Commercial Tenants Rent-Cut Pressure

by PJ Grube | September 11th, 2010

Rents are high and gross sales are severely impacted by the recession and declining consumer spending. The ability of businesses to prosper is partly due to the costs of occupying their real estate. Tenants in trouble, may achieve rent reductions in one form or another. However, it is doubtful that you will get it if you do not ask for it.

Gone Dark

Retail chain stores have already started to put the pressure on landlords. Chain stores tend to be the ‘anchor tenants’ that attract consumers to a shopping area. However, they are not the only tenants suffering in this down turn.

It is becoming a tenant’s rental market. Write-downs and declining market values are re-setting the entire market place. If a business cannot stay alive with the current rent structure, something has to give. Often small businesses have already cut expenses where they can; rent cuts are the last resort. Some landlords want desperately to hold onto credit-worthy tenants, it only makes sense.

One would think, landlords are willing to negotiate to still receive some rent rather than have a vacate store. If a commercial zone has multiple anchor tenants going dark, then there is a problem; landlords will need to address it. Controlling and/or reducing occupancy costs allow a business to fight another day. Landlords need to address their vendor costs as well.

Shuttered

Landlords should consider their tenants’ lease renegotiation requests, especially if keeping the tenant is in the landlord’s long-term best interest. If manageable solutions are not achieved, landlords face the real prospect of unprecedented amounts of commercial space coming available.

Many landlords are too highly leveraged to accommodate these requests. In these cases, the landlords have their own problem to face. Some will take the position, ‘If a lease is signed, it is signed. Everyone lives (or dies) with that.’ However, leverage is the problem in this recession, there will be some losers.

If the landlord believes a tenants request, is simply taking advantage of the current state of the economy or just staving off the inevitable, the tenant will get nowhere. Tenants need to be transparent. They need to present their situation truthfully in a credible way.

In a request to renegotiate a tenants should have:

A Generalized View Rent Trends

  • Multiple years of sales data
  • Income statements
  • Credit application
  • Most important a recovery plan

There are a number of ways to control and/or reduce occupancy costs:

  • reduce square footage
  • not overpaying on the lease
  • put together a very structured recovery program
  • pay reduced rent in order to avoid a vacating
  • reduce rent by deferring it, not forgiving it
  • short-term, six months or one year renewals. Landlords do not want longer term reductions when not optimal for the space

Tenants will have the upper hand in negotiations on the short term, even those tenants not in extreme financial distress. Realistically, relationships should be strengthened in these troubled times, because, the good times will come again. Pulling together as a community will save us for the long term.

Re-Post © 2010 Fresh Ground News™

© February 12th, 2009 Fresh Ground News™

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