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Concession Thoughts

Written by Tom Sjostrom on Monday, 13 July 2009 7:00 pm

Now is the time, in a recessionary economic cycle, when owners of investment properties begin to get calls from tenants about rent reductions, forbearance, assistance, desire to cancel their lease and a number of other requests for what amounts to financial assistance from their landlords. In these times it is hard for a landlord to know which way to turn given their own financial situation, the size of their mortgage and other variables.

In approaching a request from a tenant for some kind of relief it is vitally important that the landlord see the whole picture. That means that the landlord should expect adequate information to help make a decision that can lead to the success of the tenant and a going forward way of thinking about the business. With most tenants that means good financial information, from sales reports to operating statements, to a new business plan, to new financial statements and credit reports. With many tenants, however, realistically, such information just isn't available. Many small tenants aren't keeping records of their businesses in a manner that they understand them, let alone so a landlord can understand them.

We suggest to our owners that their attitude has to be about problem solving. They should try to avoid three things, coincidentally the same three big solutions the tenants are looking for. Those three things are: Permanent changes. If the change that is needed to solve the problem must be long term then the business you are dealing with may not be viable. The tenant may just be putting a problem they instinctively know is theirs onto you.

Short term fixes that save the tenant money but don't really solve any problem. Don't agree to a change that does not resolve existing delinquency problems or at least make it possible to see those changes make a difference with the delinquency.

Cancellation of the lease. If there is to be a lease cancellation it needs to be part of a business decision by the owner based on all the facts. Those facts include the actual loss expected: is there is current delinquency, what are the prospects of releasing the space, what are the costs of releasing the space, etc. And remember that guarantors have a voice in whatever happens.

Likewise there are three musts in approaching concessions: Only make concessions that are likely to help. If a tenant's business is falling apart because the particular widget they make or sell has no place in the market a rent concession isn't what they need. Insist on a business plan that demonstrates that the business is viable. If you feel a concession is in order tie it to performance. If you agree to take less rent for a period don't waive it but rather defer it to some future date based on performance. Say for instance a tenant gets $1,000 per month for four months as a rent reduction. What do you need to achieve before you waive that rent? You need to see that there is progress, not a further falling behind. Agree to waive the rent after the four months provided the tenant has remained current on the remaining rent obligations during the whole four month period.

Again, make reasonable decisions based on the facts. After the facts have been reviewed and it is clear the tenant cannot survive then maybe a concession just extends the pain for everyone. Don't tear up the lease (the tenant's preferred solution) at that point but rather seek a financial solution that lets the tenant out such as a buyout, or even better, an assignment to another user that is more viable. Never allow the tenant's bad luck to become your problem. If you can help them that is okay but bailing them out is a different story.

Document, document, document. You don't want to get into a dispute with your tenant about what is expected, or more likely what was expected. You don't want a guarantor to claim non-responsibility because he or she was not included in the change in the lease. Depend on your property manager to properly document anything you have agreed to. Verbal agreements invariably lead to further pain.

When an owner is approached by a tenant for a concession the owner has to think first about what will make a difference, what will not make a difference and the prospect of actually solving a problem with a concession. Anything short of that is not going to be in the best interest of the owner

Tom Sjostrom is a Vice President and the manager of our commercial department. Tom began his real estate career in 1975 in commercial lending. Tom's career has provided him with vast experience in lending, appraising, leasing, problem asset management, commercial property management, acquisition due diligence and asset disposition. Tom was the Chief Operating Officer for a major family owned northwest real estate company and then owned his own company until it merged with Bluestone and Hockley in 2005. Tom is dedicated to ensuring the best possible management of your properties.

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