The Corona Virus and its threat to the retail marketplace.
The Corona Virus has had dramatic impact on almost all business sectors. As the COVID-19 spreads globally, the commercial real-estate markets brace for the impact. This is especially true for the retail industry since the markets have shifted dramatically to a state of uncertainty. Both landlords and tenants are now affected and must brace for the fall-out. According to the World Health Organization, many details about the flu-like disease remain unknown and health officials are still working out how long and how far it might spread. But as more cases are identified, the problems become more acute for the retail industry.
Why now is the time to renegotiate your lease?
The unexpected has occurred and few saw this coming. The impact that it would have on both Landlord and Tenant is an even greater unknown. Most commercial lease terms were negotiated based on a number of known conditions in effect at the time the lease was executed. These may include: supply, market conditions, business conditions, competition, money supply, tenant improvements, allowances, start-up costs and many other factors apparent at the time the lease was negotiated. The lease was negotiated in good faith by both the landlord and tenant based on their business conditions and the tradeoffs made and the compromises reached were made based on numerous assumptions. Over the course of several months, in some case years. the landlord-tenant relationships have proven to be mutually beneficial. The retailer’s business was financially solvent and had been paying the rent to the Landlord. Due to COVID-19, those assumptions did not anticipate an event such as the global shut-downs and the abrupt collapse of the economy. Most retail stores have been shuttered and the period of these shutdowns and their affect remain unknown. No revenue for the retailer with no revenue to pay the rent to the landlord. It makes good sense that a dialogue be established between the landlord and the tenant to re-examine the future and to re-examine the lease terms for possible compromise based on current conditions.
Other factors now in play
One of the areas that now plays a huge role is supply chain disruptions. Travel bans and worldwide shut downs of factories and travel restrictions have seriously impacted the ability for retailers to access goods to put on their shelves once stores can be opened. Many major retailers expect supply chain disruptions will play a role in their expected performance for at least the first half of the year. Chinese factory shutdowns are cause for concern for some of the biggest retailers, since Walmart sources 15% of its goods from China and Target sources 30% of their goods from China. Financial expectations for most retailers will be dramatically affected.
With such uncertainty, many people have become uncertain about gathering in public and crowded public spaces, which is hurting traffic to the physical retailer location, especially at malls and even neighborhood shopping center.
Who wins when renegotiating lease terms?
Both! The idea that the landlord-tenant business relationship must be viewed as a partnership has never been more apparent. When one side suffers the other side bears some of the pain. The commercial lease is a double edge sword and can cut both ways. Renegotiating lease terms can and should be beneficial to both the landlord and the tenant. Shuttered stores disrupt income for both parties.
How can Perry Commercial Help?
We bring the parties together and examine the opportunities for compromise and trade-offs that can improve the outcome for both. We do not negotiate in a positional manner but rather fin a consultive manner. We identify the mutual interest of both parties and work towards their common interests and goals to bring the parties together. We assemble the necessary data and develop financial models and pro forma to enable realistic expectations for discussion. We examine the lease and analyze market conditions and consider direct and indirect influences to develop a renegotiating strategy that takes into consideration those lease terms that should be negotiated to avoid permanent shut-down. Perry Commercial provides lease term analysis and in conjunction with the stores past performance of revenue can identify the possibilities of new lease term opportunities. We have developed a process that systematizes our approach and incorporate a a nominal fee when we achieve results. In every case, our purpose is to mitigate the impact of the virus and improve the partnership between the landlord and the tenant that result in Win-Win deals.
What terms can be negotiated?
Just about any lease term is on the table for renegotiation. They may include changes to; rates, length of term, options, security, renewals, type of lease, maintenance, CAM and may be temporary or coincide with length of term In some cases, it may be prudent to examine changes to lease type such as percentage of sale. Most commercial leases will have some room for re-negotiation and most landlords will be sympathetic to their tenants’ situation and consider the current economic environment as a reason to renegotiate. Sometimes it is more beneficial that the landlord retain a good paying tenant at a lower rate than to take a chance on the unknown associated with length of vacancy, cost for improvements and allowances, unstable market and risk of a new and unknown tenant.
Perry Commercial adds value
Call us to arrange for a no-cost and confidential interview to explain how we can help. We can review your lease, analyze your past performance and develop realistic projections that identify future risk and opportunity for future success. Coupled with our market knowledge and lease negotiation experience, we can help you to mitigate the uncertainty. We have years of experience and proven performance and through market assessments and analysis of past and present economic conditions, know how to translate them into added value for our clients.
We are not attorneys and do not provide legal advice and cannot modify or amend lease documents. We can however negotiate the terms which are included in the lease documents. We recommend that our clients conduct their own independent due diligence and consult with their financial and legal advisers when entering into formal lease arrangements.