The Government announces help with rent for small business. But is the “help” any better than the terms you may have already negotiated with your landlord?
- Businesses who pay less than $50,000/month in rent
- Non-essential businesses who were forced to close or other businesses that have suffered at least a 70% drop in revenue
- Non-profit and charities can also qualify
What does “help” entail?:
- Your landlord can apply for a forgivable loan of up to 50% of the monthly property cost for your space.
- This loan is forgiven if the landlord lowers the tenant rent to 25% of the monthly cost for your space.
- To qualify for the loan the landlord has to agree to no tenant evictions.
When does this apply?:
- The plan is retro-active to April 1.
- It applies to rent for April, May and June.
What’s the issue?:
The fundamental problem with the program is the distinction between “cost” and “rent”. Taken at face-value, it sounded like the government was offering to pay up to 50% of monthly rent as long as the tenant paid 25% and the landlord swallowed the other 25%. However, details released by the Ontario Government (rent is a provincial jurisdiction but the program is partially funded by both federal and provincial governments) explain that landlord and tenants would each pay 25% of the “before profit cost” and the Government program would cover the other 50% of the cost.
Whereas rent is easy to calculate, there will be a difficulty in calculating “cost” and “profit”. Does “cost” include depreciation and loan principal-repayments? Most real estate is highly leveraged with monthly payments due for both principal and interest. “Interest” is generally considered to be a cost for tax purposes, but not “principal repayment”. And what about the invisible cost of depreciation?
Landlords, not tenants, must apply for the forgivable loans. The question is going to be whether it makes sense for a landlord to take a guaranteed 25% loss on operations for 3 months, while also not being able to cover any principal-repayment. At the same time they must also give up the right to evict.
We think it is more likely that a landlord will prefer to work out terms with small businesses with respect to total “rent” rather than apply for a program that might erroneously distinguish between cost and profit.
Like the other Government subsidy programs, we won’t know precisely the benefit until wording in the final legislation is passed and released.