The practice of renegotiating rent is older than selling Thanksgiving turkeys as loss leaders, but there is a relatively new, ugly wrinkle to the game.
By John E. McNellis, Principal at McNellis Partners, for The Registry:
The International Council of Shopping Centers, far better known as the ICSC, gathers this weekend for its annual meeting in Las Vegas. Retail’s leading trade organization, the ICSC counts as members the tenants, developers, contractors and brokers who have built almost every shopping center in the country. Tens of thousands of them will be attending Vegas, swapping hopes, plans, dreams and lies, congratulating one another just for showing up. It’s fair to predict the mood in Vegas will be considerably more ebullient than that back at the players’ home offices, especially those of the owners of America’s retail.
A week ago, Business Insider reported that retailers have announced closures for 6,400 stores thus far this year, already more than in all of 2018. Against this loss, 2,264 new stores are slated to open, the majority of which — Dollar Tree, Dollar General and Family Dollar—sell the cheapest of all merchandise.
Despite these dreary facts, retail is actually in reasonably good shape (good enough for us to be constantly on the look-out for acquisitions), but any developer who tells you she isn’t having issues with at least some of her tenants is spinning facts faster than Disney’s teacup ride. In truth, a week rarely goes by without at least one tenant calling us, asking for a rent reduction. Some of these requests are legitimate — the tenant is truly struggling—but some, perhaps many, spring from profitable retailers’ rapacity, companies seeking to take advantage of weak landlords in the climate of fear engendered by the near-constant retail Armageddon headlines.
The temptation to say b*** me to this importuning is nearly irresistible, but — here’s the public service announcement — resist it.
With little more than personal experience and anecdotal evidence as support, I would suggest that tenants are bluffing at least half the time when they threaten a store closure if their demands are not met. But that means that sometimes they aren’t. In this context, you might do well to recall that “Go ahead and shoot” are purportedly the last words most often uttered just before dying.
Rather than suggest a sex act or slam the phone down, the prudent owner should listen, remain calm, and then ask the retailer for evidence to back up its poverty claims. Specifically, you should request not only the store’s gross sales for the preceding five years, but a store-specific profit and loss statement (“P&L”). The retailer’s response will be that it never divulges P&L’s. Your rejoinder should be that you never grant hardship requests without proof of hardship.
With minimal tussling, they will give you the store’s sales history and, with a little effort, you should be able to determine on your own whether its sales warrant a rent break. One way to do this is to call a competing retailer, someone who understands the tenant’s business, and ask him what he thinks of the poverty plea.
If, at the end of the day, you satisfy yourself that your tenant is still making money, just say no. If you think its situation warrants a reduction, ask yourself what your Plan B would be if the tenant bolted. If you have no obvious substitute tenant, make the deal. As my brother used to say about a different but analogous situation, “When there’s only one train in the station, you better get on it.”
While the practice of renegotiating rent is older than selling Thanksgiving turkeys as loss leaders, there is a relatively new, ugly wrinkle to the game. A commission-based cottage industry has sprung up in these challenging times to help retailers “rationalize rent.” Companies such as A&G Realty Partners and Hilco Real Estate have a simple, yet distinctly unpleasant business model: they get paid only when and if they succeed in banging a rent reduction out of a landlord, getting a commission (ranging from about 5% to 12%) of the rent saved.
Think about this: A call from the retailer itself means that you’re dealing with a salaried employee in the real estate department, someone who presumably wants to continue doing business with you, someone who may even value your relationship with the company, someone whose livelihood is not dependent on screwing you out of as much rent as possible.
Dealing with one of these boiler room operations — imagine the sales floor in Glengarry Glen Ross — is different. They will threaten you with store closures, misrepresent sales and profitability, cajole, pester and badger you until you cave in. If you get such a call, hang up, again without suggesting a sex act, and call the retailer’s real estate department and insist that the only way you will consider any sort of lease restructuring is in conversations directly with the company itself.
Enjoy the ICSC. By John E. McNellis, for The Registry.
