Beginning in late 2008 landlords began receiving an influx of requests (or demands) from tenants to negotiate some form of rent relief. These situations allow experienced asset and property managers to play a vital role in negotiating terms that focus on maximizing long term property valuation and success.
Q: What makes a retailer a good candidate for rent relief?
MB: The rationale for providing rent relief at all is to maintain the stability of the property. In its best form, it's a way to give retailers enough breathing room to survive a temporary economic downturn. The best candidates are historically strong performers that are clearly suffering from the drop in overall consumer spending.
PH: My experience with large scale tenant rent relief requests began following the 9/11 attacks in New York City. As the manager of a project located near Ground Zero the economic impact following the attack was devastating with the majority of retail tenants experiencing sales declines up to 90%. Although tenants were required to carry business interruption insurance, which made them eligible for reimbursement, the level of sales decline necessitated an immediate need to offer rent relief.
Q: What retailers are not good candidates?
MB: Generally I do not offer national tenants rent relief. It is difficult to see how short term relief at one property will keep an entire national chain afloat. Local merchants as well as franchisees may be good candidates; however, in the case of a franchise operation I first want to understand what the franchisor is doing to help their franchisee. Specifically, I want to know if royalties have been lowered or eliminated as well as what additional support in the form of marketing is being offered.
PH: From a leasing perspective, any retailer that doesn't significantly add to the appeal of the center's merchandising mix and whose space can be re-leased quickly is not a great candidate. Unfortunately, in these times, the phrase "quick leasing" is an oxymoron. There are also some tenants that are too far gone. Many of these candidates were barely hanging on before the downturn and no amount of rent relief will likely change their circumstances now or in the future.
Q: What's the first step in the negotiation?
MB: It's really important to first understand the numbers. How much have sales fallen off? Have total occupancy costs as a percentage of sales gone above a certain level yet? What is the personal financial situation of the owner? When times are especially good tenants don't volunteer to pay more rent, so when times are bad there needs to be a compelling reason for landlords to lower rent. If an owner can personally fund the temporary relief of the business, we need to understand that.
PH: Our rent relief process also includes gathering complete profit and loss information. There's often a situation where payroll is too high or the owners are taking too much out of the business. We also need to know what the owner has already done to try to keep sales up or what is their plan to invest the cost savings they are requesting?
It's also important to walk the store. Often this exercise is where you find underlying merchandising or inventory management problems that can't be fixed by rent relief alone. We don't want to simply be an enabler of bad operating habits.
Q: What are primary structures for rent relief?
PH: There are many options for structuring rent relief; however, my preferred approach is to offer short term assistance that will not penalize the landlord in the event a tenant posts strong sales. Accordingly, the structure is set up where the tenant will pay the landlord the greater of two scenarios: (A) a predetermined percent of sales; or (B) an amount equal to dividing sales for a current month during the relief period by the same month prior year multiplied by tenant's regular rent and extra charges. To further protect the landlord and tenant a predefined floor (minimum rent regardless of sales) and ceiling (normal rent and extra charges) are established in the rent relief amendment.
MB: The ideal circumstance is a temporary reduction in rent per square foot that lasts 6–9 months. At the end of the period, the retailer will either repay the discounted amount in one payment or pay over time. Under this situation, funds are made available for the retailer to keep operations going while the landlord maintains in-place net operating income for the property. Moving to all percentage rent deals are often complicated by reporting issues and can be a major hit to a property's valuation.
Q: What alternative relief can you provide to retailers?
MB: Identifying ways to help retailers without providing rent relief is where a good management team can shine. One commitment that management can make is in the area of individualized marketing support. A $5,000 investment in a marketing program can sometimes make a real difference and boosts sales to a level where relief is unnecessary.
PH: Bringing in outside consultants who have expertise in various retail categories can also add tremendous value. In many cases, local and regional operators have system inefficiencies that experts can fine tune and adjust. In the long run, addressing these underlying financial leaks is far more valuable to a retailer than temporary rent relief.
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