Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 

Fixed Or Variable Commercial Rent – Cool Heads Called For

As thousands of businesses enter uncharted waters post Covid-19, one of New Zealand’s most experienced property, tourism, hospitality, and business experts is calling for cool heads over coming months.

Adrian Chisholm, founder of New Zealand-wide business TourismProperties.com, says landlords and businesses need to work together in good faith to help stem the tide of closures and redundancies.

Advocating some “good old-fashioned common sense and sensible solutions”, the Queenstown-based businessman is speaking from 45 years of previous ownership of a wide range of tourism businesses and as a former landlord and tenant.

But currently without a foot in either camp, his independent ‘helicopter view’ of current woes advocates that commercial landlords and tenants may need to accept that rent is no longer a fixed but a variable cost for the foreseeable future.

“They need to accept they’re ‘joined at the hip’ and allow common sense to prevail,” he says. “In my opinion the solution is to adopt a Variable Rent Programme (VRP).

“Within 72 hours, tourism-related businesses went from being on steroids to full cardiac arrest. For commercial tenants, strangled by rental obligations in an environment where there’s no income, the outcome is obvious and disastrous.

“On the face of it the landlord may be protected by rental obligations and personal guarantees in leases, but in fact there’s little immunity from current business risk.

“Without a tenant paying rent or outgoings to cover rates and insurance premiums, there’s significant income disruption and potentially a prolonged period of vacancy.”

Adrian says landlords should be under no illusion that if good tenants fall over, there’s no queue of prospective occupiers, resulting in illiquidity and value erosion to the market value of the property.

“There’s merit in the argument that some rent is better than losing a good tenant and the prospect of no rent at all, and other options include Government-sanctioned bank loans which require approved cashflow statements and business plans which are currently nearly impossible to establish.

“What’s required is an open book process where the tenant pays an adjusting percentage rent to turnover.”

Adrian says this works by the business’s actual percentage turnover being confirmed at the end of each calendar month, perhaps by an accountant, and that proportion applies as the adjusted rent payable for the following month.

“This continues until the tenant gets back to the prescribed rent in the current lease. It’s a process that’s well advanced in Australia,” says Adrian.

The transparent process of the “open book” rental calculation being certified could potentially be done using the free services of the Regional Business Partner Network.

Adrian says that historically, market rents for accommodation, hospitality and retail tenancies were firstly assessed by direct comparison ($/sqm or $/room) but they also needed to fit within a framework of perceived affordability.

“What that means is that rents also needed to represent an acceptable percentage of turnover or net income. Ultimately a prudent tenant will only offer a rental that is deemed to be sustainable and a landlord will accept this necessity if they wish to lease the premises.”

Accommodation rents generally equate to around 22% - 28% of expected turnover, food and beverage/hospitality business rents generally equate to 6 - 8%, and retail percentage turnover rents vary widely, depending on the business sector.

Most current leases have a ‘ratchet clause’ that holds rent at a certain level and may need to be restructured to provide an acceptable level of certainty and confidence for both parties to remain committed and further invest in the premises.

“The ratchet clause is a draconian blunt instrument that should be history,” says Adrian. “Some landlords are putting their heads in the sand if they think otherwise while tenants aren’t sleeping at night if they’ve got this hanging over them.

“Another consideration is whether the landlord has enough protection from losses. Where the business is insolvent, the guarantor is insolvent and there’s little goodwill in the business. Then the landlord and the lessee are truly joined at the hip because both are facing losses.

“If the lessee and guarantor are sound and the lease has value (such as a good motel), then landlords can happily dig their heels in and expect full payment. There’s little financial motivation to make concessions.

“We also need to separate lessees who have a cash flow problem against lessees with a viability problem. Cash flow problems can be solved by deferrals, but viability problems call for agreed reductions.”