A “bust out” is a fraud used in organized crime, wherein a business’s assets and lines of credit are exploited and exhausted to the point of bankruptcy. Read… Retail’s Existential Threat? Private Equity Firms
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I think retail is the most mismanaged industry in America and this article just confirmed my suspicion. Any commercial landlord that doesn’t know if their tenants are making money, is simply not paying attention. It doesn’t take a genius to sit in a parking lot and count bodies coming and going. Go in and chat with the staff. Do exit interviews of customers, offer an incentive for information. Check the dumpsters.
Any experienced landlord knows if the tenants are making money because they are continuously keeping track. They don’t have to ask for proof.
The body of your comment excoriates the landlords, not “retail” itself. (The topic sentence may be absolutely correct, but nothing in your comment backs that up.)
Petunia just focused on a particular part of the industry. Aren’t the owners just giant funds these days anyway? They aren’t sitting in parking lots, bothering customers.
You have a point with Dollar Tree. Many sit close to a Walmart and actually thrive. But with good reason, Dollar Tree must have a genius buying staff, you can pick up mostly what you need before entering Walmart for the remainder.
Walmart has cheaper large portions? Check the price labels for cost per oz, etc. You save almost nothing at Walmart for buying large package items over small.
As for leases at shopping centers, who in their right mind would want to knock heads with Amazon trying to pay prime location unreal rent these days?
It seems to me that Walmart is always very busy the first week of the month and as the month goes on and people run out of money, they shift their buying to the dollar stores.
Standard Welfare/Food Stamps buying pattern. Food Stamps come in, we’re buying that 4-lb box of Tyson chicken thighs and feasting on chicken. As the month went on, money got tighter, and around the end of the month I was out weeding yards or whatever work I could get, to feed myself and my two younger sisters.
Many companies have shifted to making paychecks every 2 weeks, instead of every month.
Sounds like that sort of change could be helpful to folks on government benefits?
Weekly pay might even be better.
Interesting to see an article from the property owner’s POV. However, I have a hard time sympathizing with the view that profitable tenants shouldn’t seek to re-negotiate leases downward in down markets, when it seems that property owners also do whatever most suits them – hiking rates whenever the market will bear and leases are up.
I’m not even sure I would mind if the entire construction business and leasing were nationalized as in Singapore, as long as it eliminated marketing, gimmicks, sometimes-opaque pricing, and established a single streamlined access portal for searching, buying, selling, and leasing property.
Unfortunately that’s unlikely; leases have built-in financing so every lease is simultaneously an extension of credit — you sign a 10 year lease but don’t pay 10 years’ rent up front. So there is a very labor intensive hands-on tenant credit evaluation involved.
I am a 40 years plus commercial Credit Manager now retired. Debt Wazoo has it right, as does Wolf in the next post. The author is correct, prove it with your balance sheet, and detailed P&L.
If they are seriously in trouble, they’ll share whatever you need to grant some relief. If they use the confidential excuse, there is always a non disclosure agreement. Doesn’t take much conversation to weed out who is serious and who is trying to chisel.
Da Credit Guy.
“… the view that profitable tenants shouldn’t seek to re-negotiate leases downward in down markets,”
I think you may have misunderstood the nuance of what he said. My reading is that the tenant may well try to renegotiate and that’s fine — and why shouldn’t they? — but that the property owners should only give in under certain circumstances.
My response was more about the author seeming miffed about it, as if profitable tenants re-negotiating is wrong or weasly:
“The temptation to say b*** me to this importuning is nearly irresistible”
“b*** me” Right That’s what the oligarchy says to the “little people”.
To people who actually work for a living
Anyone who has dealt with any commercial real estate professional knows that they are vicious, blood thirst, and very frequently criminal. I do not say this figuratively. Lawsuits, lying, and marginal theft are normal tools of the trade. Listing to this property owner act wronged because a tenant wants to profit maximize is unbearable. This is the first article I have seen here in years that has pissed me off.
Retail & an ageing demographic profile are opposing forces. For any retiree, a retail store doesn’t hold any appeal. They are only concerned with groceries,
essential household items, pharmaceuticals – that’s about it!
