If you are a landlord or leasing agent, you know the drill. The news comes in a phone call, often late on a Friday. It might be from the real estate representative of one of your anchors or, worse, from a consultant hired to analyze the tenant's leases and save their clients money. The caller reminds you that your tenant is bankrupt and that the hearing at which your tenant will assume or reject your lease is Monday.
The conversation goes something like this: “I'm calling to talk about our store number 547-56 at Teetering Brink Plaza. I've just gotten word from my boss that the creditors have decided to close 36% of our stores and we have to figure out which ones to recommend for rejection at the hearing on Monday.”
“Your store,” the caller continues (as you think, ‘Oh, now it's my store’), “is below average in sales and above average in occupancy costs, and it's on the short list of stores we're considering for closure. Unless we can get some help from the landlord, they'll probably make us close it.”
Help? you think. I can only imagine what kind of help they need.
“Betty,” the rep goes on, now sounding like he wants to be on your side. “I think I can convince them to keep your store open if you'll agree to reduce the rent by 52% for the next six years, and give us a couple more five-year options on the backend of our lease. Betty, this is a win-win…”
By now you're not listening. The words “reduce rent by 52%” are echoing in your ear like a trapped insect buzzing against a window. “Betty?” the rep says, wondering if the line has been cut.
“Uh, yes,” you respond, wishing you had been able to control that high-pitched squeak that came out as you answered. “Let me see if I understand. If I give you a 52% rent reduction, you'll accept my lease?”
“Well, Betty, I didn't say we'd accept your lease, I just said we wouldn't reject your lease on Monday. We're probably not going to be able to come out of bankruptcy until sometime next year, at which time — if all goes well — we'll accept your lease!”
He ends his sentence with an up-tick in tone, as if he has just given you good news! You say you will have to think about it and talk to some folks. He gives you his home number so you can call with your answer over the weekend.
What's a landlord to do?
Of course, each case is different and the conversations are not always exactly as I've described them here: they can happen on a Thursday, too.
But the fact is that the perverse (from the landlord's perspective) nature of the bankruptcy laws means that you will not be able to recapture possession of the locations you would love to have back. And you will face situations like the one described here for other locations in your portfolio.
Here are some suggestions on how to deal with moments like these:
Stay calm and project confidence. Bankruptcy can be a game of bluff and bravado. Tremulous voices do not work here.
Question what the other side says. People do what they are paid to do, which is to make the best deal they can for their company or client. Sift through their statements to determine which are credible. Gather as much information from sources other than the tenant as possible.
Consider your alternatives. What's the downside if you say no and they really do close the store? Is Teetering Brink truly teetering? You're a better judge of the prospects for the space than the tenant is. Leasing is your business.
On the other hand, if you know Teetering Brink is headed downstream, then you need to take a hard look at working something out.
Do not assume the tenant's proposal is all or nothing. You can bet it is a starting point from which they expect you to negotiate — if you are willing to negotiate. For example, why a 52% rent reduction? A number like that suggests there is some exact science to their request. That may be the case, but you will not know until you start negotiating.
Do not be rushed into a bad decision. Just because they have a hearing on Monday does not necessarily mean that Monday is D-Day for your store. If they have not cut a deal with you, they might postpone the decision to the next hearing, usually 60 days away or more.
Don't forget about your lender. Undoubtedly, your lender has approval rights over changes to anchors' leases. That does not mean they would not approve a rent reduction if you make a logical case, but not getting their approval may prove problematic later if the loan becomes non-performing.
Ultimately, how you handle this late Friday phone call will affect the performance and value of your property, not to mention how much you are able to enjoy your weekend.
Bankruptcy is treacherous and requires that you gather reliable information to make informed decisions. Staying level-headed, trusting your instincts and your knowledge of your property, and doing a careful analysis of the alternatives is your best defense in this landlord-tenant contest.
Rob Rosenfeld is a principal with JBG Rosenfeld Retail, a shopping center development, leasing and management company based in Bethesda, Md.