Are partnerships the key to brick-and-mortar success?
In today’s slowly improving economy, retail success depends
upon regularly updating the customer experience and a constant focus on
managing occupancy costs. One way to accomplish both of these goals is to
combine store remodeling campaigns with commercial lease restructuring efforts.
With a partnership approach between tenant and landlord, these seemingly
unrelated and potentially conflicting efforts can have a beneficial outcome for
both parties by creatively aligning incentives.
For the majority of landlords who work
with credit tenants, it is in their best interests to adopt this new way of
doing business. A partnership attitude between landlord and tenant creates a
win-win for both parties and can comprise various strategies, depending on the
existing situation as well as local market conditions.
together, tenants and landlords can restructure existing leases to increase
cash flow for tenants while also enabling property owners to refinance at
today’s record-low interest rates. Landlords and tenants can split the costs of
remodeling brick-and-mortar locations to create more consumer-friendly store
layouts and improve revenue for the tenant. At the same time, these
improvements add value to the underlying asset for the owner. The property’s value
can be further enhanced with a term extension that can result in a lower
capitalization rate and a higher valuation.
is key in building a successful partnership. Tenants must approach landlords
with full disclosure of the store’s specific financial situation as well as
that of the corporation. Landlords must clearly understand whether the store
and the company as a whole are struggling or thriving, and tenants must
understand where the property falls within the landlord’s portfolio. In addition
to accurately communicating the store’s financial health and broader corporate
situation, tenants must be well educated on market conditions, co-tenants,
vacancies, and current comparable rents.
a landlord’s perspective, approaching tenants with an understanding of what
adds value for the tenant sets the tone for a mutually beneficial relationship.
Framing negotiations in ways that demonstrate how both parties can benefit is
an effective strategy for landlords to use in building successful long-term
relationships with their tenants. For example, in the case of a remodel, a
landlord could be incentivized to contribute to the remodel cost in the form of
cash or a rent abatement for a period of time. In exchange, the landlord could
receive some portion of increased revenue generated by the refreshed property
or an additional firm term by the early exercise of an option period.
types of exterior and interior remodeling options not only increase traffic and
revenue for stable retail sites, but also can keep distressed brick-and-mortar
stores afloat. Successful property modifications include creating new logos,
refreshing exteriors, and updating signage and other outside imagery.
exteriors is an especially attractive remodeling option for landlords. For
example, a new facade to part of a building’s exterior entices previous
customers to return and revisit the store on a regular basis. Refreshing the
inside of the store completes the new shopping experience and helps maintain
the higher revenue stream. This applies to both stores and restaurants.
Additionally, anytime a nearby competitor constructs a new building or
renovates an existing one, the tenant must be motivated to follow suit or risk
losing some local traffic.
building owner, the landlord directly benefits from a renovation of its
physical asset. If the landlord is trying to sell the building, remodeling can
increase the value of the building. If the owner needs to refinance debt,
property renovation will improve the lender’s loan-to-value ratio, increasing
underwriting support. When a space turns over from one tenant to the next, an
improved exterior condition lowers the landlord’s tenant improvements costs.
addition to remodeling properties, renegotiating tenant leases can also
increase the value of a landlord’s assets. Negotiating lower rent for a longer
fixed term can greatly help landlords in both selling and refinancing a
example, if there are only four years left on a lease, the tenant can exercise
early and extend the lease to 10 years in exchange for a rent reduction. Having
a 10-year rather than a four-year lease will make selling or refinancing
significantly more attractive to a buyer or a lender. Providing this type of
financial certainty for a significant length of time helps to preserve the
buyer’s cash flow and equity as well as support a lender’s debt service
important factor to consider in lease restructuring is the impact of the 2008
financial crisis on current rental rates. The financial crisis left many
tenants in leases that are far above market rates, which presents a great
opportunity to renegotiate lease rates closer to today’s market.
renegotiating a lease or proposing a remodeling package to a landlord, tenants
without experience in this area may want to work with a qualified lease
restructuring advisory firm. Professionals that specialize in lease
restructuring can clearly and effectively present the current conditions and
future possibilities, which help both landlord and tenant achieve the highest
level of success.
Grams and Mark
Richardson are principals at Huntley, Mullaney,
Spargo & Sullivan. Contact them at firstname.lastname@example.org and