For the millennials, the Smartphone is their window to the retail world. Bought up using their 2 thumbs & dexterous fingers, they prefer using their hands rather than their feet. So the online retailing phenomenon continues at the expense of bricks ‘n mortars. Plus some millennials have student loans which crimped their consumption.
I have a cynical view of the existing retail trade in brick ‘n mortars – those who exist are probably laundring monies for the cartels. Or else how do they exist in a competitive retail environment where sales barely cover the staff costs, let alone store rentals?
The sturm and drang of the retail property owners, and the fear that “bricks and mortar” is doomed, is exaggeration. What’s more likely is that the rents property owners charge are in long-term decline. If it weren’t for the cost of rent, the b & m retailers would do fine against online sellers. It’s the costly rents they pay that are driving the whole thing under. And, in spite of the colorful writing skills of the author, I’m not a believer that property owners somehow have the moral high-ground in the tussle for rents. When retailers were doing well, I can only imagine that the prop. owners were turning the rent screws as tightly as they could.
Valuable insights. Thanks!
With all of this in mind, I have to wonder about the two abandoned strip malls near me. They are both surrounded by $1M homes. The first was abandoned during the GFC. The second started emptying in 2009, with retailers leaving one-by-one until Pei Wei vacated in 2014, leaving them empty. (Note this Pei Wei had a much higher level of activity than I have seen at any other Pei Wei. There is no other Pei Wei or PF Chang’s within 10 miles to pick up the demand.)
How do these (different) property managers justify the complete lack of rent for 5 to 10 years? This has been a mystery to me, but maybe it makes sense somehow.
> How do these (different) property managers justify the complete lack of rent for 5 to 10 years?
Soaring land values.
They’re still delivering ROI so the investors don’t care about the rest.
How do these (different) property managers justify the complete lack of rent for 5 to 10 years?
Because, thanks to ZIRP, it doesn’t cost anything to hold on to an empty property. In Denmark one can still get a 30 year mortgage at 1% fixed interest. So why would anyone take the loss on write down to market value and forced sale?
Same applies with the rent, nobody will adjust the rent to what is needed to fill the space because then the projected revenue growth from rentals will be impeded.
If the property manager is being your standard naughty boy, they will simply write up the value of the property every year and borrow against the nominal value, that is where the “income” comes from.
Eventually, it will be someones problem, but, not it will not be a problem for the people who are riding the carousel now.
And once the profitable losses have all been capitalized there is a great opportunity for electricians skilled in the art of connecting bare wires with the correct air gap—-.
The general public is underestimating/overlooking/ignorant of the amount of their retirement savings that are supporting all this dead real estate. ROI on land values that support buildings that don’t produce income are a big fat lie/fraud.
It’s amazing to me the degree to which “investors” have been brainwashed by all the financial engineering. BTW, everybody reading this comment has increased their wealth by: insert number here.
Give one rent reduction to a tenant and you can bet the word gets out and others will ask for the same deal. I know I would, and if I didn’t get it I would most likely go somewhere else where they would match.
This is similar to why I quit shopping at Lordco for auto parts. They have different rates for different customers. Sure, they all do, but Lordco is blatant about it so much so I started to register every purchase to the account of a local sawmill, but then just paid for it once I got the rate. Now, I just go to a different store where the rate variations are behind the computer screen. :-)
VVS (plumbing) articles, up to an 80% trade discount is the norm! Same with electrical supplies. We got real cartels here in building materials.
Those silly DIY’ers are gouged so hard here in Scandinavia that they save maybe 10% compared to having the whole job done by professionals, probably not even that because the common DYI person will blow their winnings on the many extra trips to fetch those trivial bits they forgot the first time.
