K2 Business Rescue analyses why business is tough for commercial landlords
Commercial landlords are coming under pressure from all sides in the current economic climate.
The plight of those landlords in the retail sector has perhaps been the most widely publicised as more and more empty shops appear on the High Streets where retailers have either ceased trading or moved out of expensive and badly performing outlets.
The problem for landlords is the double pressure of receiving no rent for their empty properties while still being liable for paying expensive business rates. With business rates calculated at approximately 40% of estimated annual rental value the burden on landlords can be considerable, argues Tony Groom, CEO of K2 Business Rescue.
Recently Dixons, owner of Currys and PC World, revealed that it had agreed with some of its landlords, to pay rent of just £1 a year in exchange for Dixons continuing to pay the business rates. Dixons is not the only retailer with business rate only deals with landlords.
Many commercial landlords are struggling as their tenants downsize, restructure or go out of business altogether, leaving empty industrial and office units for whom new tenants are hard to find. They still have to service their own loans as well as securing their empty premises and paying rates.
Compounding the problem, says Groom, is the change in attitude among lenders towards property companies. Property loans are generally provided by banks who are now asking for much more equity and much better tenant covenants with evidence of a secure income when considering new or renewal of commercial mortgages.
Banks are already overloaded with vacant and distressed property assets. While they are often reluctant to appoint Receivers to recover assets pledged as security for loans, especially while interest on the loan is being serviced, it still reverts to the bank when the borrower goes bust.
The confluence of pressure is leaving many commercial landlords completely boxed in, often with empty premises on their hands, unable to service mortgage liabilities, unable to pay business rates and increasingly dealing with creditor pressure such as winding up petitions.
Another issue is the amount of commercial property on the market. There are a large number of industrial estates suffering with ‘For Sale’ signs on empty as well as occupied premises. And there are few potential tenants, with most of the interest coming from firms that are downsizing.
A related issue is the number of businesses that cannot be sold because of an existing lease obligation. Buyers often want to downsize and therefore are seeking to renegotiate lease terms before purchasing the business.
Groom says there are formal and informal restructuring options that can be used to help commercial landlords who are dealing with vacant and loss-making properties.
However, restructuring property portfolios is a complex process and every single situation is different. Essentially this is a situation that requires the knowledge and skill of an experienced restructuring adviser who will look at each component of the assets and debts in the portfolio as a matrix, and find the right solution for each component.
K2 Business Rescue is a business turnaround and rescue company:
Tony Groom: 0844 8040540
Read more at www.rescue.co.uk