Coming Together
Sep 1, 2009 12:00 PM, By Elaine Misonzhnik
Landlords and tenants have had a trying year, but it is time for the two sides to adopt a joint view of success.
At the controls
Some tenants, however, aware that they may have a short window of opportunity to rework unfavorable lease terms, are driving hard bargains. Today, one of the biggest sources of conflict in landlord/tenant relations has to do with demands by some retailers to get rent reductions in the absence of any proof of distress, according to Paul Kinney, executive director with NRTA. When that happens, the big REITs and the well-positioned private players have the power to decline the requests and often do. A lease is still fundamentally a contract and while this is the worst economic downturn we've seen, you are not making a commitment for five months, says Gould. You are making a commitment for 5, 10, 15 years.
Smaller operators, especially in battered markets like Nevada and Florida, might feel pressure to grant even unreasonable requests from large tenants because there are few alternatives. At times, it also makes more financial sense to give in.
Landlords nationwide have also become more flexible in taking on temporary tenants, so-called pop-up shops that allow a retailer to sign a lease for up to six months in a new market so the company can take advantage of a particular shopping season or do a test drive before committing to a permanent store. (See related story on p. 84.) The pop-ups generally pay half the rental rate of existing tenants at the same center, plus up to 8 percent in percentage of sales rent, according to Jerry Welkis, partner with Welco Realty Inc., a New Rochelle, N.Y.-based brokerage firm and member of the national X Team retail services network.
Meanwhile, the landlords' obvious anxiety about vacancy rates has made permanent tenants bolder. For example, Finkelstein is currently in the middle of negotiating a case where a national tenant with only two years remaining on its lease gave the landlord a choice: agree to a reduction in store size to 10,000 square feet from 15,000 square feet or cut the base rental rate by 30 percent in exchange for extending the lease agreement. The retailer is claiming the store isn't profitable at its current size, but has never provided hard data to back up that assertion. The company also happens to be in the midst of reworking its store prototype into a smaller format and had talked about reducing its space three years ago. That has made Finkelstein's client think the issue has less to do with financial need than with taking advantage of opportune timing. But after adding up the costs of creating an additional storefront for the leftover space, putting in a new bathroom and working in the price of a tenant improvement allowance for a new tenant, the transaction would result in the loss of three years' worth of rent. Under normal circumstances, the landlord's answer would be a resounding no. But given today's environment, the landlord is seriously considering simply reducing the current tenant's rent in exchange for a lease extension.
Moreover, some tenants are trying to hold up lease agreements with other retailers as a ploy to get more perks, says Finkelstein. He mentions an owner of a regional shopping center who needed consent of several anchor stores to fill a dark space left by another anchor. In response, the existing tenants asked for tenant improvement allowances and other financial aid that had nothing to do with the potential changes. Nevertheless, they got their way.
Honey vs. vinegar
Both sides have to keep in mind, however, that their relationship is a long-term one. For landlords, that means letting go of the victim mentality and realizing that in many cases, retailers are simply exercising their rights under existing lease agreements, Maxcy notes. When the document was signed, five years ago, neither side might have expected that co-tenancy provisions would ever need to be put into effect. But that doesn't take away their validity.
I think landlords always think they are being taking advantage of, and I say that as someone who represents landlords, says Maxcy. We are a long way from being out of the woods and there will have to be an understanding that the concessions you make aren't going to be for forever, but it might make sense to help your tenants through a tough period.
For tenants, creating a cooperative atmosphere means accepting the fact that landlords might not be in a position to offer rent relief, at least not in the form of outright rent reductions, says Kinney. He advises retailers to abstain from starting concession negotiations from an adversarial position. That tactic tends to make landlords angry and in many cases, the ultimate decision might rest with the landlord's bank anyway.
Instead, tenants should think in terms of an exchange. Lackman, for example, recently worked with a restaurant client at a shopping center where one of the anchor stores went dark. According to the lease agreement, Lackman's client had the right to leave because of the resulting drop in shopper traffic. But the restaurant's owner felt it wasn't overly reliant on the anchor, so the restaurant offered to give up the co-tenancy clause in exchange for a temporary rent reduction. The landlord was more than happy to agree.
Cooperation also means being willing to accept adjustments in the terms of the leasing agreement in lieu of adjustments to base rent. For example, tenants can ask for a cap on CAM charges, Burke says. Or they can try to revoke an exclusivity clause that prevents them from selling an additional line of products. Or they may request financial assistance from the landlord in the form of marketing and advertising fees rather than in the form of a rent cut.
Tenants have already started developing closer working relationships with landlords when it comes to marketing initiatives many owners are reporting that whereas before tenants preferred to concentrate on their own store promotions, they are now approaching them about working as a team to drive up sales for the entire center. Some retailers, for example, are now willing to provide free goody bags for shoppers as part of center-wide charity drives, while others offer store discounts for customers who spent a large amount of money at the center. For both tenants and landlords to survive, that spirit of cooperation needs to be translated to leasing.
The whole idea is that the landlord doesn't get hit hard, but the tenant saves money as well, Burke says. So it's about being as creative as you can.
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