If your particular perversion is DIY, and you have a big job to do, you really should register a personal company and set up credit facilities with some of the “builders-outlets”, that way you will get some of the “trade-only” rebates – at least until they sniff out that you are just working for yourself. They go by volume so to get the best deals you should renovate 2 houses before your own :)
“tenants, developers, contractors and brokers who have built almost every shopping center in the country”
As someone who has actually built several shopping centers, I can say that none of that list of people have every built a single shopping center. Oh, you might see a developer or a contractor show up at the site and make a few loud cell-phone calls, but it is surveyors, engineers, carpenters, heavy-equipment operators, plumbers, roofers, concrete layers, masons and the like who actually build shopping centers. I’d love to see a developer or a head of a contracting company get their shiny shoes dirty on a construction site someday, but one thing that’s for certain is that by themselves they could never build a decent doghouse.
“Build” has common and broad meanings in English that exceed by far the narrow meaning of actually putting tilt-up concrete walls together. “I built a company” doesn’t mean that I used bricks and steel and lumber to build it.
I think Bill’s comment is spot-on.
Finance types frequently take overmuch credit for doing very little genuine hands-on work, inflating their contribution with grandiose language.
“Build” is high on my personal list of words whose proper meaning has been destroyed by marketing propaganda types. Another one is “Capital”, which used to mean surplus-of-production-over-consumption but now merely means “available credit”.
And Wolf, your proposed counter-example of “built a company” – as if a company is a physical building – is uncharacteristically off. A store maybe. But a company is quite literally a group of people not a place. Someone who builds a company organizes people to achieve a business goal and build in that sort of org-chart context works just fine.
The people who got their hands dirty built the building. The guy who paid for it contracted the building – he didn’t build it.
> One way to do this is to call a competing retailer
Your tenant is going to insist that you sign an NDA in order to get the P&L’s. This is actually a reasonable request for them to make. For you to say “gimme P&L’s no NDA” is no different from saying “go ahead and shoot”.
I find this idea that a landlord can force a retail tenant to divulge their detailed financials distasteful. I think it should be illegal to demand it, ever.
Or, if they demand it, the tenant should have the equal right to get the detailed financials (all rents, leases, gross income, P&L, everything) from the landlord, both at the detailed level of the building or site, and of the corporation as a whole.
That seems fair to me.
But wait…. A lease is a contract. If the tenant wants the landlord to modify the contract, such as a reduction in rent, the landlord has all the right in the world to say, forget it. And many landlords do.
A tenant cannot unilaterally modify the lease. So the tenant has the option of continuing with the lease according to the lease terms or defaulting on the lease.
If the tenant defaults on the lease, the landlord can evict the tenant and in addition can use a slew of legal remedies to collect from the tenant even after eviction.
The tenant then can seek protection via a bankruptcy filing from those collection efforts by the landlord.
Often enough, bankruptcy filings are used to renegotiate or cancel leases. But in a bankruptcy filing, ALL detailed financial data of the tenant are put on the table.
So if a tenant is in trouble and needs help from the landlord, it would be helpful if the tenant cooperates with the landlord and supports the request for a rent reduction with some financial data.
The landlord cannot force the tenant to divulge this data, but the tenant cannot force the landlord to modify the lease. So if both parties are serious about keeping the tenant in the location, they’re better off cooperating.
My impression, correct me if I am wrong, is that it is common for commercial/retail landlords to demand detailed tenant financials not only when tenants request a lease re-negotiation (rent reduction), but fairly routinely as part of periodic lease renewals or even as an ongoing requirement of tenancy. If a tenant pleads a special hardship, it may be warranted to confirm by requesting financials, but otherwise I am not so sure.
I think such demands create an asymmetrical market condition where the landlord has much more power and information than the tenant. I don’t think it should be allowed. A credit check, okay. Detailed financials, I cannot get on board with that in general. People may disagree.
Most commercial leases have a provision that allows the landlord to get the tenant’s financial statements – some annually, some just need to request them. And this is part of a contract agreed upon by both sides. It is also much more common for a tenant to have financial problems that can lead to severe consequences for the landlord than for the reverse to be true. While it may be a populist point of view that the evil landlord shouldn’t be able to get financial information from the virtuous tenant it is also ignorant of the true dynamics of commercial real estate ownership and operation of a business.
You are living in a dream world. Renters cheating you out of exorbitant rent? Go ahead and demand more. You will have papered over storefronts as far as the eye can see.
