Noah Shaffer, our Senior Director of Asset Management, is here to answer your commercial real estate and asset management questions

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The first step is to gauge your gut feeling on the tenant. How do you feel about this tenant long term?

The second step is to analyze your property’s position in the market. Are you far below market rents? Far above? What about the condition of the facilities?

The answers to these questions will help you determine how hard of a line you can take on your response. Your risk of the tenant leaving will be lower if you are far below market rents in a top of the line facility with minimal comparable space available in the immediate surrounding market.

The reality is that it will be expensive to re-tenant your property with a new tenant, especially because there are very few tenants signing new leases or analyzing new opportunities at the moment. The risk with taking a hard-line is that you will have a vacant property for 6-9 months, have to pay leasing commissions, the property expenses (taxes, insurance, utilities and maintenance) and tenant improvement allowances. Unless you entirely hate your tenant we suggest entering into discussions on a compromise.

You should request store level financials, guarantor financials, site plans, and any other documents the tenant has in their possession which would be beneficial to a landlord before considering a rent abatement. If you feel strongly about the tenant and their financials you can request a stronger or additional guarantee from the parent entity or franchisee. You could also explore higher increases throughout the lease, or the exercising of an option. These provide the franchisee tenant with immediate relief they require, but put the property in a strong position for the rest of the lease term. We suggest trading short-term dollars for long-term benefit if you have the flexibility to do so.

We worked on a Mattress Firm a number of years ago when they were struggling financially. We obtained store level sales and felt comfortable that they would not abandon this location despite the threat to leave if the landlord did not accommodate a 25% rent reduction. Ultimately, we took a hard-line and they remained at the location. We felt comfortable about releasing the property and were in a different environment. The situation is different now and we would likely have taken a different approach in today’s environment. There are a significant number of factors that come into play, and all should be well thought out prior to making a decision.

Strong relationships with your tenant are key to lease and rent negotiations. Ongoing communication between a landlord and tenant throughout property ownership, and a real interest in improving a tenant’s operating performance, allows for both parties to remain calmer when tough discussions are necessary.

Relationships cannot be built in a week or a month. They are meant to be built over years, and strong relationships have tangible benefits to landlords.

For example: A property in our management portfolio had a rapidly dwindling lease term with a strong tenant. Our client was especially conscious of the shortened term. We knew from experience with the tenant at other properties that they were open to extensions, and we knew the terms related to those extensions. Our relationship with the tenant and past experience allowed us to extend the term for 12 years with favorable terms.