, in the Crossroads Arts District, on the Country Club Plaza, and across the metro. Made in KC is a non-financial partner of Startland News.
Enders’ open letter to landlords follows a commentary — The Kansas City you know is dying; Open letter to banks, donor-advised funds, and fellow Kansas Citians — by Adam Arredondo, CEO of STARTLAND, the parent organization of Startland News.
Adam Arredondo’s open letter last week inspired me. I hope it inspired you too. Especially if you are a person in power.
As our economy is rocked by a 100-year pandemic, the power-dynamic that governs our society intensifies and shifts, bending in areas, breaking in others. It’s left a chaotic landscape with people unsure of the ground they stand on. Many have found their footing and begun playing their new part, most artfully, despite an often clumsy start. Among those who find their power greatly magnified are landlords. While their importance has never been questioned, they now hold more power than ever before, with the ability to make or break the brick-and-mortar retail market in the coming months.
You can almost forgive those who are just coming around to understanding their place in this pandemic. Just as we individually hoard toilet paper out of self-interest, we shoot ourselves in the proverbial group-interest’s foot. And as karma would have it, it doesn’t feel good for your individual foot either.
As a small business owner with a handful of retail businesses — a combined 12-plus locations, and just shy of 100 employees — let me opine on the biggest threat to our existence, a threat that simply isn’t being talked about. It involves confidential conversations, uncharted waters, and the ultimate stakes. It’s about paying our rent.
First order of business: Save lives; second, the economy
The poorly-orchestrated, scattershot approach to our lockdowns and quarantines have ultimately proven successful. As good ‘ol Ben Franklin would say “an ounce of prevention is worth a pound of cure,” and if it’s good enough for the hundred dollar bill, it’s good enough for me.
So it seems that we could take the same logic with our economy: “an ounce of liquidity is worth a pound of solvency.” It doesn’t sound quite the same, but it rings just as true right now. The Fed knows it, Congress knows it, you and I know it — so why is there one part of the economy that refuses to face the (deafening) music?
As we gear up for reopenings, we’re bolstered by supportive customers, loyal employees, and government assistance in the form of the Paycheck Protection Program. The PPP, despite its faults, will allow us to reopen at least some of our stores.
Our story is the same as others: We were growing — no, maybe not growing … we were flourishing. We were hitting record sales and adding locations. We were getting better and smarter and, boy, did we have plans. Fast-forward to July 2020: we’ll be fine. We’ll be serving customers and serving the city. We don’t have a solvency problem. We have a liquidity problem.
And to save you the story we’ve all already heard, suffice it to say: We’ve figured everything out except for our rent. Meaning, we’ve solved this complex cluster of a rubik’s cube called corona-life and have figured out how to navigate a new normal and a new economy with new habits and new uncertainties. Everyone seems to have played their part, all the stakeholders have carried their load, and we can see the other side. Well, almost.
There’s one side of our rubik’s cube that hasn’t quite fallen into place. That same side that won’t face the music. That same side that finds its new footing in a position of increased power and responsibility. But while they’re overly concerned about how much toilet paper they’ve pulled from the shelves, you can already tell they’re going to have a screwed up foot.
It seems as though the toughest choices are those made in private. But we can’t run a marketing campaign for this or sell you a T-shirt to garner public support. Instead, I give you this angsty letter in hopes that it can be the UV light to the virus inside President Trump’s brain.
Be it bankers or benefactors of donor-advised funds, we need those in positions of responsibility to make the responsible choice. And if not for altruism or reciprocity, then do it for callous self-preservation.
As landlords addicted to debt act out of a fear of perceived scarcity, few have the wherewithal to proactively provide their dose of prevention. As it goes with residential mortgages, so too can commercial mortgages provide forbearance (a temporary reprieve on monthly payments that are made up later). Last I checked, the pension plans, the life insurers, the banks, governments, REITs (Real Estate Investment Trust), and institutional investors didn’t invest in commercial mortgages for their short-term gain. It was a long-term play on long-term value and long-term stability. So how would that make a 10- or 20-year investment look to trip over a little three- to four-month delay? Pretty silly, I think.
Keep It Simple, Stupid
That’s how simple it is: just extend the lease by four months and provide a four-month forbearance period. All-of-Earth’s-Retailers to Landlords: “you can voluntarily restructure mortgage bonds!” You can even bill the additional interest as to eliminate any loss in your return on your investment. But I can’t have that conversation for you; I’m your tenant, not your CFO, and not your lawyer. I have my own crosses to bear. Yes, this is nuanced. Yes, there are many relationships to consider, but at the end of the day, this is the most sensible solution and many landlords have already paved the way.
Yet, instead of acting responsibly, you now hear a chorus of more household names than I can list here: from Gap, Urban Outfitters, and H&M, to Subway, to the Mattress Firm, to the Cheesecake Factory. They’re singing a multi-billion dollar chart-topping tune that still isn’t being heard. It’s titled: “Guess What? We’re Not Paying Our Rent.”
Wait … what?
That’s why commercial REIT values have plummeted 67 percent since the start of the pandemic. That’s why they’re being downgraded by analysts across the board. Instead of negotiating sensible, mutually beneficial extensions, they’re encouraging tenants to look into insurance policies for business interruption coverage and sending them webinars on how to apply for the PPP (I’ll save if for another time, but the PPP will only cover about 40 percent of our total rent due; it is not a solution in and of itself). These landlords would prefer their tenants saddle themselves with debt, consigning them to solvency problems down the road. Or in some instances, force closure, admonishing tenants with lawsuits, saying, “If you’re going to go bankrupt, then I think I’ll take what I can get for the next couple of months rather than never get it at the end.” These are scenarios I pulled from the Wall Street Journal and Bloomberg News, but I promise you these are also the concerns I’m getting emails about and the topics that are being discussed on phone calls all across America.
Uncharted waters
Yes, this is a completely novel situation that requires some ingenuity. But, instead of flooding our court system with hundreds of thousands of landlord-tenant disputes, landlords should get ahead of this problem and negotiate with their creditors. I know each situation is different, but I also have a workable understanding of the dynamics at play. I am a landlord with a commercial mortgage. And as a tenant, we do have local landlords that have already agreed to our proposed rent forgiveness or forbearance. But these conversations are coming way too late and most are not coming easily.
I’m talking to landlords every day and cringe to know that the large retailers of the world — the publicly traded companies with golden parachutes and teams of lawyers — are fighting for fair deals while our small business friends are being bullied and scared into untenable agreements.
Retail vacancies are expected to increase by 30 percent by the end of the year, and by 50 percent in 2021. I think these increases are optimistic. I believe that the biggest threat to retail right now is the inability of landlords to provide short-term relief. I ask all commercial landlords, whether you own a single building or are a multinational, publicly-traded REIT, to do what you can to provide workable solutions that will benefit us all in the long-term.
Tyler Enders is co-founder of Made in KC, anaphora, and Kindred, as well as co-owner of hutch modern.