Was there one landlord, or one commercial tenant in the comments section so far?
I couldn’t tell.
Yeah, that was me. Tenant if you could not tell.
Usually Wolf is pretty good, but this article is off the wall. Everyone tries to hang on but by the time it is lost you are looking to move out your equipment in the middle of the night before the landlord padlocks the place.
After reading “China RX by Rosemary Gibson I have learned China’s game plan. They undercut with prices and drive American manufacturers out of business, they when they have a monopoly control of a product (only worldwide producer) they jack prices hundreds of percents.
They also then disrespect all laws written by any government. They are beating us by dividing the special interests further apart. While we think short term, they are planning the long term to destroy us economically when they have full control of our drugs, medical devices as CT scanners, and the rest of our healthcare costs.
Big Pharma wants to claim they need high drug prices when all along since about 2000 counterfeit drugs could be in our country simply because the FDA cannot inspect their drug manufacturing facilities in China.
my landlord keeps raising the rent
thus i work for her, as she gets all the profit
homeless vagrants live in tents on the sidewalk
but she thinks its a tony neighborhood
medi-cal pays me very little
originally rent was 1.35.
now she has raised it so much
she want 2.20 this time, and 2.50 next time
can anyone advise me what to do?
Move all your stuff out in the middle of the night and abandon the place. If you are a product seller go on the internet. If you are a service provider work from home. Preferably move out of state and let the landlord chase you – not worth it. If he does, go bankrupt on your LLC.
Look at New York, everybody is gone.
Tough times need tough people. No one is looking out for you.
Having operated as both an anchor tenant as well as a landlord, many times simultaneously on the same piece of property, I have sat on both sides of the desk. Got to be honest, my usual reaction to a phone call out of the blue requesting a rent reduction tied to a threat of not renewing a lease was to say b*** me or to suggest that the caller attempt to engage in a physically impossible act of pro-creation.
However, if a couple of polite warning shots had been placed across my bow by a tenant regarding the plight of a given facility, I was much more inclined to engage in a conversation, provided that the supplicant was willing to provide documentation supporting their claim of distress. The decision for a landlord is really relatively simple: Which provides a better return; a rent concession to the distressed tenant?; or, finding a replacement tenant? (which involves balancing the the costs of refitting and re-letting the space to a new tenant versus the income received from said new tenant) In this day and time, more often than not, the concession, distasteful as it might be, is the better business decision simply due to the fact that presently, in many secondary and tertiary markets in the US, the supply of retail space available exceeds the demand for same. By the way, just for the record, if the shoe was on the other foot and I was attempting to renegotiate a rental for a distressed unit (fortunately we had very few) I had no issue with providing supporting information so that the landlord could go to their lender and justify why they were needing to provide rental relief.
Commercial Real Estate is not magical, its a math problem. In its simplest terms it breaks down to this: For any given project, will the rentals projected to be generated exceed the cost of the mortgage placed upon said project such that a positive return/cash flow can be generated by the project that is in excess of the opportunity cost of not doing the next project? If one understands ones numbers there is no reason for bombast and posturing either the math problem works or it doesn’t.
Unfortunately, there are many in this industry, both tenants and landlords, for whom it is far easier use the the “You’re screwing me” negotiating strategy rather than to attempt to negotiate from a common set of facts. In those instances I found that a thunderous silence and a little bit of time more often than not brought the recalcitrant landlord,, or tenant, to heel.
Finally, yes, while it is the engineers, bricklayers, plumbers etc. who “build” the project, those folks unfortunately would not have the opportunity to do so without a developer, who places assets at risk to obtain the funds, providing employment to those who actually do the building. As a postscript; yes, I have stood in mud more than once looking through a surveyors transom or discussing driveway cuts with civil engineers and highway officials or a myriad of other issues that are incumbent with creating a profitable commercial retail real estate development.
@”He who shall not be named”
As a CRE pro, I like your style.
From my experience it is not mathematical finesse but survive or die. May be you big guys have room to play taxes and finance but the small guy has positive cash flow, or he doesn’t.