If the landlord has designs on selling the property, the lease restructuring can be more beneficial than forbearance.
Right now, in the wake of the COVID crisis, many forbearance discussions are occurring.
But, in some situations, Michael Wiener, the founder and president of Excess Space Retail Services, thinks landlords may want to look beyond that and consider just restructuring the lease. Excess Space Retail Services began in 1992 as a firm that helps retailers reduce occupancy costs through real estate disposition, lease restructuring and lease renewals.
With retailers struggling and going out of business, landlords have seen their rent collection go from above to 90% to 70% and below in a short period of time.
“Looking at it from the landlord side, the benefits of lease restructuring would obviously be long-term stability in their portfolio and not having to wake up tomorrow and worry about rent payments,” Wiener says. “That assumes that they’re dealing with a creditworthy retailer who’s not having too much trouble.”
If the landlord has designs on selling the property, the lease restructuring can also be beneficial. With a long-term lease commitment, their property is easier to sell and finance down the road.
In an environment where rents are going down, the lease restructure can also protect the landlord by locking in a tenant at today’s rates. Even though the situation is challenging now, it could be worse in the future. By locking in a tenant, the landlord is protected, according to Weiner. Without that, tenants could start looking for less expensive space.
For the retailer, lease restructuring can offer a noticeable benefit—low rent. “For certain businesses, like supermarkets and home improvement stores, things have been thriving,” Weiner says. “But many other businesses are really suffering, whether it’s a restaurant or an apparel store. These businesses need assistance in order to thrive in the future. Their two biggest expenses are rent and labor.”
By helping with the rent side equation, landlords can offer the retailer a major boost. Stores are already laying off workers and reducing pay and hours to corral personnel costs.
Right now, Weiner thinks lease restructuring programs make sense for retailers who want to take further steps to limit uncertainty, especially if they face e-commerce threats..
“It’s always hard to predict what’s going to happen to any one retailer at any given time,” Weiner says. “There are always shifts in business models.”
For instance, e-commerce has added a level of uncertainty over the past decade.
“Amazon has changed that dynamic exponentially for retailers,” Weiner says. “They have a business model where if they see a certain amount of retail has moved online, they go into that business themselves in a more robust fashion. That then impacts retailers.”
Source: “How Lease Restructuring Can Help with Dispositions and Financing“