The tenant requested that the landlord reduce the rent. Now what? Now is the time to complete a due diligence. 

Every landlord should have a tenant strategy already in place. This strategy looks at each tenant, identifies the ‘keepers’ – those tenants that must be kept for merchandising and other reasons such as co-tenancy, each tenant’s GROC (Gross Rent Occupancy Cost) or RTS (Rent to Sales) ratio, budgeted rent mark-downs [yes, just as a retailer budgets mark-downs landlords should know what their maximum allowable pain will be in advance], legal requirements, loan covenants, and potential releasing prospects. An owner may elect to add other things to the strategy such as pre defined clawbacks, by tenant, whenever opportunities arise, but the basics should cover the items I’ve listed. We can help you craft this strategy for your property.

Therefore, the first step is to review the tenant strategy and see where the request fits. When a retail tenant asks me for any form of rent relief, I immediately ask them the following questions:  

What specifically caused the request? Citing the economy is often too broad an answer. It could be that their credit line was reduced, their latest stock wasn’t shipped because the supplier unexpectedly went under, etc. You need to know.

How is it impacting their business? Is it short term or long term? What else is the tenant doing to overcome the situation? Very specific answers are needed here.

Who else is supporting them? Who else is reducing their costs? Get it in writing as the landlord can’t be the only supplier feeling the pain of reducing their price. If no-one else is assisting them red flags go up for me. If the most anyone is willing to help them is, say, a 10% reduction, then that sets my initial maximum relief too, subject to my overall strategy and the other information I get from the tenant.

How will the tenant benefit from the rent relief? How will they use the resulting funds to change their situation? There has to be a plan to recover from the situation. Will they use the money to buy stock, increase marketing, etc.

Finally, I want to know exactly what they would like the landlord to do? Essentially, I want a business plan that goes through the rent relief period.

I also want third party prepared financials if it is a small firm. I look at these and restate them removing non-cash items, luxury items such as travel and car allowances, pay to relatives that don’t work the store, etc. and inter-personal loans. This part of the exercise reveals if the business can even be saved. It may be of no use to reduce rent on a business that is doomed anyway.

If the tenant is not prepared to provide any of these answers or financial information, it is unlikely I will recommend a relief program to the landlord.

Part of the due diligence process is determining how you are going to structure the deal. These options include an abatement or deferment.

Either one of those is the basic financial consideration of the agreement; but I feel that any time the contract is opened there is an opportunity to renegotiate other aspects of the deal. Any time a tenant wants to re-trade the original agreement there is a change in the risk profile that the landlord considered in the original negotiation. This is particularly true when a tenant seeks rent relief, because the landlord’s risk always increases in these cases. Part of the deal structure, therefore, is to mitigate as much of the risk increase as possible in each unique circumstance. Please recognize though that not all of these will be achievable in every situation, so think of this as an a la carte menu of possibilities rather than must-haves for every deal.

Get a conditional surrender either ongoing for the balance of term or during the relief period. This allows the landlord to obtain control of the premises, on reasonable notice, if the landlord finds a replacement tenant or otherwise needs the space. Sometimes a tenant will ask that if the landlord elects to provide notice to terminate the lease the tenant can stop the process by repaying the amount of abatement.

Immediate termination and repayment of relief upon a material default during the relief and repayment periods or upon assignment, subletting etc.

Get additional security, either in the form of personal indemnification, promissory note for the relieved rent, third party co-covenant, etc.

Recapture clauses that give the landlord more flexibility. These include co-tenancy clauses, exclusivity clauses, options, first rights, etc. Clawing back each of these clauses allows the landlord to mitigate their risk adjunctively to the specific tenant in question.

Add repayment of incentives such as allowances, free rent, etc. to a level that is at least equal to the new net effective rent resulting from the lowered face rate.

Reduce the amount of the requested relief by giving the tenant temporary merchandising flexibility. If the tenant can find and add a non-conflicting adjunctive use to their existing use to boost sales, consider that part of the process and relief package.

Set artificial break points for percentage rent during any relief repayment period so the higher basic rent doesn’t take a percent rent breakpoint higher too, creating a double jeopardy situation for the landlord.

Increase the percentage rent factor (or add percentage rent) to accelerate relief repayment in addition to (not as a replacement of) a defined repayment program. This mitigates risk during a repayment period.

These are just a few of the many options available to the landlord to consider when the tenant asks for a concession.

pmorris@Beyond-The-Building.com

www.Beyond-The-Building.com

Copyright 2009 Peter D. Morris SCSM, SCMD, CLS