Learning to Leverage

Transcription

1 STRATEGIES AND PRACTICES IN LEASE RENEGOTIATIONS -- Learning to Leverage Janet E. Jackim, Esq. May 18, 2018 WEST VALLEY COMMERCIAL REAL ESTATE GROUP

2 WHY RENEGOTIATE A LEASE? o An anchor has gone dark, customer traffic down JC Penny s, Borders o Market rents have declined or new competition new mall, warehouse or office building available o Lease rents too high, tenant benefits too limited o Substantial renovation or construction scheduled o Recession local, regional or country-wide o Catastrophe or casualty -- fire, roof collapse o Strategic, assertive reasons merger, planned closures Our perspective today: you represent the tenant

3 PREPARING TO RENEGOTIATE DO YOUR HOMEWORK FIRST!

4 o Investigate the landlord: Look for landlord s negotiation weaknesses Review portions of landlord s website events planned, new tenants coming, expansion or remodeling plans, mission and vision statements, company s view on the economy or marketplace Broker s marketing info -- lengthy vacancies, large unleased spaces, more units coming to market, concessions offered Public company s annual report costs up, earnings down, management shake-up, outdated mission, expansion, remodeling, closure or merger plans News coverage -- bad or good Public records -- lawsuits, tax liens, deeds of trust, trustee s sale Quality of property management cleanliness, gang activity, out of order equipment, broken lights, parking lot potholes Landlords would rather keep, than lose, a tenant

5 o Know your tenant: Look for tenant s negotiation strengths + or - financial numbers -- EBITDA, gross sales, expenses, customer counts, historical and proforma trends Management resumes -- prior successes Plans to overcome business challenges -- expense reductions, higher wages, outsourcing, new technologies, ads placed The environment of the property -- closures, outdated utilities, equipment or facility, poor access, no expansion room, too much space, high competition, casualty losses Strategies, goals for renegotiation sell the business, retirement, better ROI, refinancing, abandon the property Wish list of lease modifications

6 o Know your market: Look for market characteristics supporting tenant s position Comparable market statistics -- rent, concessions, incentives, tenant mixes, amenities, customer counts Any new competitive product coming online? Any plans for property upgrades, remodeling, new tenants coming soon? Any destination attractions, highway construction, an Amazon or Intel expansion coming soon? Are other comparable properties retaining or losing tenants and why? Any technology revolutions on the horizon? Any State or municipality bond projects?

7 PREPARE AND DELIVER TENANT S PITCH FOR LEASE MODIFICATIONS

8 o Contact local property management or listing broker, if any: Any rent relief or other concessions available? Any other tenants requesting relief? Authority to renegotiate? Probably not Draft renegotiation terms as a test draft an LOI or amendment Expect limited assistance -- no incentive to assist you, could be disincentive if commissions are reduced o Go to decision-makers: Property owner, CEO, COO, General Counsel Leverage your tenant s strengths, landlord s weaknesses Request a meeting in person with persons of authority Present an LOI or proposed lease amendment in writing

9 o Leverage your tenant s strengths against landlord s weaknesses: Why should the lease be modified? Franchisee tenant -- cite franchisor's high ranking awards, # of stores, expansion plans Cite tenant s historical financial data show declining sales or profit, increased costs, loss of market share Describe tenant s management s own successes as business persons this property is an anomaly Actions of tenant to increase revenues, decrease costs, make strategic changes Tenant s challenges are temporary Your tenant is a known quantity

10 o Remind landlord of missteps and weaknesses: Complain (nicely, but factually) Contrast your tenant s past successes with current poor performance Cite negative market intelligence on comparables or new developments Call out disjoints between descriptions of the property and reality o Landlord s website portrays a rosy picture, but other information indicates otherwise o Vacancies high, remodeling needed, FF&E outdated, amenities lacking o Past and current marketing materials on broker s webpage vs. your tenant s rent and other financial terms o Poll your tenant s neighbors Their own store statistics Information on the grapevine Their expectations and plans future closure, renegotiation, additional capital infusion o Condition of the property take photos to compare and illustrate

11 o Describe tenant s complaints: What s bothering tenant? Few customers, events and special attractions High tenant and/or prop manager turnover Tenant concentrations in poor-performing industries Little or no marketing efforts Remodeling or other construction interference, difficult access Unassigned parking, not enough parking Anchors moved out, closed, going out of business sales Property mismanagement or no management Excessive rent, CAM s as compared to market Little or no tenant concessions or amenities Minimal maintenance, capital improvements HVAC out or underserving

12 o Suggest resolutions: Draft a modification proposal Financial or monetary o Lengthy free rent period until stated sales level is met o Reduce base rent to a livable amount for X years with minimal increases o Credit for excessive rents paid o Only percentage rent is paid o Resist tacking on of rent reductions to the end of lease term o Other concessions -- remodeling TI or FF&E dollars, marketing contribution o Landlord buys tenant s interests o Tenant buys out and terminates the lease o Tenant moves out, parties release each other

13 Non-monetary o Landlord funds marketing budget -- hires marketing expert, upgrades center s website, plans attractions o Landlord creates tenant marketing committee o Landlord remodels, upgrades utilities and common areas o Landlord relaxes assignment and sublease restrictions o Personal guarantees expire or terminate early o Landlord reimburses tenant for certain FF&E, fixtures o New property manager appointed o Parking upgraded, increased o Access improved o Ex-anchor spaces repurposed o Amenities added o Store relocation o Reduce leased premises size

14 o Implications to not reaching a modification: How far will tenant go to prove its point? Bankruptcy filing of tenant and/or guarantors Abandonment of the property Removal of FF&E landlord s lien impacted Landlord s lockout, eviction Another failing center, office building or warehouse blight Landlord can t meet its obligations to property, lender Constructive eviction Litigation over damages People out of work Commissions rescinded, unpaid New opportunities created for replacing tenant, broker, prop manager, landlord, property

15 Thank you! Janet E. Jackim Janet Jackim is a partner in the Downtown Scottsdale law firm Sacks Tierney, P.A. She is a former Vice President--Real Estate and Assistant General Counsel at The Circle K Corporation. During four decades as a commercial real estate and business attorney, Janet has represented developers, franchisees/franchisors, lenders/investors, landlords, tenants, owners and other commercial property interests in real estate sales, financing, development, leasing and other transactions. The Best Lawyers in America and AV-Preeminent Martindale- Hubbell rated honoree has completed more than $1 billion in mergers and acquisitions (sales price) of large and small businesses. Janet also provides considerable legal services to medical marijuana businesses. Jackim@sackstierney.com