Robin Roberts, president and CEO of Pikes Peak National Bank, worked all weekend after the Small Business Administration opened up the new paycheck protection program loans for applications.
These loans are designed to incentivize small businesses to keep their workers on their payrolls, but the money also can be used for rent or mortgage interest — the other large, fixed costs that some shuttered businesses are having difficulty meeting.
Congress allocated $349 billion for the program in the CARES Act and likely will allocate more.
“Every banker I know worked all weekend, and we’re still working,” Roberts said.
Access to the SBA program has been sporadic because of high demand, she said, with thousands of lenders crowding the website in a short period of time.
Many businesses are strapped to make their April rent or mortgage payments, and some landlords and lenders are working with them by deferring interest or full payments until their clients get loans to tide them over or begin generating revenue again.
BLEND AND EXTEND
Downtown landlords are “all over the map” on rent accommodations, from waiving monthly payments or providing partial concessions to requiring full payments, said Susan Edmondson, president and CEO of the Downtown Partnership of Colorado Springs.
“Many of these property owners owe on their buildings and have to pay the bank,” she said. “That puts them in a bind if their tenants are unable to pay.”
What landlords are able to do “often comes down to the unique situation financially of the property owner and the tenant, as well as the relationships between them — because, really, it’s a partnership as much as possible,” Edmondson said.
“We’ve advised folks in talking to their landlord to take a blend-and-extend approach — come to some kind of agreement, perhaps a lower amount, but extend the term of the lease on the back end,” she said. “That still creates a short-term need for the property owner, but … [for the tenant] to just suddenly have a balloon payment three or four months later, after your worst three or four months in business ever, it’s pretty tough. I do think the flip side is tenants have to show that they are pursuing all the funding available.”
Many businesses will need to rely on the SBA loans, as well as local sources such as Survive & Thrive COS, a collaboration between Exponential Impact and Pikes Peak Community Foundation that provides recovery funding and mentoring to assist small businesses based in the Pikes Peak region, for funds to get them through the next few months.
Many restaurants are bringing in at least some income through takeout and delivery services, but soft-goods retailers can’t be open at all.
“They may be full of inventory that was perfect for winter shopping, … and they don’t have the revenue to buy their summer inventory,” Edmondson said.
Some retailers have ramped up online sales and built up their websites, but others aren’t positioned to do that.
“So every business has its own unique challenges,” she said.
Most tenants want to be able to pay their rent in full, and “it’s killing them that everything has been so incredibly difficult,” Edmondson said. “Oftentimes we may know both the property owner and the tenant, and if it is helpful for us to moderate the conversation or step in, we’re happy to do that.”
Jay Gust, president and chef at Ascent Restaurant Group, leases the spaces for his restaurants, which include TAPAteria and Pizzeria Rustica in Old Colorado City.
He’s paying full rent at TAPAteria, which he had to close when the crisis hit.
“It is such a unique little restaurant,” he said. “It’s not a delivery place; it’s like you go there for the energy, the environment, the smell, the noise, the texture, so to speak.”
Gust was doing deliveries until Pizzeria Rustica had to close because of a plumbing flood. He decided it didn’t make sense to “pretend that I’ll be able to do a little bit of sales and keep some people employed in this environment,” and shut down completely.
But the rent still comes due.
Landlords “are not really making the monies off us, but we’re putting enough towards it so at least the common areas are supported until we can figure out what a payback program is,” he said. “I don’t want to put myself into a position where … in September, it’s going to come to the tune of $18,000. So I’m paying what I can with what I have.”
Gust thinks he’s in a better position than many small businesses because he has some savings that he feels will carry him for the next four months or so.
“Right now, everybody’s waiting patiently for the PPP to get put out,” he said. “And once that goes in, then, you know, we’re looking at bringing people back.
“If this can kind of simmer down by June or July, we’ll be in a good position. If it dips past July, that’s going to be some really tough choices.
“The longer this goes without being able to make money, the more restaurants are going to die on the vine,” he said. “And it’s not just restaurants; it’s tattoo parlors and beauty salons and all the other things that aren’t considered essential businesses.”
GOOD TIME TO BUY?
