The current state of retail is not what anyone could have predicted for landlords and retail tenants and certainly isn’t anything for which they could have planned.
While grocery and food retailers are responding to unprecedented demand that strains their resources, on-line sales have experienced a 49% surge on average, leaving traditional retailers grappling with a 16.4% sales decline in May and questions on how to safely reopen and recover from lost retail sales.
So how are some making positive strides, creating lemonade from the lemons so to speak? Here are some considerations.
- Plan and prepare for customer and employee safety upon reopening, and what those modifications mean for your operation to allow for seamless reopening, when appropriate.
- Optimize! Find ways to increase sales within the confines you now face, be they government restrictions, safety concerns or consumer behavior. If your restaurant can’t fully reopen yet, can you convert part of the dining room to a delivery or pick-up food prep area? Could you find ways to expand outdoor seating? Can you streamline staffing plans? Advertise more or differently? Offer specials? Before approaching a lender, an investor or your landlord for assistance, re-examine every part of your operation to find ways you can optimize your business.
- Consider that curb-side pick-up, home delivery and shipping may be part of your new normal operations—embrace them as part of your business plan.
- Investigate if you are eligible for a government assistance program or other funding assistance source.
- As you reopen, if meeting your current lease obligation is a challenge, communicate with your landlord on options from rent deferrals to lease amendments or rent relief. Be prepared to provide financials including historical sales, liabilities and your business plan for a productive, solution-based conversation. Be sure you are able to communicate the measures you’ve taken prior to approaching your landlord, including which capital sources you’ve already had conversations with and which ones you plan to approach. Remember that your landlord has obligations as well and may not be able to accommodate your entire request. Transparent and responsive communication is critical.
- If you are requesting concessions to your lease obligations, be prepared to give as well to reach a conclusion that supports both parties. Consider what you can offer your landlord in exchange for any relief or concessions.
- Request past and ongoing sales reporting in addition to financials, including a current balance sheet. This information is crucial in evaluating the tenant’s overall viability, and also allows the you to make educated decisions and craft custom tailored solutions if necessary. In addition, ongoing sales reporting is a critical tool if planning for the future disposition of a retail asset.
- Request a detailed accounting of the measures the tenant has taken to date to optimize their operations within the new and evolving environment, as well as a detailed explanation of their go-forward business plan.
- Request detailed information on which lenders or other capital sources the tenant is pursuing. If there is a government assistance program for which the tenant is eligible to apply, request proof that the tenant has submitted such applications and is diligently pursuing obtaining new funds.
- Utilize any request for rent relief as an opportunity to renegotiate any tenant favorable clauses such as “co-tenancy” or “exclusive use” provisions. Ongoing sales reporting is a must.
- For tenants that were already underperforming prior to COVID-19, consider adding a landlord lease termination right with 90-day notice. This provides the opportunity to collect rents but also the flexibility to recapture the space.
- For financially viable tenants with near term expirations or capital requirements, now is an opportune time to negotiate a lease extension in exchange for rent relief or tenant improvement allowances.
- Within the new lease amendment that has a forbearance as part of it, include a waiver of the automatic stay in the event of a bankruptcy, which may help minimize the risk and allow for a quicker recovery of the space.
Whichever side of the lease you find yourself, working through this difficult financial period to improve leasing flexibility provides a path forward. For landlords, achieving better insight into sales performance of your retailers is a wise move. And for retailers, clear and consistent communication with your landlord on the challenges you’re facing can lead to long-term, collaborative solutions.
Michelle Schierberl serves as a Senior Vice President in Stream Realty Partners’ Greater Los Angeles office. Michelle is part of the retail investment division for Stream in Southern California, specializing in the sale of retail shopping centers. Michelle’s clientele ranges from private clients to institutional owners of shopping centers.
Jack Arnold serves as the Managing Director for the Stream Southeast Retail Team, based in Atlanta. Jack oversees the strategic growth of the firm’s retail presence in the southeast, concentrating on retail project leasing, property management, tenant representation, retail acquisitions, and development/redevelopment.