This is a time for calm. The Foxtrot, in ballroom parlance, is a “smooth” dance, noted for its elegance and artistry. Here are some reflections on how thoughtful landlords might think and proceed gracefully, navigating shoals littered with face-planted brothers and sisters.
One: We’re all in this together. There are no tactics that will guaranty successful commercial projects in uncertain financial times. But here’s one fundamental: A well-tenanted project not only shows well to new prospects, it flows better, cash-wise. So, a landlord must take a long view toward reducing tenant failures. That’s right—I’m suggesting viewing your tenants as your co-conspirators opposing your creditors, instead of seeing your tenants as your enemies. No tenants = no cash flow = no mortgage payment. It’s not a complicated formula. Think constructively, and abandon yanking out the hacksaw to mangle away a partly-functional limb.
Two: Appreciate that tenants are not all alike. Super-regional and national tenants are not motivated the same as “moms and pops” enterprises. Prepare for entirely distinct types of conversations with the principals of the two types of tenants. Larger tenants with multiple units (offices/stores) make decisions based on market forces that often have little to do with your particular project or its productivity there. Consider bank branches, or electronics stores—they may be doing well in your center but still tank. So if your multi-unit tenant is thinking of closing fewer than all its locations, ponder this: what will cause them to stay open in your project?
Three: If your center is financed, read your loan documents carefully, especially the loan agreement, the deed of trust and, if separate, the assignment of rents. Look for rays of hope that you may be able to renegotiate rent terms without having the lender interject its point of view; in these times, lenders may not be making profoundly wise decisions. The institutional lenders, they say, have their own sets of issues. Often, for example, the loan documents say that “major” tenants’ leases cannot be modified without lender consent. Look especially for text that states or implies that the landlord has some latitude in acting in the “ordinary course of business.” There is no ordinary course of business in market crises; therefore, this may afford you some latitude to act in concert with saving your project notwithstanding express prohibitions on your conduct.
Four: Be patient–and listen carefully. You’re not the only creditor of your tenant, who is battling with vendors, suppliers, equipment lessors, lenders and perhaps the landlords of its other location[s]. A tenant who is struggling for survival may have some good ideas, scattered among its unrealistic ones, about how to stay in business in your project. Consider adopting the tenant’s sensible proposals into your relationship.
Five: Be creative. Consider some of the following options in workouts with tenants:
a. Relocate them in your project; this can be a win-all-around situation, if the result is that you keep your tenant and a portion of the original rent payment and common area contributions, perhaps freeing up a prime location for re-letting in the process.
b. Back-load a portion of the reserved, fixed rent in a lease amendment; yes, this will diminish your cash flow in the short term—but so does a half-empty project.
c. Allow the tenant to sublease, so long as that rent flows directly to the landlord and the sublessee agrees that any option to renew has to be approved by you.
d. Allow them to downsize, if loss of customers has translated into decreased inventory or staff or whatever it is that has shrunk its need for space; of course, you cannot accommodate a request to reduce the rentable square footage if the shrinkage means that the usable footage excess is compromised by bizarre (unusable) configurations of floor area. You must see the whole chess board at once.
e. Apply a portion of the security deposit to rent installments due—I mean, do they really have time to trash their suite if the tenants are trying to make ends meet? You always can demand replenishment of the deposit when times are better.
f. Promote the businesses by permitting a sidewalk sale (if retail) or [-gasp-] putting the name of the tenant in an otherwise-still empty sign bin in your project monument. One of my clients negotiated a billboard lease renewal by exacting from the lessee a promise that his office project tenants on site could have a discount on advertising when the billboard had no other business.
g. Consider accepting surrender of the premises and terminating the lease before the tenant files bankruptcy and your space becomes subject to the 120- day, assume or reject period in the Code. “Go ahead and file—I dare you!” may not be your smartest mantra—try, instead, asking for evidence of insolvency in the course of making your decision whether to take a hard line as opposed to abating some of the rent for a period or just terminating the lease altogether.
h. Accept rent more frequently than monthly; your loan documents may say you won’t accept rent more than a month in advance—but there are no other handcuffs on when you accept it, usually. With competing mouths to feed, might it be more likely you’ll get paid if you accept half the rent two times during the month?
Six: Scrutinize your common area expenses. Green-eyeshade your CAM vendors’ billings, and make sure their services are re-bid at the end of every contract period. There are plenty of people who would like to mow the turf in the common area or wash your windows these days. Minimize expense by cutting back service; what about having janitorial service only 4 days a week? Think your tenants will despise you for cutting their pass-through costs by 20%? And hey, what’s your management company charging you? By being thoughtful and demanding competitiveness from your vendors, you’ve saved everyone money, including the tenants.
Seven: Continue to study the tenant market. Read widely in the field of your leasing product-type. What’s the forthcoming demand for your type of project, and how can you start soliciting that business now? How do you best position your project for occupancy (besides terminating your tenancies to the “see-through” building point)? Take a really smart commercial broker to lunch; ask her what innovations she’s seeing in your market that is making leasing happen? Remember the adage “the harder you work, the luckier you get.”
Eight: Those you befriend in adversity remain your allies in prosperity. I’m cynical enough not to believe this in the abstract. But I’ve seen it occur in business life, so I know it can happen—“it,” here, meaning referral of tenant prospects from existing or former tenants.
So, landlord–are you doing the dance of Saint Vitus, or trotting with the Foxes?
MNW
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