By Benji Rosenzweig
Benji Rosenzweig is a commerical real estate broker with Colliers International, global commercial real estate services organization. He is based in Southfield. He specializes in retail throughout Southeast Michigan and is an expert in all things commercial real estate in the city of Detroit.
As the pandemic shut down stores for weeks, many retailers have gone without any revenue and have had trouble paying fixed costs like rent. Nationally we are seeing tenants asking for rent reduction and/or deferment to help alleviate rental burdens until the business can get back to ‘normal’ or stable.
As a real estate broker who works with both landlords and tenants, I have some perspective and information which may be helpful to retailers.
Landlords who are resistant to deferring rent are often themselves in a precarious position. As of today, the banks have not released any information or offered mortgage relief. They are in a wait-and-see status until they know what concessions the government is going to provide the banks. That said, if you have any sort of sophisticated landlord, they are (or should be) having daily conversations with their bank. Banks for the most part don’t want to take back the property. The banks want to work with the property owner to prevent a repeat of 2008.
However, there are some exceptions. So, if you’re approaching your landlord and asking for rent relief or rent deferment, here are a handful off proactive measures and rent structures that can increase your chances of working out an arrangement.
1) Show your landlord that you have applied for all the various business loans and grants (Apply if you have not already.). Asking your landlord to help you without showing that you tried to help yourself will likely rub them the wrong way.
2) Be transparent with your books. Provide your landlord the year-to-date income in comparison to last year. There are a handful of retailers who are actually doing really well right now and still asking for rent relief. Show your landlord that you’re asking for help, and that you really do need it.
3) Offer to add any agreed upon deferred payments to the end of the lease. For example: If you have 40 months remaining on your lease, and request March, April and May to be deferred, add 3 months at the end of your lease so the landlord still gets 40 additional rental payments. It basically froze the lease for 3 months.
4) Although most landlords do not prefer this rental structure, you might offer percentage rent while you ramp up again. For example: During the first 6 months, you can offer 8% of gross sales as your rent. In that scenario, the landlord gets to participate in any upside of your success. Different industries have different benchmark standards for percentage rent: 8% is often used for a food and beverage business. 12% is often used for a coffee shop/café. Depending on the type of retail business you have it can be slightly higher or lower.
5) Lastly, while retailers are all working to make sure they are financially covered, we also need to remember that the landlords need empathy too. Many of them are seeing 80% default rates on their existing rental income, and some closer to 100%. So, please speak professionally to your landlord so they know you understand that we are in this together. Don’t forget to ask them how their families are holding up, how home-schooling is going or if their parents are safe. They have the same fears and concerns for their families and businesses. Some of their other tenants may not be speaking to them as nicely, so bring back the human factor to the conversation.
I understand that every situation and tenant-landlord relationship is different. So, if you have any questions, I would be happy to discuss free of charge.
