Unfortunately, it has become all too common for corporate retail tenants to attempt to renegotiate their rent when the lease term is coming due even when the store is a strong performer AND there are options built into the lease to renew at pre-determined and agreed upon rents.
This practice has become big business for certain brokerage and consulting firms as many corporate tenants outsource the process in exchange for these firms receiving a percentage of the rent reduction given by the landlord.
At Progressive Real Estate Partners, we are frequently contacted by landlords who are subject to tenant renegotiations. In this role, I have personally witnessed some pretty good poker playing. These consultants often use tactics to try to scare the landlord into believing the tenant will leave if they don’t get a reduction and furthermore deny the landlord information that would help them make a reasonable decision (i.e. sales data).
It is particularly bothersome when the landlord is a private party that is living off the income from the property. These are likely the most vulnerable owners, and the corporate tenants know it. They figure if they make 100 requests for a rent reduction and 70 respond “no way”, but the other 30 make a concession, this is a very positive result. As more and more properties are single tenant investments, I expect that these renegotiations will be ongoing.
The reason this topic is so important to me is because I find it very disingenuous and an unproductive use of time. It reinforces my belief that just because something is legal it does not make it ethical. While it is perfectly legal for a corporate tenant to request reduced rent is it ethical to try and renegotiate a lower rent by telling a landlord that the tenant may not renew the lease when the store is doing great, and the tenant knows they will exercise their option if they can’t get a concession?
Here are 5 strategies for a landlord to use when addressing a corporate tenant’s request to reduce their rent when they have options to renew their lease.
1. Know Your Property: Most leases written in the past 20 years do not require the tenant to report sales. And although it is prudent to ask the tenant to provide sales information when they ask to renegotiate their lease, most will tell you that they are not allowed to provide the information. So how can a landlord improve their negotiating position?
Obtain Mobile Analytics Data: Most retail brokerage firms have at least one program that they are using that provides mobile analytic data which provides store visitor information as well as how the store ranks compared to its other stores in the region, state, and nationally. This data is not perfect but seeing that your store is in the upper 50% compared to the lower 50% should be a positive indication. So next time you get a cold or warm call by a broker, you might want to ask them to share this data with you about your tenant.
Talk to the Store Manager: Many store managers will talk to you and share some information that could be helpful.Here is my 4-step process for talking to store managers:
- I do some research prior to visiting the store so I know what an average location does in weekly, monthly and annual sales. You can frequently get this information from their annual reports or by searching for “average unit volume for ABC company.”
- Let’s say a certain fast-food brand has average annual sales of $2,200,000 or $42,000/week. I visit the location and ask to speak with the manager. I identify myself as a representative of the owner or manager of the building and explain that I am curious about how this particular location performs and that I understand the average location does about $40,000/week nationally and is this store above or below this amount.
- Before prying further about how the store performs (because I know generally many won’t/can’t tell me exactly how it does), I ask how many stores are in their region and/or district. If they shared that the store does above the average, I would ask “do your current sales put you in the upper half of store sales in the district?”
- I then tend to play a higher lower game. In the top 25%? In the bottom 25%? Do stores in this region tend to do much below or better than the average of the company. And so on. I am quick about this process because I don’t want to waste their time.
Although I virtually never learn the exact sales, by the time I’m done with these questions, I usually have a pretty good idea of whether the store is a strong, average, or below average location.
Talk to a Local Broker: Reach out to a local broker to find out the current market rent and if there are any truly viable locations for the tenant to relocate into.
Understand Relocation Costs: A tenant that has minor tenant improvements is more likely to relocate vs. a tenant with substantial tenant improvements. That being said, these days it seems that just about all corporate tenants want to tear everything out of a former user’s space and build it out exactly to their specifications. Therefore, what appears to be an easy space to duplicate down the street likely is not.
2. Unless You Want Something, Don’t Renegotiate: In my experience, there is virtually no differential in rent that will cause a corporate retail tenant to relocate. The one exception to this rule is if the existing store is old, in poor condition and either over or undersized.
The cost for them to relocate is frequently too great compared to the risk of whether they will do better at a new location. Almost no real estate manager and their team want to recommend that their company invest a lot of capital into a new store only to find out that the new store does not do well.
If the tenant’s decision is not a relocation issue, but a decision to keep a store in the trade area, the rent reduction you would have to offer would have to be so extreme for the tenant to not vacate the space and therefore lowering the rent will only cost you money, but will likely not be the factor that makes the tenant stay or leave.
3. Only Negotiate When Tenant Waives Their Option to Renew: Let’s say a tenant is paying $10,000/month in rent and their pre-determined option to renew is $11,000/month. And in this case, they have to notify the landlord by June 30 of this year if they are going to exercise their option that begins in January of the following year. When the tenant approaches the landlord in April asking for rent to go to $8,000/month, they know they have until June 30 to exercise their option at $11,000/month. Therefore, they have 3 months to haggle with the landlord before they encounter their worst-case scenario of the rent increasing to $11,000/month.
A skilled landlord will not enter into negotiations with the tenant until the tenant has waived their option to renew at the $11,000/month. If the tenant is willing to waive their option, then you know the tenant is serious about not renewing. In my opinion, until the tenant waives their option you are wasting your time unless you as the landlord want something.
4. Do You as the Landlord Want Something?: The request to renegotiate the rent should not be viewed with total frustration. This could be a very good opportunity to gain something in exchange for renegotiating the rent. The following are some items that could benefit the landlord:
Longer Lease Term – Most options to renew are 5 years at a time, but sometimes a tenant will agree to extend the lease for 10 years in exchange for items such as lowering the current rent, a reduction in future rent increases, and more future options to renew. A longer lease term could make the property more valuable in case there is a desire to sell or refinance. It can also be worthwhile just knowing that they renewed for 10 years and now you don’t have to worry about what will happen 5 years from now.
Removal of Exclusive or Prohibited Use Provision – One of the biggest challenges for many owners is the exclusive use or prohibited use provision that was negotiated many years ago. If you are the owner of a shopping center, you will likely know what uses have been prevented by the corporate tenant’s lease language. This is a great time to renegotiate the exclusive or prohibited use provisions. Don’t expect to have the entire clause deleted, but many times a corporate tenant will modify these provisions in exchange for economic concessions.
5. Offer a Landlord Termination Provision: Another strategy and potentially a beneficial outcome is to offer the tenant a reduced rent in exchange for the landlord having the right to terminate the lease on 90 days’ notice. This could be a win/win. It could allow the retailer to move a store from unprofitable to profitable while giving the landlord some income, co-tenancy and property security while seeking a replacement tenant. If a tenant says yes to this idea, then they certainly were not bluffing when they say the store is an underperformer.
Conclusion
As mentioned above our team at Progressive Real Estate Partners is frequently contacted when one of our landlord clients receives this type of request. We often help out by providing complimentary data, market information, and street reconnaissance to assist them with the renegotiation or non-negotiation process. And, if the property isn’t in our market, we will likely refer the client to one of our over 700 retail colleagues affiliated with Retail Brokers Network.