Why most landlords aren’t applying for CERCA

The fact is — the COVID-19 shutdown is killing small businesses.

Many cannot afford rent and many are closing.

According to a CBC article, numbers from Statistics Canada and the Canadian Chamber of Commerce suggests that 50 per cent or more of Canadian companies have lost at least 20 per cent of their revenue due to the shutdown.

Landlords started to apply on May 25 when it was finally available. So far, it’s unclear how many will apply, but according to a survey by Save Small Business, a grassroots coalition of just over 38,000 small businesses across Canada, they found that only one in five small businesses expect their landlord to sign on to The Canada Emergency Commercial Rent Assistance (CERCA).

CERCA was put in place for small businesses and landlords to work together to provide relief for small businesses who are facing financial issues due to the shutdown.

According to the Canada Mortgage and Housing Corporation (CMHC), CERCA is meant to:

  • Cover 50 per cent of a small businesses rent.
  • The tenant will pay up to 25 per cent of their rent.
  • The landlord is to forgive the remaining 25 per cent of their rent.

This means landlords will get 75 per cent of their rent for the months of April, May and June, while still holding on to their tenants if they can afford to make it through this tough time.

It is important to note that in the fine print under “faqs for property owners,” it says the following:

Screenshot from https://www.cmhc-schl.gc.ca/en/finance-and-investing/covid19-cecra-small-business.

Who will CERCA benefit the most — the landlord or the tenant?

Brett Salomons is a commercial real estate ambassador in Central Alberta. Photo from LinkedIn

“It [CERCA] would benefit the tenants more because all of the risk is shifted to the landlord. A good point a colleague of mine made in a CBC article is that 50 per cent is a loan and only is forgiven if it meets criteria. What if the tenant lies and revenues weren’t reduced by 70 per cent, does that mean the landlord is on the hook for the 50 per cent? What if the tenant still goes under, does the loan get forgiven?,” said Brett Salomons, an ambassador for commercial real estate in Central Alberta and a partner at Salomons Commercial in Red Deer, AB.

Benjamin Bach is the Vice President of Cushman and Wakefield, which is located in the Waterloo Region. Photo from https://cushwakewr.com/our-people/.

In a YouTube video webinar titled “Commercial Real Estate During a Pandemic,” Benjamin Bach, Vice President of Cushman and Wakefield, which is located in the Waterloo Region, he talked about the same point.

“The landlord this morning asked me, they said ‘Ben, what if my tenant is not being a good actor and actually falsifies some of this revenue information?’ They were just asking the hypothetical that their lawyer is. There wasn’t a specific case. The landlord said if it’s then determined that the tenant wasn’t really eligible, but the landlord has already applied and the landlord has already gotten that forgivable loan and has only received 25 per cent of the rent from the tenant — does the landlord then have that liability? Does the landlord have a mechanism to recover that amount?” said Bach.

“One of the unfortunate things is that their lawyer said they can have no clarity on that yet,” he said.

All plausible questions — that are still unknown, which makes this program confusing for landlords and leaves small businesses weary of their futures.

According to Salomons, not all landlords will be able to afford the 25 per cent drop in income — but some will.

“That’s hard to give an opinion on because you can have an individual who owns one building and its their retirement income all the way to publicly traded REITs that own property across Canada. Therefore some can, whether the storm [is] better than others. It also depends on the vacancy in that particular property and the debt obligations the landlord has. All in all, I think most landlords would find a 25 per cent reduction in rents would put them in a tough position,” he said.

At the end of the day, maybe the CERCA program should be re-evaluated once again.

“Money should just go to the tenants and it shouldn’t be on the landlords to administer a program meant for tenants.”