Recession Creates Opportunity to Negotiate Real Estate Leases

By Rob Reuteman
FOXBusiness

Which came first: the small business or the landlord? More to the point: who needs whom more? Thanks to the recession, today it’s a little too close to call.

Paul Chapman, who owns 14 commercial properties in Las Vegas, put it bluntly.

“Small business is the only customer in commercial real estate today,” Chapman said. “The big names aren’t making any moves, so small business has become our life blood.”

Across the country, commercial real estate prices have dropped 37% since September 2008 and 42% since their peak in October 2007, according to Moody’s investor services company. The commercial property price index hasn't been this low since 2002, and that’s built a lot of room for negotiating between tenant and landlord.

“I am no longer the big, bad landlord,” Chapman said. “This is a mutual relationship. If these tenants don’t succeed, it will take me months to find another. And quite frankly, I do not have the liquid capital to float these properties for months on end with no tenants.”
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Post-Recession Landscape of Small Business-Landlord Relations

"Retention is the key," said Sherman Miller, a regional manager for commercial broker Cushman & Wakefield, which operates 100 U.S. offices. "It's a lot easier to keep a client than to find a new one."

C&W might lower lease rates for existing tenants, or pay for tenant improvements, Miller said.

"If a tenant moves out, you may be looking at a year of down time for the property, and then you have to renovate the space for a new tenant," he said.

Some smaller landlords, dealing with less volume than a big national broker, haven’t been quite as generous.

David Finkel, who owns commercial buildings in North Carolina, Texas and Colorado, said he deals "daily" with tenants who want lower leases and other recessionary givebacks.

"We're offering strong tenant improvement incentives," Finkel said. "But lowering rents - we're fighting it tooth and nail. If we make concessions, we're making sure we build in escalations over the next two to three years. And we're only doing that of a lease is near expiration. If not, we're holding the line."

With new tenants, Finkel is keeping lease rates high in order to improve the valuation of his properties. But he's offering new tenants more improvements and "in some cases -- if it's a great tenant or a really tough lease to get -- some free rent periods."

On the other hand, Howard Ecker + Company, a national tenant representative firm with offices in Chicago, Denver, New York, Charleston, Miami and Detroit, reports seeing “a substantial increase in tenants who are able to renegotiate lease terms on existing leases with as many as five or more years remaining.”

No question, the nationwide credit crunch is putting the squeeze on landlords as well as their tenants.

“Landlords are stressed because they often are not getting the rent receipts required to meet their cash flow requirements,” said Howard Gelt, a real-estate attorney at Polsinelli Shughart, a firm with 470 attorneys in 13 cities. “They are being squeezed like everyone else -- either about to lose or have lost all their equity in the property, ready to file their own bankruptcy.

“Tenants are squeezed because of lower staffing as a result of layoffs, making part of their rental space of no value,” Gelt added. “Some are close to bankruptcy, others are just moving out and letting the landlords try to pursue them.”

In Napa, Calif., downtown rents have dropped an average of 20 percent, estimated Cathy Holmes, a commercial agent with Coldwell Banker.

Rebecca Lee, who owns a half block near Napa Creek, has been trying to fill two vacancies -- one for a year -- in her landmark stone buildings.

“It’s not that people don’t have ideas about what they want to do, but when they go to their banker, they have handcuffs put on,” she told the Napa Valley Register.

So Lee has lowered rents to keep existing tenants. “It’s ‘share the pain,’ I guess. I’d rather have rates lowered than shut the door,” she said.

"Everybody is asking for a rent reduction," said Cal Evans Jr., a loan administrator at AFB&T, an Athens, Ga.-based bank with operations in eight states.

For small-business landlords, Evans said, the rent reductions may the best option to keep tenants from moving to cheaper, vacant space. "It is a renter's or buyer's market," he told the Augusta Chronicle last month.

Mall tenants also are asking for rent reductions, said John Gibson, president of Augusta, Ga.-based mall owner Hull Storey Gibson Co., which owns 17 malls in the Southeast. But his company is adhering strictly to contracts, Gibson said, considering such requests only as a tenant reaches the end of their lease.

In good times, tenants didn’t offer to pay higher rent, he said.

Indeed, every situation is different, said Miller of Cushman & Wakefield: "You're not going to do a negative net deal for anyone. You can't cut a new deal for a tenant if your cash flow is not at least covering your debt service.”

In New York City, Councilman Robert Jackson is stirring controversy with his proposed Small Business Survival Act, a bill that would impose new restrictions to commercial landlords and reshape commercial renting in the city.

Under Jackson’s proposal, all businesses with less than 100 employees -- retail or office -- would have the ability to go to arbitration with their landlords if they feel a proposed rent is unfair. Jackson’s purported aim is to slow the rapid turnover of storefronts in gentrifying neighborhoods, and decrease the number of newly-vacant fronts citywide.

NYC Council Speaker Christine Quinn said she thinks the bill is “not within the Council’s powers” and will be thrown out by the courts, and should not be approved. The Bloomberg administration opposes the measure, as does the real-estate industry, which says that any curbs to the ability of building owners to set market-based rents will be disastrous.

As a countermeasure, Quinn’s staff proposes legislation that would create a tax break for smaller retail tenants and add incentives for landlords to renew leases of small businesses.

Just outside New York City, the tension seems to lessen. Sean O’Neil, who runs the One to One Leadership consultancy in Westchester County, New York, reports an unexpectedly pleasant experience with his landlord.

"When my lease renewed recently, I noticed that my landlord reduced my rent without my ever raising the thought of it,” O’Neil said. “First time I had heard of that. When I thanked him for it, he replied, 'Hey, it’s the right thing to do.'”

But few small businesses can likely match the benevolence shown to Shannon Ninburg, proprietor of Eye Can Art, an arts and crafts studio for kids in Seattle’s Georgetown neighborhood.

“We moved from a partner's basement into our current location in September 2008,” Ninburg said. “When we asked our landlord how much rent would be, he told us we could start paying him when we got on our feet financially.”

Since profitability still eludes Ninburg, she is keeping her landlord happy with a constant stream of cookies and bread she and her partners bake.

Another innovative solution to landlord-tenant tension comes from outside rural Waterford, Ohio, where Susie and Lyndon Little are wholesalers of organic and sustainable products made by a collective of families in the region. (See photo above)

“Our landlord would not give us a break when things got a little tighter, so we went out and bought a building that was in foreclosure,” Susie Little said. “I am so glad we did. We spend less on electricity, gas and rent and will own the building in four years.”

Small business needs to think outside the box, she said.

“There are other options out there and staying with the norm is not necessary in this economy.”

(Rob Reuteman is a freelance journalist based in Denver where he was longtime business editor of the Rocky Mountain News.)For article please go to Fox Business Small Business


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