Re: Commercial Lease Rent Bumps

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Posted by ray@lcorn on October 26, 2009 at 08:57:52:

In Reply to: Commercial Lease Rent Bumps posted by Dennis on October 25, 2009 at 21:35:57:

Dennis,

This is the reality in today's market. Many (but not all) retailers are struggling, and the retail trade associations are even publishing articles with tips on how to get concessions from landlords. And the trend isn't limited to smaller retailers. The most aggressive drivers for concessions are the nationals. including the dollar and discount stores.

We handle it on a case-by-case basis. Our common starting point in the conversation is to assure the tenant we are willing to work with them to get through these difficult times, and there are a number of ways we might be able to restructure the lease obligations to fit their "present sales volume" (key phrase here).

We then ask the tenant to schedule a meeting with us (in person or conference call) to discuss appropriate rent amounts and terms. When the date and time are agreed to, we then ask that prior to the meeting they provide us a copy of their most recent profit and loss statement (P&L), preferably a trailing-twelve statement (reflecting the last 12 months operations) or 2009 year-to-date and their latest two years annual statement (e.g. 2008 & 2007), to help us better understand their situation. We also ask for any information they may have about average occupancy costs for their industry.

You'll be surprised at how quickly some tenants will backpedal when asked for the P&L. They may cite confidentiality, etc., but our response is that unless we understand the scope of the problem we cannot make informed decisions regarding the appropriate amount or duration of any concessions, and frankly, their viability as a business. In my experience it is better to have empty space than one tied up in bankruptcy for which I'm paying the expenses.

Recently we had a restaurant tenant who cried the blues over an impending rent renewal with a 5% bump, citing poor sales, increased costs, etc. They came to the meeting, but without the P&L. When they left they'd signed the renewal with the full bump.

Another tenant was habitually late, and refused to pay the scheduled bump. He threatened bankruptcy, and we took him seriously, issuing a default letter immediately (allowed under our lease terms with two late payments within 12 months) and filing court action for judgment on his personal guarantee. That got his attention in a hurry. He came to the next meeting with a different attitude, P&L in hand. We adjusted the due date for rent from the 1st to the 15th because of his accounts receivables cycle, left the rent flat for this year and tacked on another year to the end of the lease, with a bump. We also required that he furnish P&L's quarterly for the next 12 months.

These examples are two extremes. The point is don't be afraid to be adamant in asking for proof of financial performance when asked for concessions. And don't be afraid of getting rid of a tenant sooner than later if the patient is likely terminal anyway.

ray


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