(Each month, Site Optimizer discusses industry trends—most importantly, leasing issues—with experts in the retail real estate industry in our Tenant's Perspective interviews.)
With so many retailers struggling with low sales due to a recession now in its second year, asking for a helping hand from the landlord is becoming more and more common. And as vacancy rates rise and rents for shopping center space fall, more and more landlords seem willing to consider granting a reprieve.
Bill Sullivan is partner at the real estate and financial restructuring firm Huntley, Mullaney, Spargo & Sullivan LLC. The company works to help retailers restructure their leases to secure rent reductions and other concessions from landlords. Sullivan tells us more about the challenges facing tenants and how landlords are responding to their requests for help.
Site Optimizer: What are the challenges in restructuring leases in this economic environment?
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.
SO: Have you found that in the past year 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 ... I think landlords are receptive and willing to help.
SO: What advice can you give to a retailer saddled with underperforming locations who wants to improve profitability?
Sullivan: I would say it's critical to really 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.
SO: For a retailer looking to exit a lease for one underperforming location with an unwilling landlord, how long can that process take?
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 releasing--those tend to be more difficult situations and take more time.
SO: I know you sometimes work with retailers to negotiate landlord contributions to remodeling projects and other improvements. How amenable are landlords to doing this, particularly in this economic climate?
Sullivan: That's one of the areas where landlords really respond. They see [a return] for their investment actually 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.
SO: How have lenders complicated the picture?
Sullivan: There was a day where landlords would be able to just unilaterally make that decision.... Today, just with the environment that many of the landlords are in, lenders are involved in the decision in restructuring leases. It sometimes will slow it down or take it off track…. The key to the lender…is really having the facts lined up, having the financials pulled together and having the rationale for the rent restructure outlined and clear.
SO: 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. I would tell you a haphazard approach to this will bear very little fruit.
Check out some of our previous interviews in our "Tenant's Perspective" series:
- February: Larry Sidoti, vice president of development with long-time mall stalwart Mrs. Fields Original Cookies Inc.
- March: Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp.
- April: Chuck Fallon, the president for North America at Burger King Corp.
- May: Nick Koros, senior vice president of development with Quiznos.
- June: Dan Porter, senior vice president of real estate and new store development at 7-Eleven Inc.