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Why landlords hold the post-pandemic fate of downtown in their hands like never before

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The Boston Globe

Restaurants and retailers still struggling to meet the terms of leases they signed before COVID are approaching landlords with creative proposals to restructure their monthly rent check. The answers often determine the fate of the business.

Small businesses are approaching landlords more and more to negotiate new lease terms, such as lower rents or deferments on payments. Clover recently struggled to find compromise with its Back Bay landlord and filed for bankruptcy shortly after. DAVID L. RYAN/GLOBE STAFF

Two downtown locations of Clover tell two very different stories about the state of storefront retail in the heart of Boston right now.

One outpost of the vegetarian fast-casual chain, near South Station, has stayed alive in part because of flexibility from its landlord. Early in the pandemic, Rockhill Management, which owns the building on Federal Street, agreed to switch Clover’s rent to a percentage-based model, in which Clover paid a cut of its revenue each month, rather than a traditional flat rate by square foot. And “that restaurant became, even at low volumes, profitable,” said Ayr Muir, Clover’s founder and former CEO.

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Over in the Back Bay, at 565 Boylston Street, the opposite scenario played out. Clover’s landlord there refused to negotiate lower monthly payments or a more accommodating schedule. Instead, Muir said, the Community Church of Boston maintained Clover’s $350,000 annual rent, even when sales fell flat.

In August, that Clover closed up shop, and further difficulties with leases were a major factor in Clover filing for bankruptcy earlier this month. (Neither Rockhill or the Community Church responded to requests for comment.)

Clover’s story is a microcosm of how the commercial rental market in downtown Boston operates today, approaching four years since the COVID-19 pandemic upended foot traffic and business patterns. Restaurants and retailers still struggling to meet the terms of leases they signed before COVID are approaching landlords with creative proposals to restructure their monthly rent check. The answers often determine the fate of the business.

Some building owners are in a position to offer deferments or waive rent increases. Others shrug off any proposals.

Either way, one thing is clear: Never before has the will of landlords mattered so much to small businesses, or to the vibrancy of downtown as a whole.

Absent flexibility from building owners, businesses worry that downtown will see even more vacancies and that tourists and office workers slowly returning to the neighborhood will have less reason to make the trip. Consider the worst-case scenario: Downtown falls further into post-pandemic disarray or a long-feared “doom loop.”

“Tenants are at the mercy of landlords,” Muir said. “Because if you have a landlord willing to work with you, you can come up with something that is sustainable and survive. Otherwise, we’re in trouble.”

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During the pandemic, many businesses, including Clover, reached agreements with landlords to pay rent through a a percentage-based model, rather than a flat fee.

Like many big-city downtowns, Boston is still in the midst of its recovery after COVID. Many offices and ground-floor spaces remain empty, and buildings lately have sold for sizable losses. Fears about what downtown will become were only exacerbated by the bankruptcy of the coworking giant WeWork, one of the largest office tenants in Boston.

Stijn Van Nieuwerburgh, professor of real estate at Columbia Business School, said the announcement and its impact on WeWork’s nine Greater Boston locations — around 1 million square feet in office space — could put even more downward pressure on rents.

“That’s a major negative shot to the office market that was already struggling with record-high vacancy rates,” Nieuwerburgh added.

What happens next may depend on how open landlords are to take a hit to their bottom line, said Cheryl Cronin, CEO of the Boston Public Market.

She is leading by example: The marketplace by Haymarket, which is a nonprofit, did not take rent from its vendors for the first six months of the pandemic. Then it offered new lease terms, such as percentage-based rents, to every business, significantly reducing monthly payments for many. Roughly half of the vendors in the market are still not back to conventional leases.

That leeway, Cronin added, is the only way the market can ensure the survival of independent businesses, especially when some landlords would rather keep a space vacant in hopes of luring a big-dollar tenant than cut rent for an existing one.

“A classic commercial landlord thinks it’s advantageous to have a space empty. That was never our approach,” she said. “The only way this would work for small-business owners is if we took the ride with them.”

Jennifer Sowden, owner of Jennifer Lee’s Bakery and a seven-year tenant at Boston Public Market, credits that flexibility with her ability to stay open. Lower rent gave her more wiggle room as new mutations of the virus slowed business time and time again — and still does today, with sales still below 2019 levels. (In Worcester, Sowden had to shutter her original location because the landlord required full rent from her two months after the lockdown started.)

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Jennifer Sowden, the founder-owner of Jennifer Lee’s Bakery in the Boston Public Market.

“Obviously, the market needs enough money to cover all their expenses,” Sowden said. “But we also can only afford so much based on what sales are. If they weren’t so understanding, I don’t know if I would be in business.”

But in a challenging financial market, not all landlords can afford to bend. Many are bound to air-tight mortgages and lending agreements they cannot fulfill without the agreed-upon rent from retail tenants, said Josh Bowman, an attorney who chairs the hospitality group at law firm Sherin and Lodgen in Boston.

Others would rather have an empty storefront they can later lease at full price than a tenant in place paying below-market. And they often answer to lenders with little connection to the local market.

“As an example, let’s say the lender is underwriting a revenue stream from that lease for at least five years. The landlord will sometimes say the tenant needs an accommodation. And then the lender says no,” Bowman said. “That’s the end of the story.”

It’s an experience that Boloco majority owner John Pepper knows all too well. His well-known burrito and bowls chain reached an agreement with several of its landlords to pay 10 percent sales in rent early in the pandemic, an amendment that Pepper called “a lifesaver.” But they hit a bump at the flagship location at 1080 Boylston St., where Boloco sub-leased space from Berklee College of Music.

For months, Berklee covered the difference between the 10 percent deal it had agreed to with Boloco and the larger sum the college owed its landlord. But when the lease neared its expiration date, the deal was no longer tenable for Berklee.

“Berklee did negotiate with us just because they were more human,” said Pepper. “But their landlord gave them no break.”

John Pepper, the co-founder and majority owner of fast-casual chain Boloco.

(The Berklee storefront closed in August. Two of three remaining Boloco locations will shutter by the end of the year.)

In April, Steve “Nookie” Postal of Revival Cafe + Kitchen closed his Newbury Street location, too, because of a landlord who could not budge.

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“I don’t blame him. He was very upfront about it the whole time,” Postal said. “But at the end of the day, he needed to make the mortgage. It doesn’t work for a small, independent operator.”

Yet upsides for restaurants remain, said Nancy Caswell, restaurateur and president of Mass. Restaurants United. Landlords are more amenable to compromise than they were before the pandemic, she said. And many are offering strong tenant improvement packages and construction incentives for businesses moving into new retail developments that are proving difficult to fill.

Those who can’t compromise with tenants may be struggling themselves, she added. “This is a strong shakeout for landlords who are in a good place, and those who aren’t.”

Still, for existing businesses struggling to stay where they are, challenges persist.

Bessie King of downtown lunch mainstay Villa Mexico, for example, plans to send a proposal to her landlord on Water Street to not increase the rent this coming year. If the rent goes up, she said, they may be forced to close.

“In our current scenario, we have zero profits,” King said. “We will go under.”

Villa Mexico owner Julie King in 2020.

Source: Boston Globe

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