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This Is What Happens When Retailer Asks Landlord for a Rent Reduction

Summary:
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,

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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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This Is What Happens When Retailer Asks Landlord for a Rent Reduction

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