In the wake of the COVID-19 crisis, many medical practices are struggling with larger outbound cash obligations as they work to preserve their businesses. In particular, monthly rent costs have become a significant hardship for practices that are experiencing a loss of revenue during this trying time. Curi has curated guidance on how to most effectively mitigate this challenge and minimize long-term negative financial impact on practices.
THINGS TO BE AWARE OF
- Landlords are operating businesses that carry fixed costs, just like a medical practice. They, too, have employees and overhead to consider.
- Most lease modifications require lender approval from the bank holding the debt on the property, so it’s important to understand that the decision chain includes more parties than just the landlord.
- Perhaps this is stating the obvious, but deferral of rents and/or restructuring of lease terms will have a much better chance of approval than a request for rent forgiveness.
- Be prepared to share financial statements, forward-looking P&L projections, and narrative describing the specific impact the current crisis is having on your practice. Unlike some vendors and business partners, many landlords of commercial properties have yet to demonstrate the level of ease, responsiveness, and “generosity” that many would like to see in times like these.
HOW PRACTICES SHOULD APPROACH THEIR LANDLORD
- A simple request for relief is nothing to be ashamed of. Businesses across multiple industries are doing just that as it relates to managing their cash flows. A first step may be simply asking for 60-90 days of rent deferral.
- Consider offering to at least cover the landlord’s fixed operating costs during the deferral period, which typically amounts to $7-$8 per square foot.
- As the practice’s cash flows are modeled out, a formulaic relief structure can be considered that aligns with what might be both dwindling cash reserves and incoming cash flows from patient visits. For example, a practice might seek a 90-day relief period, receiving a 25% rent reduction in the first month, 50% in the second month, and 75% in the third month.
- Continuing with the notion that deferral is more likely to be considered by a landlord than forgiveness, be thoughtful about how your practice will repay the deferred rent. Commonly, the deferred balance would be amortized back into monthly rent payments over a 12-month period. You practice might consider requesting that such amortization and repayment not commence until 6 months after the relief period ends to allow time for your cash flows and reserves to stabilize.
If you have any questions or would like to discuss this issue further, please contact Jason Sandner (firstname.lastname@example.org) or Lee Roberts (email@example.com)