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You may have heard about tenants contacting landlords to ask for rent reductions and concessions to help them stay in business.  Recently, two clients called us when they received a letter from their tenant’s real estate broker giving notice that they were seeking to renegotiate their leases because of a decline in sales.  50 letters were sent, and they warned that if they didn’t agree to lower the rent, they wouldn’t renew and would close the operations.

This was a big problem.  Our clients depend on these assets and were upset that they could lose the tenant and consequently, their income stream.  To boot, they were angry because they said they hadn’t gone to their tenant in good times when sales were up.

What to do?

Ideally, the owners wanted to keep the tenant for as long as possible to maintain their cash flow.  The problem was, the tenant was looking for an 18% reduction in rent and was only willing to sign for 3 additional years.  Not a great deal.  In fact, they even considered telling the tenant to vacate and then lease the properties to other users because they were so insulted by their initial offer, but after seeing our analysis of the financial impact of actually locating a new tenant, they decided to respond to the tenant’s offer.

The trick, however, was figuring out what was happening with those 50 owners that received letters.

We called all of the other owners to see whether they received a letter as well as assemble a group of owners to share information of the tenant and their leases.  (By the way, most corporate tenants–Hewlett-Packard among many–keep a negotiation database of all leases they sign so they know which landlords grant certain concessions, where rents should be, as well as to prevent themselves from granting concessions that could haunt them later.  We sought to do the same on the landlord side.)

What we learned was that 9 letters had been received.  Further, based on comparable data collected, our clients were among the most expensive locations for this tenant, which seemed to be the real reason why the tenant had approached them.

The tenant wanted immediate cash flow benefits and our clients wanted commitment without much disruption to their income.  We advised they ask the tenant to sign for 15 more years in all locations and in exchange grant them a rent concession over the term of approximately 7%.  The tenant responded and said the longest lease they would entertain would be for 10 years.  We accepted the length and went to work on the rate.

After several back and forth discussions and financial profiling of the lease proposals, we settled the tenant into new, 10 year leases with 9% rent concessions over the entire term.  To boot, their rent was staggered to allow our clients the ability to answer the tenant’s short-term need for rent relief while still maintaining the cash flow they depend on.

In this case, seeing through the market to other owners and understanding the implications of decisions over rent concessions and term requests paid off for everyone involved.  The tenant kept their operations open.

The owners maintained their cash flow and secured new lease commitments in a tough market.

Need help renegotiating with your tenants? If so, email me at Jeremy@Mansardcre.com with the words “My tenants want new deals” in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will contact you to schedule a time for you to invite me to your office for a free consultation.  If there’s a fit, you may retain us to work on your behalf to stabilize and renew your tenant relationships.  If there isn’t a fit, we’ll tell you we cannot help and will refer you to another firm that may be a better match.

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About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.