With shops shuttered, retail tenants and landlords search for short-term rent workarounds

For the past two months, Jim Berg has been able to pay the rent on his nearly 11,000-square-foot costume store in West St. Paul despite being forced to close the shop because of the coronavirus pandemic. Time will tell if Berg can make the rent for May; however, he said he isn't worried because his landlord said he would be flexible if Berg couldn't pay.

"The building would be worse off if it's empty," Berg said. "The core of it is everybody has to survive."

As the coronavirus crisis continues to keep many stores shuttered, Twin Cities tenants and landlords have started to renegotiate leases, with many striking deals to provide payment flexibility to allow shop owners to stay afloat and shopping centers to remain full.

Twin Cities Magic & Costume has been a regional staple for more than 30 years, providing one of the area's largest assortments of costumes and magic supplies under one roof. For most of its history, the store was in downtown St. Paul, but in 2012 founder and general manager Berg decided to relocate it to a stand-alone building on Robert Street close to a strip mall.

Business has been good with Berg running the shop with his wife and a small staff, but that all changed in March after Gov. Tim Walz announced the state's stay-at-home order. Businesses that would normally need costumes such as schools, theaters and country clubs canceled orders as they closed themselves. Others who would rent for large events and holidays such as St. Patrick's Day canceled too. A couple of days after Berg paid his mid-month March rent payment, he called his landlord to inform him he might have trouble with the rent in the near future.

"The answer to me was to make your payment [if you can]," Berg said. "If you can't, we will try to defer your payment and wrap it with something else."

For landlords, the current crisis can be a complicated dance in which property owners have to navigate their continued expenses and the needs of their tenants.

"We are trying to work on options for our tenants that need additional support while we work through expenses that still have to be paid [property taxes, insurance, service providers, etc. in addition to mortgages]," said Jackie Knight, senior managing director for Minneapolis developer, manager and property owner Ackerberg, in an e-mail.

Each property faces different financial constraints and works with different lenders so there isn't a "one size fits all" solution, but Ackerberg has worked with tenants who needed help making their payments, Knight said. In some cases it has made sense to agree to waive rent now, with a lease extension happening on the back end of the tenant's lease term, Knight said.

Tricia Pitchford, senior vice president of leasing for Mid-America Real Estate-Minnesota, said some landlords have looked to real estate brokers and property managers to help renegotiate with tenants. She said some tenants have been able to pay partial rent and have asked to pay the rest within a certain amount of time.

"Anything is open to talk about," Pitchford said. "Really the underlying message between both parties is everyone is in this together."

Jim Walston, a commercial real estate attorney for Ballard Spahr in Minneapolis, said he hadn't heard of retail landlords threatening tenants with eviction and that many landlords weren't being aggressive with tenants because lenders have been understanding.

"You don't want to have the lights going out," Walston said of smaller retail tenants. "Retail, once the lights start going out, it doesn't take long for the spiral to go down."

In exchange for rent leniency, some property owners are putting aside tenant improvements or canceling tenants' rights to first refusal for additional space, he said. Many tenants and landlords are amending their contract agreements on their own without the consultation of an attorney, though Walston warns that agreements should be in writing.

Lease renegotiations haven't been limited to retail tenants. Ryan Krzmarzick, a broker for Colliers International's Twin Cities offices, said he has seen about 30% of industrial tenants request lease changes in the past few weeks. Landlords have sent out questionnaires to tenants who want base rent deferrals asking for financial statements, creditors' information and how the coronavirus has affected their businesses.

"We see a wide range of those who need deferrals and those who don't," Krzmarzick said.