A recent commercial rent survey, co-sponsored by Central Pacific Bank, revealed that one in three Hawaii businesses did not pay rent in full from April to June, and that one in 10 did not pay rent at all. Of those businesses, 44%, or 984, were closed at the time of the survey and over 60% of respondents have not received any rental assistance from their landlord.
Although temporary business closures may have reduced payroll and operating expenses, rent is a fixed cost that business must continue to pay. Of the few businesses that have received some form of rent assistance, most received rent deferrals, which will only contribute to an increasing rent burden over the coming months.
Rent relief is on the way
NAIOP, and over a dozen other organizations joined forces to draft and support Resolution 20-208 Honolulu Economic Recovery and Employment Support (H.E.R.E.S.) package, also known as The Commercial Landlord-Tenant Grant Program. This program is designed to provide rent relief for eligible businesses. Under this plan, the County would allow landowners to apply for grants on behalf of their eligible business tenants. Grants would be allocated using an index based off 2019 Taxable Revenue.
General program details include the following:
- CARES Act Language – Suitable language using the current CARES funding that would be deemed forgivable for the State of Hawaii follow that reimbursements are not required. The Rent Relief & Housing Assistance Program is to cover residential rent payments due between August 1 and December 28, 2020.
- Require 50-100% to be used for Rent Relief – Because grant money would be used for rent relief, this positive dialogue would help businesses with current lease negotiations and lease restructuring into the new normal.
- Using 2.5% of 2019 Taxable Revenue as an Index – As a fairness control, we recommended that a business would be eligible for the lesser of an amount greater than 2.5% of its annual taxable revenue or three months of back rent. Generally speaking, 2.5% of businesses’ 2019 taxable revenue equates to three months of rent. Eligible businesses have suffered little to no revenue since March and are on the verge of collapsing without any help. Using the lesser of 2.5% annual taxable revenue or three months of rent is formulaic and a rules-based approach.
- Funding Used to Rescue Local Businesses – Similar to PPP, businesses that are publicly traded would not qualify. In addition, national chains would not qualify unless businesses are eligible franchise owners.
- Demonstrable Financial Hardship – We recommend an auditable qualifier to ensure funding goes to businesses with demonstrable financial hardship. For example, businesses would provide their April, May, and/or June G45(s) in both 2019 and 2020. Business tenants with demonstrable financial hardship would need to show a 30% or greater reduction in taxable revenue.
The resolution passed unanimously in the Honolulu City Council, and Mayor Kirk Caldwell earmarked an additional $75 million from the city's CARES Act fund for this program. We're currently approaching Governor David Ige and hoping the State of Hawaii can provide funding to support struggling business statewide.
As the pandemic continues, and businesses remain closed, we are seeing the struggles many businesses are facing firsthand. Rent restructuring would allow businesses and landlords to redefine parameters and set new expectations to accommodate for ever changing market conditions. In many cases, businesses, especially restaurants and entertainment venues are facing 50% - 60% reduced capacity in the new normal with the same or an even higher rent caused by rent deferral. The unbearable burden of back rent piling up coupled with an unrealistic future rent obligation is the reason why so many businesses are and will continue to permanently close.
Hawaii setting an example for the rest of the nation.
All eyes are on Hawaii as Resolution 20-208 will serve as a blueprint for other states to provide rent relief for businesses.
In this recent article in Forbes, Hawaii is front and center in the push to provide commercial rent relief.