In the past year, many retailers have improved their financial standing or disappeared from the landscape altogether. Instead, landlords now face a new trend in negotiations; healthy tenants are asking for permanent changes to their leases in exchange for signing longer contracts or for giving up restrictive clauses.
It’s a different dynamic from last year. Then, most requests for changes came from retailers on the edge of financial ruin. Such tenants had little to offer landlords and instead needed relief in bids to ward off store closures, bankruptcies and liquidations, says Rick Burke, founder of Lease Administration Solutions, a Marblehead, Mass.-based lease administration and auditing firm, and founding member of the National Retail Tenants Association.
Those sorts of requests have subsided. For instance, J. Scott Fawcett, president of Marinita Development Co., a Newport Beach, Calif.-based development firm with a portfolio of about 15 grocery-anchored shopping centers, notes that he has received just one rent relief request in the past few months, from a dry cleaning business he believes is not being run properly. By contrast, at this time last year, Marinita received rent relief requests at least once a week and granted temporarily concessions in about 50 percent of the cases. Executives from retail REITs have also noted that they’ve seen a dramatic cutback in tenants asking for rent reductions and deferments.
Today, the requests that do come are much more likely to be from healthy national players who see an opportunity to work out a mutually beneficial deal with the center’s owner.
“The stage of it being a major crisis is slowly dissipating,” Burke notes. “You don’t have that ‘We are going to have rent reductions or we are going out of business’ mentality anymore. There is more optimism in the market, so you can’t cry poverty as much. You need to come to the table with some strategies, some leverage.”
Among the best options tenants can offer landlords right now is a lease extension, according to Michael Jackowitz, principal and New York director with Reduce Your Rent LLC, a nationwide rent reduction consultancy. With vacancy rates at record highs and many owners facing upcoming mortgage maturities, ensuring a healthy tenant is locked in for a few more years makes refinancing more viable, Jackowitz notes. But even those landlords who don’t have loans coming due know that a longer lease might be a fair exchange for more affordable lease terms, givens that rents continue to trend down.
Jackowitz brings up a client Reduce Your Rent recently represented in Long Island City, N.Y. The retailer had a lease for a warehouse/showroom space that was scheduled to expire in February of 2014. After the tenant agreed to enter into a new lease, with an expiration date in 2019, the landlord agreed to a 20 percent reduction in rent. According to Jackowitz, “everyone was happy. The landlord has obviously taken a hit, but locking this tenant in stabilized the asset.”
Some tenants might also be willing to give up co-tenancy clauses or offer their landlords more personal or corporate guarantees if they’d like to get a reduction in their long-term occupancy costs. The hitch, according to Jackowitz, is that these kinds of arrangements are viable only in those cases where the tenant signed the original lease prior to September of 2008, when the real estate market began its freefall.
“I don’t think any new leases will have a basis for restructuring because those were done on a completely different set of assumptions,” he says.