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SUBMITTED BY PKW Thad Fisco ON Tue, 03/24/2020 - 00:11
By Thad Fisco, Landlord, Brewery Owner, & Brewing Equipment Fabricator
As with many of you, my current livelihood is completely dependent upon the craft beer industry’s success. I’ve watched with pride and amazement as my coworkers, employees, customers, and fellow brewing entrepreneurs have made the best of an unprecedented and difficult first half of March 2020. Difficult choices like laying off employees so they can get in line early for unemployment have been made. Government mandates have shuttered bars and taprooms and wholesale orders are evaporating. Craft Brewing entrepreneurs keep fighting and innovating as we pray our customers keep buying beer so we can all stay alive.
April Fool’s Day will be especially cruel this year as in less than ten days your brewery’s first rent and/or loan payments since the COVID-19 crisis started comes due. By now you have likely driven COGS to a bare bone minimum. Unless you are 100% capitalized with cash and own your real estate, a significant portion of your overhead expense will be your capital equipment loan, building rent, or mortgage. I want to help you understand the best way to talk with your landlord or bank about not making payments according to terms.
In general, it is going to be far more advantageous to all parties to give short term payment relief than to evict or foreclose on your brewery. Tenant changes typically cost landlords 12 to 24 months of revenue. Banks rarely come out whole when they are forced to foreclose.
If the intention is to short, or not pay your loans, it is both good etiquette and will strengthen your position with your lender if you discuss this with them ahead of time.
Lenders tend not to be proactive about checking on the health of their clients until something goes wrong. If the intention is to short, or not pay your loans, it is both good etiquette and will strengthen your position with your lender if you discuss this with them ahead of time. The people behind the contracts are feeling a lot of stress and are likely not prepared for what is coming. Banks hold the biggest hammer, but like your landlord, they will want to avoid wielding it to its potential. The win:win for everyone is that no breweries go out of business, and the entire lending stream suffers a momentary shock with a quick recovery. However, we all know this is not likely.
As you prepare to speak with your landlord, remember that they are entrepreneurs too. They are scared and now may be the best time to pour your landlord a beer and ask for their help. How you ask for help could be the biggest factor in successfully negotiating payment relief. We recommend you have the following information at your fingertips:
- Reread your lease and loan documents. Look for clauses like “force majeure,” which is an “act of God” or an “extraordinary event” clause. Know your loan covenants, and what happens if (when) you violate them. The sobering facts surrounding the “Remedies” articles in your contract are what is to be avoided. Knowing your contract is a good foundation for the call to your landlords or banks.
- Be ready to show how you’ve done absolutely everything possible to reduce costs while staying alive. Show how your brewery has driven COGS to near zero. Remind your landlord that, thankfully, our legislators seem to have our employees' backs as we drastically reduce staff. When discussing cost reduction, this is a great time to ask your landlord for help. Is there something they see that you may have missed, something that could free up cash and eventually be used to pay rent.
- Be empathetic to your landlord’s situation and their relationships with their lenders.
What is responsible behavior and what can we expect from our landlords or lenders?
A strong relationship with your landlords and lenders may be your most valuable asset in the next few months...
As a landlord, I can say with 100% confidence that responsible management of our lending or lease relationships is the pillar of our businesses. Lenders and landlords want the businesses of their clients to be strong and in the best possible position to pay.
- The “trickle up” effect in the lease and mortgage world means that tenants who do not pay rent, reduce cash flow to landlords, which can put landlords in violation of their loan covenants. Banks are constantly on guard to keep covenant violations to an absolute minimum, because they are a primary means of ranking their strength by their overlords, the Fed, FDIC and other federal entities. The same hierarchy applies if you “own” your real estate, as your real estate holding company is your landlord. Regardless, a respectful and business minded conversation is an absolute necessity if we intend to short pay or not pay our obligation in the coming month(s).
- When you call be prepared with facts, and lay out a rational argument without wasting time. While your insurance company is not likely to assist at this time, it would be helpful to call your agent before speaking with your lender. Let your lender know you have read your contract, and that you have every intention of abiding by every article that you possibly can, but you need something right now. Be prepared with numbers, how much business is down, have you suspended operations, what you are doing to control costs, and exactly what you would like from them. Let them know that you intend to resume operations, if you intend to do so. If you do not it’s probably time to inform that of that fact now, unless you have a buyer. Follow up your conversation with an email, copying all stakeholders.
- If you are a brewery in planning or under construction you should be asking for an extension on your free rent period, and for a concession on your loan payments. Breweries in the formative stages of their business may or may not be in better positions than operating breweries, depending on the amount of cash they have on hand.
We Are in for a Wild and Messy Ride – Stick Together, Keep Talking, Don’t Hide
What can we expect from these conversations depends on a lot of factors. The beer and hospitality industries are in completely uncharted waters. Even in 2008, some tenants were able to limp their business along and pay substantial portions of their rent. Today 90% of small businesses, restaurants, breweries and taprooms are shut down. The loss of tenant cash flow is going to result in a lot of unpaid rent, and landlords with debt obligations will begin defaulting in unprecedented numbers if they do not get assistance from the banks. (Since starting this blog, the banks I work with have begun the process of mortgage hiatuses, with details still forthcoming. If this comes to pass, your landlords and banks will be positioned to grant lease and loan moratoriums. I will comment in the threads as I learn more.)
Regardless of the chaos that is about to ensue, we should be capable of negotiating a vacation from our lease, and hopefully, our mortgage obligations for the month of April. What happens with operations in April is anybody’s guess. If we don’t get green lighted to open our doors until April 28, the day Oregon schools are scheduled to re-open, none of us are going to be well positioned to pay our lease and mortgage obligations in May. Thereafter, lets all hope the beer engines are running at full steam again.
In an effort to leave on a positive note, this is an excellent time to consider refinancing your loans. Interest rates are at their lowest since the 2008 meltdown. Owner occupied buildings can expect rates below 3.0% if supported by a well capitalized and profitable business. Most of us are currently paying rates in the 4.5% range or higher. Assuming a 25 year amortization and reducing our rate from 4.5% to 3.0% on $1,000,000 saves $780.00 per month in mortgage payments, ($9,300 annually). The extra cash flow may come in extremely handy in the coming months.
Stay calm, hold on, and believe in the power of beer. People are still thirsty!