Plan Now To Give Concessions To Existing Tenants Before They Ask
In the last few years, we have seen several trends for retail properties. Everything from positive outlooks, to dire feelings of ‘Are we on the brink of a retail apocalypse?’” Those thoughts are according to George Pino, CEO of Commercial Brokers International.
According to Pino, it can be quite disarming to try to determine what to believe. One thing though will remain a truth throughout all of the changes, he says. “If a landlord does not adapt to the changes we will see, then they are sure to bear the brunt of any downturn.”
One thing though will remain a truth throughout all of the changes, he says. “If a landlord does not adapt to the changes we will see, then they are sure to bear the brunt of any downturn.”
In the exclusive commentary below, Pino continues to dive into this subject. The views expressed are the author’s own.
“By failing to prepare, you are preparing to fail.” It’s one of my favorite Ben Franklin quotes, but what does it mean for a retail landlord who may be locked into long term leases?
One of the tools an experienced landlord has at their disposal is the ability to reposition the lease to either create value, or assist a tenant during hard times. During a slowdown in the economy, a tenant may approach a landlord and ask for rental concessions. Perhaps their sales no longer support the rents they are paying. Before agreeing, a landlord should take the necessary steps to determine what is best for their interests. The first step, of course, would be to determine whether or not the tenant actually needs a rental concession. Or it is a situation of the tenant is asking to increase their bottom line. A landlord should ask for not only the guaranteeing entity’s financials, but also the accounting specific to the location. If the tenant is unwilling to cooperate, then they are likely not in dire need of the concessions they are asking for.
The next step is to determine whether or not the tenant is paying market rate rents. If the tenant is already paying less than market rate rents, then it may be more prudent to offer a buy out of the lease. This allows the landlord the opportunity to find a new tenant, at the higher rate. If the tenant is paying fair market rate, then a landlord needs to carefully consider their options. For instance: What is the current market vacancy for the area? How difficult will it be to lease the property at market rate? How long will it take to rent? If you do lease the property at market rate, what concessions would you have to give a new tenant? Factor in all of the expenses you may incur, to determine whether or not it is in your best interest to offer a concession.
If you do offer a concession on the rental rate to a tenant, make sure you get something in return. When negotiating, some concessions to ask of the tenant are: Monthly or annual sales reporting, if they are not already doing it. When sales hit a certain level, then the concession will stop. The lease can be extended. Longer term leases offer security, and therefore value to the landlord. If you are going to offer a rental concession, then extend the lease accordingly. Maybe the tenant only needs short term rent abatement, or partial rent abatement. If you do go this route, up build in a structure to recapture the rental abatement near the end of the lease, or through higher annual rent increases.
By knowing all of these factors ahead of time, a landlord can have systems in place, and will know immediately what steps to take if a tenant approaches for a rental concession. Keep in mind, a tenant who truly needs a concession to stay in business, is coming to you for help. This is their business, many times their dream, and they may be emotional. Communication between all parties should defuse feelings, and instead help structure a deal which is a win-win for everyone.