Lease renegotiation considerations

Lease renegotiation considerations

Markets across the globe are in a state of disruption. The effects of COVID-19 are being felt by small and larger businesses, due to low consumer confidence, less disposable income and continued health concerns. Overnight, our ways of working, living and socialising have changed. Most businesses along with Commercial Real Estate leaders are struggling to address both the safety of their workers and the viability of operating their businesses using traditional methods. Commercial Real Estate executives are seeking solutions to better position their organizations for the economic realities ahead. With this in mind, landlords and tenants need to consider how best to decrease their risks and are encouraged to consider the following in preparation for lease renegotiations and rental relief requests.

1. A Well-Planned and Timed Strategy.
   Critical details such as legislation, legal interpretation, and overall economic impact of current events are still unfolding. Pursuing immediate relief funding options without a well-planned strategy is unlikely to yield to most advantageous outcomes for your business. Developing an informed strategy versus approaching a landlord with no strategy will almost always yield better results and help preserve relationships that will be critical in the future.
    
2. Determine Your Business Position.
   Tenants in specific sectors and organizations may face immense liquidity issues in the later part of April. Others will need to create more strategic mid-and long-term plans to protect their business continuity. For example, not all locations may be of equal strategic value to a business, especially in cost reduction mode. If a location in your portfolio was already experiencing low utilization, rather than negotiating lower rent, you may decide to exit the asset. For those businesses with multi-tenant assets or that experience a reduction in production or utilization, you may have a basis for not only renegotiating rent, but also operating expenses. Connect with your key business leaders and define your overall position, and the specific parameters for evaluating and taking action. Consolidation of rental space can result in a huge cost saving both in rental and operational expenses.
    
3. Leverage Data.
   Prior to engaging with a landlord or any other Commercial Real Estate participants, analyse and leverage all data available to you. While your organization's priorities may be rapidly shifting, the same applies to landlords, developers, investors and lenders.
   
   >  Internal data can help business leaders understand their options. Examples include
       business specific actions, utilization, and other internal business patterns and trends.
   
   >  External data will vary by asset class. For example, in seeking alternate supply chain routes,
       leaders might look to market data that outlines the geographic regions or locales less
       impacted by current events, and get orders placed before shutdowns. Corporates may
       leverage re-openings data in considering whether to open in co-working suites that are
       closer to places of residence while they shed square footage in city centres.
   
   >  Additionally, knowing and connecting with neighbouring tenants can also inform your
       strategy through comparison using knowledge of their activities.
   
   The more volatile a situation, the more important it is to understand all data available.
    
4. Articulate the Value Proposition of Your Specific Asset or Lease.
   Flexible office space and warehousing on demand were specifically designed to thrive in the current environment. However, for a build-to-suit asset that was purchased, built, and exists for your specific purpose and use, the approach to defining the value proposition of your assets/leases with landlords will vary.
    
5. Partner with Landlords.
   Generally landlords are empathetic with tenants that are facing true hardship and seek to foster relationships that will extend beyond the current lease term. A tenant's ask needs to be realistic. Like any negotiation, creative avenues of relief versus full rent relief will demonstrate a willingness to find a solution. Negotiations should also demonstrate consideration of additional economic structures, such as government relief funds and private relief funds. Also, many landlords will be more amenable to deferment (e.g. amortize into 2021). Awareness of constraints on either side will further inform the discussion:
   
   >  Tenants' perspective: Many organizations see their landlords as strategic partners, enablers
       of their business, and sources of capital, while others see them simply as a routine
       component of business operations. Commercial Real Estate leaders should collaborate with
       their executives, supply chain, manufacturing, marketing and finance teams to understand
       the strategic value of these relationships balanced against specific contracts and liabilities.
   
   >  Landlord's perspective: Depending on the ownership structure (e.g., Institutional Landlord,
       REIT and Private Landlord) and level of liquidity, governance and decision results will vary.
       In most cases, debt service payments will continue, as will property operating expenses.
       Landlords may need to escalate asks to lenders and/or joint venture partners for their
       most leveraged assets.
   
   Understanding your landlords' ownership structure, scale, leverage, product mix, culture, and many other characteristics and objectives will have a significant impact on how they respond to requests for rent relief and/or lease re-structures.
    
6. Understand Your Lease Options.
   Work with your lease administration, service providers and or landlords to understand your lease option notification dates for termination and renewal. If needed, this knowledge will enable you to speak to your landlords about extending these dates to allow more time for decision making. Long term extensions may mitigate short term cash flow problems.
    
7. Understand Your Leverage. 
   Strategic investors respond well to facts and opportunities to create long term value through partnership. For example, identify opportunities where you have multiple locations with the same landlord. Smaller, independent landlords may be motivated to address your specific asset/lease. The actions, stability, and liquidity of co-tenants may also be points of leverage with your landlords. Work broadly across your organization to understand all levers that are impacting your sector and business.
    
8. Respect Subtenants.
   Commercial Real Estate Executives and landlords should look at subtenants as direct clients of their organizations. Much like you, they have concerns regarding their both rental obligations and business operations. Formulate a strategy and communicate openly and directly with them.
    
9. Consider Your Culture and Brand.
   Building loyalty in a time of crisis can make or break a brand. Actions companies take, or don't take, will define them in the eyes of consumers, shareholders, and the landlord community in the weeks, months and years to come. In an age of social responsibility and social media, actions you take now can have a significant long-term impact on your culture, reputation and brand.
    
10. Know You Are Not Alone.
    Deal Core Property Group are working with clients experiencing similar challenges during this unprecedented time. Our team is able to share best practices coupled with successful leasing strategies that yield optimal solutions across our client base. Furthermore we can help guide you through the complexities we are all facing, share updates on how similar challenges are addressed, and provide the necessary thought initiative to help you make informed decisions.

The commercial real estate sector is typically a lagging indicator in a recession, but during a crisis, it gets prominent emphasis for strategic leverage. All parties in the commercial real estate ecosystem-tenants, landlords, and lenders-are preparing.

The race to savings and stabilization requires careful planning and knowing which levers can be pulled to reduce costs. While tactical clean-up is necessary as activities slow, proactive planning on actionable portfolio strategies will prepare companies for what's next. Effective communication is key.

Leveraging the lessons learned from China and Europe at the onset of the COVID-19 crises, Deal Core Property Group professionals are helping organizations develop an informed, collaborative style of negotiation that is proving to maintain, and in some cases enhance, pre-crisis levels of partnerships with landlords amidst uncertainty.