From time time DDIFO is pleased to present Guest Commentary from valued contributors. The following is an article written and submitted by Jim Fiola and Paul Kinney from The National Retail Tenants Association (NRTA)  60 Shaker Road, East Longmeadow, MA 01028-2760, Phone: (413)525-4565

Rent Concessions May Benefit Both Tenant and Landlord

While not a new discipline within well-structured lease administration departments, the function of lease renewal negotiation has taken on a life of its own in today’s economic climate for both tenant and landlord positions. One leading lease administration director said that he has extended the renewal negotiation calendar from its customary 18-month period to include stores with renewal dates four
years out.

Most leading retailers have lease renewal action plans operating in full gear to secure significant occupancy cost savings. One lease renewal negotiator exclaimed, “there is a lot of money out there, and
everyone wants their fair share.” Still another lease administrator for a high profile apparel chain has over 150 active negotiations underway. She confides, “I could not imagine anyone who is paying occupancy costs not taking the renewal process very seriously.” In her circumstance, she is fighting to secure more favorable occupancy agreements using a percent-of-sales benchmark that more accurately reflects her company’s market-to-sales balance.

Jerry King of Rent Research Consultants, Inc. specializes in lease renewal negotiations, and has taught a course on this subject at NRTA’s Annual Conference for the past several years. He is seeing retailers with strong desirable site positions achieve 5 to 15 percent reductions in monthly rents, asserting that “your case improves if you are a strong tenant and the landlord really needs your commitment to

When entering into negotiations, King advises his clients to approach the question with an attitude of cooperation. Yes, you need a short-term cost reduction. But, what can you do to help the landlord? Many of whom are also cash stressed, he adds. Tenants sending letters requesting a reduction in rent definitely are getting a landlord’s attention. However, with vacancy rates more than double from two
years ago, solutions usually don’t represent an immediate cash windfall to tenants.

Landlord responses have varied, ranging from agreeing to keep a rent flat or foregoing a scheduled rent jump while in turn asking a tenant to either extend the lease or renegotiate the co-tenancy clause or some other clause.

One industry observer explained how a landlord agreed to immediate rent abatements during the current term and tagged on increased amounts at the end of the lease. King suggests that about 80 percent of renewals now involve language in which the landlord agrees to not impose the planned rent increase in exchange for a tenant’s agreement to stretch out occupancy commitments.

Some industry observers expressed concern that an overly aggressive attitude on the part of retailers pushing for immediate lower rates might reap short term concessions, but may also breed bad relations
down the road. Others concede that while this is a possibility, there is also a critical short-term window of time available for them to get market prices and costs in line.

Rick Burke of Lease Administration Solutions, LLC believes that most landlords recognize their tenants are experiencing revenue drops and cost increases. Using a benchmark ratio of sales per square foot, retailers need help to avoid having occupancy expenses reaching dangerous levels. At these higher cost levels, the rent becomes too much of a burden and a retailer faces the risk of having to “go dark.”

In those cases landlords lose too, and want to cooperate to avoid those negative situations. Admittedly these danger levels vary depending on the industry segment a retailer falls within. Traditionally jewelry
retail is at the higher end, apparel retailers fall within a middle ground and electronic and dollar store retailers are in the lower spectrum.

It is in a tenant’s best interest to work closely with its landlords.

Read more at: NRTA Rent Concessions

Hear Paul Kinney, President of NRTA speak at the DDIFO Members Meeting, 9/22/09 at the DCU Center, Worcester, MA. Register Here