Unless you have been living in a cave for the last year, you could not have missed the news that the economy is stalled, no one is shopping, spending is at a standstill and millions of people have been laid off nationally. What’s a retailer to do?
The lease you signed a few years ago in the economic boom, which seemed good at the time is now a millstone around your neck and threatening to sink your business – what can you do now?
In response to these hard times, many retailers are forced to shut their doors, but if rent alone is the make or break issue in keeping your business alive, perhaps there is hope – if – your landlord is willing and able to work with you, and you armed are with the right ammunition.
Not every property owner will be able or willing to work out a new deal, but that should not keep you from having the conversation. If you have been a good tenant, paid your rent on time, and are an asset to the landlord’s property you should arrange to meet your landlord and explain your situation. Unless he/she has been living in a cave too, he will not be surprised to get that call!
If your revenues are down because of the bad economy, you could share your sales receipts with your landlord so he can see you still have a viable business, but you need some help to get over the hump. Most tenants are reluctant to have this conversation, it is always difficult to admit that your financial situation is not as stellar as you would like. But, frequently, a property owner will be willing to work something out with you rather than have you shut your doors and leave him with an empty space.
Landlords are business people just like you and they have a vested interest in keeping their property leased. An inventory of vacant retail spaces in a down economy is not something a landlord wants to have. In all probability, he would have a very difficult time re-leasing your space if you closed up, and, he would probably have to reduce the rent to compete with all the other vacant space sure to come on the market shortly. Plus, while the space is vacant, the landlord’s expenses do not stop; mortgages, taxes, insurance, maintenance, and utilities still need to be paid, so empty space is a drain on his financial statement too. Then there is the expense of installing a new tenant, such as brokerage commissions, improvements to the space or property and the cost of the downtime while the space is empty. When the owner looks at the prospect of replacing a good tenant that will leave, they will frequently be willing to work things out to have you stay.
Rent reduction can come in many forms and here are a few suggestions.
Ask to amend the lease and reduce your monthly rent. - Of course this is the simple way, but probably the one the landlord is least likely to agree to. But, it is surely worth a try. Just straight up tell your landlord the rent is too high and your business is in jeopardy and ask for a rent reduction. Nothing ventured, nothing gained – he just may agree to a reduction to keep you. You would have a particularly strong argument if your lease is close to it’s end and you have other options in the market.
Defer the rent – if you have a long term remaining on your lease, ask the landlord if you can make partial rent payments and defer the balance until your business picks up. This can buy you some time. If your business is down 20% ask for a similar rent reduction. As business picks up, you can increase the rent accordingly.
Pay a percentage rent. This is a bit trickier as it requires that you open your books to the landlord and most landlords don’t want the added hassle of monitoring your business. But, if he believes in the future of your business and that you are in a growth industry, he just might be interested in having this discussion. In principal, percentage rent is just like it sounds, you pay a percentage of your profits toward your rent. As an example, if you were making $200,000 a year in profit previously, and your rent was 20% of that ($40,000 a year) and you are now making $150,000, then under a percentage rent basis, you would pay $30,000 a year. Of course, on the flip side, if your business picks up and you make $300,000 a year, your rent increases to $60,000.
Decrease operating expenses. This is an often-overlooked part of the equation, but property expenses are sometimes a way to reduce rent expense. Operating expenses for a property are passed through to the tenant either directly or indirectly through the base rent. By reducing the expenses, you can reduce your occupancy costs. Some of the things that can be examined are:
Examine Real Estate Taxes – has the landlord appealed the assessment to get a tax reduction? Property owners have the right to appeal their tax assessment once a year if they think the appraisal of their property is too high. It is worth looking at the property assessment to see if this could be an area of cost reduction,. Ask your landlord if he has reviewed the property tax assessment recently.
Operating expenses – many things go into the make of property expenses, landscaping, snow removal, trash removal, management company fees, insurance, cleaning, etc. In tough economic times, all these vendor contracts should be reviewed and rebid. In many cases, just putting the contracts up for rebidding can lower expenses. As a tenant, you should review any expenses that are passed through to you to make sure there are no errors in calculation.
Energy savings – perhaps this is an obvious option, but it is always worth mentioning. Examine all your utility expenses and see if there are ways you can reduce these costs without impacting your business negatively. For instance: reduce lighting or replace bulbs with energy savers, lower heat or air conditioning, lower hot water temperature, or perhaps change your hours of operation. All of these can provide small savings, and in times like these, every penny counts.
Just remember, you are not the only one suffering in this down economy. Talk to your landlord about your problem and see if you can reach a mutual solution. A smart landlord will want to work with you to keep his space leased. Not only does vacant space impact his rental income, it also has a negative impact on the other retailers in the center. If other stores count on your foot traffic to increase their business, your demise could cause a domino effect on the other stores. Retail landlords know this and should be realistic in these though times by working with the tenants they want to keep.
For more tips and strategies for finding, renting, and occupying space for your small business, go to www.mysquarefeet.com., the premier commercial real estate listing service that connects leasing agents directly with tenants searching for space today.
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