COVID has accelerated the need for us to reevaluate our role as landlords in Casco Viejo. Now more than ever our success depends on the ability of our tenants to recover and perform under unprecedented conditions, when health challenges and technological advancements threaten in-person retail, office, and hospitality experiences as we know them.
These challenges represent a unique opportunity for landlords to partner with their tenants, sharing both risk and return in ways that can benefit both parties, as well as the end customer. One of the most powerful tools landlords can use involves eliminating fixed rents and going to a formula based almost entirely on their tenants’ sales.
The prevalence of fixed rents can be largely traced to most landlord’s need to make fixed debt payments. Retailers in seasonal businesses are expected to manage their cash flow and absorb losses in slow months so that landlords can present steady cash flow projections to their banks so that, in turn, banks can pay steady interest to their depositors.
But managing cash flow is difficult, especially for small businesses in highly seasonal sectors like retail and restaurants. The small scale of businesses in Casco Viejo makes it almost impossible to realize the efficiencies of bigger competitors or access similar lines of working capital. To make matters more complicated, e-commerce and internet delivery services take disproportionately high fees from small businesses that have little leverage to negotiate.
Small retail businesses are the lifeblood of Casco Viejo. They provide not just employment, but much of the fundamental draw of the district. We think that landlords who maintain the mindset of fixed rents, ignoring seasonal vicissitudes and demanding a continuous cycle of fixed rent, will struggle and cause their tenants to struggle too. Those who approach landlord-tenant relationships with a mindset of deep partnership will flourish, helping Casco to do so also.
At Conservatorio, we have accepted that this type of relationship will require more work and may cause a significant decrease in rent in the immediate future. It will also require us to pay off our mortgages so we have the financial flexibility to deal with our tenants on terms that make sense for their specific businesses. It will allow us to enter into powerful explorations of our tenants’ possibilities for growth powered by the unmatched attractive power of Casco Viejo, as well as the financial certainty to invest in their brands, digital presence, and other aspects of their businesses that are not generally addressed in standard rental arrangements. In the long term, as our current and new tenants’ businesses expand and flourish, we expect to see healthier returns and, of even greater value, a more vibrant and inclusive Casco Viejo.
We invite you to watch our Webinar on "What you need to know about Urban Retail after COVID19"