For a full outline of the issues and solutions go to: https://www.tourismproperties.co.nz/variable-rent-programme-vrp/

© Scoop Media

 
 
 
Business Headlines | Sci-Tech Headlines

 

National: National Backs Businesses With $10k JobStart

National will provide a $10,000 cash payment to businesses that hire additional staff as part of our commitment to keeping New Zealanders in jobs, National Party Leader Todd Muller and Finance spokesperson Paul Goldsmith have announced. Our JobStart ... More>>

ALSO:

DIY Law: Government Exempts Some Home Improvements From Costly Consents

Homeowners, builders and DIYers will soon have an easier time making basic home improvements as the Government scraps the need for consents for low-risk building work such as sleep-outs, sheds and carports – allowing the construction sector ... More>>

ALSO:

Media Awards: The New Zealand Herald Named Newspaper Of The Year, Website Of The Year At Voyager Media Awards

The New Zealand Herald has been labelled a “powerhouse news operation” as it claims the two biggest prizes – Newspaper of the Year and Website of the Year – along with many individual awards at the 2020 Voyager Media Awards Website of the ... More>>

ALSO:

ASB Bank: ASB Takes The Lead Again With New Low Home Loan Interest Rate

ASB has moved again to support its customers, cutting a number of home loan rates, including the two-year special rate to a new low of 2.69% p.a. Craig Sims, ASB executive general manager Retail Banking says the reduced rate will be welcome news for many ... More>>

ALSO:

Nathan Hoturoa Gray: The Problems With Testing And Case Statistics For Covid-19

To begin to understand disease transmission in a country requires adequate testing of your population with properly vetted, accurate tests. As the world struggles to find what 'adequate percentage' of the population is necessary, (estimates predict ... More>>

ALSO:

RNZ: Fletcher Building To Lay Off 1000 Staff In New Zealand

The construction company will cut around 10 percent of its workforce as it struggles with the fallout from Covid-19. More>>

ALSO:

Can Pay, Won't Pay: Cashflow Moves Urged

Government Ministers are asking significant private enterprises to adopt prompt payment practices in line with the state sector, as a way to improve cashflow for small businesses. More>>

ALSO:

Gordon Campbell: On Why We Should Legally Protect The Right To Work From Home

For understandable reasons, the media messaging around Level Two has been all about “freedom” and “celebration”, but this is not necessarily going to be a universal experience. When it comes to workplace relations, Level Two is just as likely to ... More>>

ALSO:



Auckland Airport: Thousands Of Kiwis Travelling For Queen’s Birthday Weekend


Confidence in domestic travel is beginning to steadily ramp up, with thousands of Kiwis travelling within New Zealand for Queen’s Birthday.
Nearly 400 flights will be operating to and from Auckland Airport over the long weekend... More>>

ALSO:

Science Media Centre: Understanding 5G Concerns – Expert Q&A


Recent attacks on cell phone towers have brought concerns over the rollout of 5G technology into sharp relief.
While scientific research has consistently shown that the technology does not adversely affect human health, public concerns about its impact have spread around the world, fueled in part by growing misinformation online. The SMC asked experts to comment... More>>

ALSO:


Trade: Record Monthly Surplus As Imports Dive

Imports in April 2020 had their biggest fall since October 2009, resulting in a monthly trade surplus of $1.3 billion, Stats NZ said today. “This is the largest monthly trade surplus on record and the annual goods trade deficit is the lowest ... More>>

ALSO:


Media Blues: Stuff Chief Executive Buys Company For $1

Stuff chief executive Sinead Boucher has purchased Stuff from its Australian owners Nine Entertainment for $1.
The chief executive was returning the company to New Zealand ownership, with the sale is expected to be completed by 31 May.
"Our plan is to transition the ownership of Stuff to give staff a direct stake in the business as shareholders," Boucher said in a statement.... More>>

ALSO:

RNZ: Bar Reopening Night 'much, Much Quieter'

Pubs and bars are reporting a sluggish first day back after the lockdown, with the fear of going out, or perhaps the joy of staying home, thought to be a reason for the low numbers. More>>

ALSO:

Stats NZ: New Zealand’s Population Passes 5 Million

New Zealand's resident population provisionally reached 5 million in March 2020, Stats NZ said today. More>>

NIWA: Seven Weeks Of Clearing The Air Provides Huge Benefits: Scientist

Seven weeks of lockdown has provided evidence of how pollution can vanish overnight with benefits for the environment and individuals, says NIWA air quality scientist Dr Ian Longley. Dr Longley has been monitoring air quality in Auckland, Wellington ... More>>

ALSO:

Government: Milestone In Cash Flow Support To SMEs

A significant package of tax reforms will be pushed through all stages in Parliament today to throw a cash flow lifeline to small businesses. More>>

ALSO: