In Retail Today, Honor Will Be Rewarded

I got a call today from a small retailer in Las Vegas who was referred by a friend of his in San Francisco.  (How does this stuff happen?)  He has two businesses in an outlet mall on Las Vegas Blvd.  Foot traffic is down to a trickle and his sales are down by 60% since the pandemic.  Property management has been pressing him for past due July rent.  He wanted to strike a deal for a reduction but they weren’t offering any more relief than a rent deferral which just would have put him in a deeper hole.  He called me for advice.

I listened to his story: he had been a merchant in the center for 10 years, worked hard, merchandised well, and faithfully paid his rent without fail.  He couldn’t pay his rent now and wondered what his options were.  He felt like a deadbeat and hated it.

He is no deadbeat.  To the contrary, he is a model tenant.  I suggested he propose paying the landlord pure percentage rent – a set percentage of his gross monthly sales until mall traffic returned to normal.  This would keep his rent sustainable whether his sales went up or down. 

He appreciated my advice but wanted to know if I would write the letter for him because ‘I was the voice of authority.’  While I was flattered, I explained that getting a letter from an unknown third party – from Los Angeles, no less – would only aggravate the landlord.  I told him “the authority is you.  You know your business and have proven it month in and month out over ten years.  Tenants bigger and smaller than you are just quitting but you are fighting for your business.”  Not quite convinced that his words would have leverage, he said that his landlord was a big corporation.  “All the more reason they do see the value in a tenant who works hard and respects the lease contract.”

He is going to write the letter.  I suggested he start with a percentage that is a bit lower than what he can afford, just to leave him a little room to negotiate.  I’ll let you know how it goes for him.

The universe looks after good tenants.

The Smart Approach To Working Things Out With Your Landlord

This week I was engaged by two clients who wanted my advice about approaching their landlord for rent workouts during and after the COVID-19 lockdown.  One was a retail business that had to close their store but that still does a fair amount of online commerce.  The other is a salon that is just sitting on their thumbs – they can do nothing until the economy opens up again.

The financial workout strategy naturally looks different for each of these tenants but the principles listed below apply to all tenants that need to work things out with their landlord right now:

·        Treat the landlord like a business partner that you are striking a deal with or a bank you are hoping to get a loan from.  Certainly, financial hardship is what brought you to the table but mix some optimism into your negotiations.  Something like “this is my challenge today but with your assistance, I will be strong and profitable again soon.”

·        If you can pay any rent, pay something.  That accomplishes two things: 1) Your debt to the landlord will be less and therefore easier to pay off, and 2) It shows tremendous good faith and respect for the lease contract and the landlord.

·        Keep in mind that the challenging economic conditions will continue for some time after the economy reopens.  By most accounts, we will be coming out of the “freezer” of the lockdown into the “winter” of a recession.  Try to extend some level of rent relief several months into the future.  You will be glad you did.

And while we are on the subject of relief, many tenants may have some relief coming if they have business interruption insurance.  In fact, many tenants are required by their lease to carry such insurance.  However, many insurers are denying business interruption claims.  I have resources that can help you if your insurance company is pushing back.  I will be happy to point you to someone who can be a valuable advocate for you.

Do You Really Want To Deal With This?

Picture this:  you have negotiated a lease for a new office space for your business and need to get the lease signed so the landlord can start construction to get your space ready.  At the same time, you are busy corralling your troops to meet an important project deadline.  It is December 23 and the holidays are looming.  The landlord calls you – he is balking at signing the lease until you write him a side letter acknowledging that you will pay the utilities during the free rent period at the beginning of the lease term.  This obligation is inferred in the lease but the landlord has been burned by this situation before and he insists on the side letter.  You stop what you are doing to write the letter, sign it, scan it, and email it to your partner who is already away visiting his grandchildren in Ohio.  Lucky for you, he is at the house and his son has a printer.  An hour later, the letter is sent to the landlord.

Thirty minutes later – it is 2:00 now and you are running out of time before your project deadline and Christmas Eve – another call comes in from the landlord.  He asked you to submit two separate checks with the signed lease: one for the first month’s rent and another for the security deposit.  An odd request, but you complied.  You pick up the phone to hear him whine that he wants the security deposit check replaced because you didn’t write “security deposit” on the note line at the bottom and he is worried that if it doesn’t say “security deposit” at right there on the check it will be taxed as income.  He won’t sign the lease until you do.  It’s all you can do to keep from throwing the telephone out the window.

This last minute brouhaha really happened to me when my client – the tenant – was out of town.  My blood pressure rose again just writing this blog!  I solved both problems without aggravating my client.  By the way, I told the landlord to call his accountant who assured him the check was OK and wouldn’t incur any income taxes.

Friends don’t let (busy) friends represent themselves in lease negotiations.  Everyone should have a good tenant representation broker in their corner.

Don’t Mutiny A Difficult Landlord

Many of you have read my previous post admonishing you to “Pick Your Landlord Wisely.”  Well, the same wisdom that recognizes the best landlord qualities also has to make the most of stubborn and inflexible landlords.  Does that mean a tenant should run the other direction as fast as possible when he or she encounters one?  No!  What I do advise is that you make sure you have a good tenant rep broker getting in the mud on your behalf.  If you end up with a good, thorough lease, the only thing the landlord can do to interfere with your tenancy will be to neglect their maintenance obligations.  And your broker can even work in some lease language that will give you plenty of recourse should that situation ever arise.

I recently slogged through lease documentation that was a royal mess.  The lease appeared to be a blend of two or three different lease contracts cobbled together and there were embarrassing flaws throughout: redundant language, paragraph numbering that was out of sequence, and a mash up of references to landlord/tenant and lessor/lessee.  If that wasn’t aggravating enough, the landlord balked when I (and his own broker!) recommended changes to this “Frankenstein” lease to clean it up.  Then he tried to sneak into the second round of lease comments some common area charges that were not included in the signed letter of intent (lease offer).  Ugh!

If I can’t get logic and fairness to prevail, at some point I will recommend to my client that we walk away from the deal because the final contract will be full of holes and the captain of the ship – the landlord – cannot be trusted to keep the vessel afloat.  But if your broker (together with your attorney in situations like this) can overcome the landlord’s stubborn attitude and get a solid lease signed, you should be fine except for a little queasiness from the turbulent negotiations.   In the end, a watertight  lease will stay upright in choppy seas.

No Need To Succumb To Unfounded Fears

Far be it for me to tell you a good real estate broker and tenant advocate can build a protective force field that will protect your business from the occasionally harsh winds of the market and the law.  But I am here to tell you that there is no need to be afraid of the monster under the bed.  There is nothing under there…really.

I had a manufacturer client that had been doing business in the same building since their inception 55 years earlier.  As a concession to getting some rent relief from the family that had owned the property since the dawn of time, they agreed to a six month cancellation clause in the event the property was sold.  It never occurred to my client that might happen…and then it did.  When they got the six month notice from the new owner they were blindsided.  That is when I was referred by their banker to help them find a new home.

The president and CFO of the company were panicked.  How could their established manufacturing company possibly find a new location and move there in six months?  Their fear was existential  -- was the company doomed?

With 25 years of property management experience , I knew how hard it is to physically pry a tenant out of a space.  Ultimately, the law will side with a landlord against a tenant that is ignoring valid demands to vacate their premises but it takes time and a lot of legal gyrations.   My message to them was to take action toward the goal of vacating the property and communicate their progress to the new owner.  Six months might turn out to be a year but if they were responding in good faith to the demand to leave, the landlord would certainly spare themselves the legal cost of being draconian.  I also reminded my client that the new owner had plenty of hurdles of their own to clear in order to make the necessary changes at the property to accommodate their business there.

My client settled into their new home across town approximately 10 months after I signed on as their broker.  They followed my advice and kept the new owner informed and in the end, the scary monster under the bed turned out to be Shrek.  OK, maybe a little ugly but docile.

Hire experience and let it be your guide.  Don’t go it alone.

Pick Your Landlord Wisely

When you are looking at a number of potential locations, it is not unusual to become  preoccupied with data comparison: square footage, load factors (don’t know what that is?  You need an advocate who does!), base rent, concessions, operating expenses, and on and on.  Sometimes the distillation of this data will point you to a preferred site.  But there is another often underestimated factor to be considered: the landlord.

Evaluating the landlord is more art than science.   Consider that a “Class A” office building is often defined by size and on-site staff.  But it’s the landlord’s attitude toward the building that puts the “Class” in Class A.  Does the landlord have a reputation for seeing tenants as their most precious commodity or as a nuisance?  This attitude doesn’t appear on the page of their counteroffer or even on their website.  But a seasoned broker knows or can see the telltale signs in the management of the property.

Sometimes the magic is in matching the agendas of the two parties.  I recently ended a one year search for the perfect building for an aerospace manufacturing client.  The building I found was not at all remarkable from the outside but a new owner had just taken over the building and in an effort to restore the building’s value and curb appeal, had his checkbook out and was undertaking property-wide upgrades.  I caught him at the perfect moment.  I introduced the tenant and suggested he redirect his capital investment to tailor the building for their needs.  Done deal and our search was over!  It helped tremendously that this landlord takes great pride in their investments and holds them for a long time.

I am presently working with a unique, niche bakery searching for the perfect location in downtown Los Angeles.  We looked at several properties.  One stood out in both of our minds.  The reason?  In the tenant’s words (reflecting on the landlord), “He is cool, and he gets it.”  That may sound esoteric but it is absolutely on point.  So much more can be accomplished with a landlord who is truly enthusiastic about the tenant’s business, especially with retail real estate.

Don’t miss the forest for the trees – choosing the right landlord is crucial! 

Property Management is an 80/20 Proposition

Most commercial tenants think of property management and say “thank goodness the landlord takes care of that!”  That is largely true in multi-tenant buildings but to think it is entirely so is to put your financial bottom line into the hands of the landlord or property manager – at best a well-intentioned stranger and at worst a totally indifferent one.  While it is true that a tenant in a large class A office tower does not have to perform janitorial services or maintain the building’s heating and air conditioning systems, they do assume significant repair responsibilities inside of their premises and have important administrative duties relating to property management.  

Think about it: for every bill you receive, whose responsibility is it to review it for accuracy and actually cut the check?  There is not a lot of review required when you get a utility or cable TV bill at home, but what about that annual operating expense reconciliation letter you get from the landlord?  Does it accurately reflect the terms of your lease; in particular, the special operating expense lease provisions a well-informed real estate broker should have negotiated on your behalf?

80% of property management is shouldered by the landlord, but 20% is the tenant looking out for their own interests.  

Who is looking out for yours?