By Alissa Kono, Anthony Nguyen and Rynd Morgan
Research Interns, McNair Center for Entrepreneurship and Economic Growth
The coronavirus pandemic has temporarily shuttered many small businesses in industries such as hospitality, restaurants and bars, and retail. These businesses, which were unable to continue operating at the same capacity while cities were shut down, were often also unable to pay rent for the commercial spaces required to operate their business. Rent relief has been provided to some residential tenants through local funds, but what policy solutions are available to commercial tenants to make sure they have a space to operate their business once the pandemic is over?
The PPP and its limits
One existing solution for commercial tenants unable to pay rent comes in the form of the Paycheck Protection Program (PPP). However, in order for the loan to be forgiven, only 40% of a PPP loan can go to expenses outside of payroll. Rent is only one of many expenses outside of payroll that small business owners must confront amidst a shortage of revenue due to the pandemic, including costs related to sanitation regimens and safety equipment. A recent survey reveals that 84% of PPP loan recipients will exhaust funding by the first week of August, and only 16% of recipients are confident that they will be able to maintain payroll without further relief. Therefore, it seems likely that the PPP as it currently stands is not enough to support small businesses with covering their monthly rent.
Without a substantial expansion of local or national funds to support small businesses in all of their expenses, the build-up of late rent payments ultimately affects the owners of commercial properties, who are in some cases small business owners themselves. Small landlords will struggle to pay mortgage loans back to banks as most small property owners do not make a significant profit from rent payments, and more than half do not have access to any lines of credit. Policies that help commercial tenants afford rent must also account for the ripple effects involved in those costs.
So far, solutions that target landlords have been largely informal or overburdening. Landlords have worked with tenants on an individual basis, with options such as rent reduction, abatement and deferral. Some jurisdictions have attempted to work these options into law to make them more widespread. California Senate Bill 939, which died in committee, gave tenants affected by Covid-19 more leverage to negotiate their leases, preventing them from getting evicted and allowing them to break their lease without punishment. These changes kept the onus on landlords for property maintenance costs and thus were highly contentious. Still, the introduction of the bill itself signals a growing interest in protecting commercial real estate, even as many lawmakers continue to focus on residential tenants.
A Houston initiative
For most of the pandemic, the PPP and individual negotiations with landlords have been the two primary courses of action for commercial tenants in Harris County, Texas, who have struggled to pay rent. However, additional relief is now coming in the form of the Harris County Small Business Recovery Fund. Unlike the PPP, the fund does not have payroll restrictions and is a grant, not a forgivable loan. It may be used on “rent, lease, or mortgage expenses for real property used exclusively for business purposes (excludes personal residences),” and there is no restriction on how much of the award must go towards payroll. “Residential builders and speculative real estate investments” are ineligible, which means that small commercial landlords are ineligible, but they too may see relief once tenants receive grants.
To solve the issue of commercial renters being unable to pay rent and small commercial real estate owners missing out on payments and being unable to pay their debts, a variety of policy approaches are necessary. They range from local and federal funds for small businesses in general, which have already been implemented, to rent and debt forgiveness for tenants and/or landlords respectively. Policies should ensure that all small business expenses are protected in the short-term while promoting growth in the future.