Landlords are more receptive to rent restructuring when tenants give good reasons.
With so many retailers struggling with low sales these days, asking for a helping hand from the landlord is becoming more common. And as vacancy rates rise and rents for shopping center space fall, more landlords seem willing to consider granting a reprieve. Real estate andrestructuring firm Huntley, Mullaney, Spargo, & Sullivan works to help retailers restructure their leases to secure rent reductions and other concessions. Sullivan tells us about the challenges facing tenants and how landlords are responding to their requests for help.
Retail Traffic: What are the challenges in restructuring leases in today's market?
Sullivan: The one challenge is there are lots of folks out there who are looking for rent reductions. The landlords are challenged with determining which requests are valid.
RT: Have you found in the past year that landlords have become more willing to renegotiate leases and offer more favorable lease terms or less willing to do so?
Sullivan: It depends on an individual, case by case situation. When there's truly a need landlords are receptive and willing to help.
RT: What advice can you give to a retailer saddled with underperforming locations who wants to improve profitability?
Sullivan: It's critical to have a program that's designed where the landlord, if they say “yes,” there's a reason to say yes. It's a question of laying out the alternatives of, “We continue as is or, if we continue with the rent restructure, here's what's going to happen.” The first alternative isn't that great.
RT: How long does it take a retailer to exit a lease at an underperforming location with an unwilling landlord?
Sullivan: It depends on the retailer. If the financial circumstances are such that the retailer is struggling or in a true credit or bankruptcy crisis, landlords get that process moving a little bit quicker. [That's also true] for good retailers in good locations. But a healthy retailer in a poor location where there's really not a lot of prospects for re-leasing — those tend to be more difficult situations and take more time.
RT: You sometimes work with retailers to negotiate landlord contributions to remodeling projects and other improvements. How amenable are landlords to doing this?
Sullivan: That's one of the areas [to which] landlords really respond. They see [a return] for theiractually occurring. They're generally willing to take a strong look at that and give it fair consideration. Where you're just doing a rent restructure and it's just status quo, sometimes landlords don't see the benefit in that.
RT: How have lenders complicated the picture?
Sullivan: With the environment that many of the landlords are in, lenders are involved in the decision in restructuring leases. It sometimes will slow [the process] down or take it off track… The key to the lender…is really having the facts lined up, the financials pulled together and the rationale for the rent restructure outlined and clear.
RT: So would you suggest a retailer pull together something quantifiable to show a landlord that an improvement inside a store or a restaurant will generate higher sales?
Sullivan: Definitely. Landlords are very astute financially. They like to understand the economics of a situation. A haphazard approach to this will bear very little fruit.