Real estate firm Hoff & Leigh works with about 60 commercial tenants of properties that the firm owns or manages, and so far has had only three tenants who have been unable to pay rent, co-owner Holly Trinidad said.
Two of those are retail-type businesses and one is a nonprofit.
“What we’re seeing right now is the highest risk in hospitality, student housing, senior housing and retail,” Trinidad said. “They’re going to be hit the worst, immediately.”
After that, she thinks the office market is at medium risk and the industrial sector faces the least risk.
“Most hospitality groups own their properties and are talking direct to their lenders,” she said.
Trinidad said she and her group have been discussing how to deal with their own tenants and advise the landlords they represent about rent shortfalls since before the passage of the CARES Act.
“We came up with a couple of different ideas,” she said. “One was, ‘Listen, we will pay your rent while the mandate is in place to stay home, and as soon as the mandate is lifted, you’ve got to start paying rent again and the rent that we’ve rebated, we’ll tack that on to the back end of your lease.’ There are a couple of landlords doing this.”
Landlords then will have to talk with their lenders to work out a payment plan on their mortgages.
Trinidad said she is urging her clients who own office buildings to keep their tenants in place if possible.
“As soon as they can go back into the office, they’re going to be back in there working,” she said.
She’s also telling her industrial clients that it might be a good time to consider buying buildings.
Trinidad recalled that after the Great Recession began in 2008, “when people were really struggling, the lenders were really rigorous. That’s when we saw a lot of foreclosures and a lot of people go out of business.”
What’s different today, she said, is that “lenders are really stepping in because they’re receiving funding from the federal government. I’ve seen a lot of local lenders being really proactive and saying, ‘What can we do to help you?’”
Trinidad agrees that fallout from the pandemic will worsen the longer it continues.
“It’ll be interesting to see what users can’t pay rent in the month of May,” she said. “I think that’s when we’ll begin to see office and industrial users say, ‘Hey, I can’t pay rent this month.’”
LENDERS STEP UP
Roberts said Pikes Peak National Bank is still seeing commercial loan activity where people are seeking to buy commercial property, but it has slowed down.
“Now we’re in a different demand, which is the PPP loans and changes in the terms of existing loans,” she said.
Roberts said the bank has not had commercial property owners come in and say their tenants are not paying rent. But she acknowledges that the situation could change in subsequent months.
The first line of defense, she said, “is to do some interest-only or payment deferrals for those landlords, so that hopefully then they could pass that on to their tenants that can’t make their rent on time. … If it were to continue, the bank would have to figure out a way to work with that borrower.”
When payments are deferred, interest continues to accrue on the loan principal, Roberts said.
“When normal principal and interest payments are resumed, those payments will most likely go to pay down the accrued interest first and then principal,” she said. “So the repercussions of deferring payments are just that the principal will not be reduced according to the original amortization schedule and will take a few regular payments (once resumed) to catch back up. No additional payments in excess of the contractual payment amount will be required. Finally, their loan will mature a few months later than it normally would have.”
There has already been lots of demand for the PPP loans, Roberts said, and banks are having to roll out the loans rapidly and also provide other services, as well as protect their own employees.
Some banks are not accepting noncustomers into the program, she said, either because they don’t have the personnel to administer it or they don’t have liquidity.
“We’re coming from a very strong economic cycle where many banks are at a 90 percent loan-to-deposit ratio, so they don’t have access to liquidity to support another $10 [million] to $15 million of these loans,” she said.
The Federal Reserve announced recently that it would increase the amount of money it is offering to banks for their short-term funding needs to bolster funding markets. At the same time, regulators are telling them that they need to exercise reasonable caution in releasing collateral. Regulators have also given banks additional time to report their quarterly financials.
Roberts said all banks are required to have pandemic plans as part of their continuity planning.
“It’s working, but there are aspects of the pandemic that we have not been through,” she said. “It’ll be interesting to see the plan versus how it really happens. We will have a much stronger pandemic plan after this is over.”
The new paycheck protection loans are 100 guaranteed by the SBA as long as banks follow the program, Roberts said, providing an incentive to make the loans.
“Borrowers that need help need to talk to their bank right away so their bankers can assist them with payment deferrals or modifications on their loans,” she said. “Get it out of the way, and then they can focus on the challenges of every day.”