By Jeremy D. Cohen, partner, Hartman Simons
Although the economy is starting to turn around, let’s face it, it’s still a tenant’s market out there. Today’s retail tenant is not shy to try and renegotiate a lease early to take advantage of current market conditions. Landlords in today’s landscape are understandably tempted to yield to a tenant’s wishes. However, below are three questions you should consider when an existing tenant comes to renegotiate its lease before a renewal period:
1. What is the financial strength of the existing tenant? Landlords need to be students of their tenants’ industries. Understanding industry trends and the health of the specific market will provide good insight into whether your tenant has a good chance of surviving and continuing to pay its rent. This leads into the second question…
2. How well is the tenant performing in the space? You should make it a habit to review your tenant's quarterly gross sales (and making such provision exists in your lease is essential in this arena). How are they comparing to similar businesses in your market area?
3. How easily can you, the Landlord, replace the existing tenant? Don’t you wish you could look into your crystal ball and see how easy it would be to replace a tenant? Well, I cannot provide you with psychic powers for seeing the future, but I can offer several questions you should ask yourself:
- If the tenant vacates, what rent could you get at market value?
- What are the existing sub-market vacancy rates?
- How long would it take you to locate a new tenant?
- What is the size and marketability of the existing space?
- What is the condition of the existing space?
- How much will the build-out for the new tenant cost plus how much tenant allowance would need to be delivered to such new tenant?
Landlords, I hope you find these questions helpful when a retail tenant approaches you asking to renegotiate its lease. In this market, you will still often find yourself walking a fine line of knowing when to renegotiate and when you should let the tenant walk from the space.
Please feel free to comment on my post. I would love to hear your insights on this topic!