It s negotiable cost savings for business in a difficult economy
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IT’S NEGOTIABLE: Cost Savings for Business in a Difficult Economy. Retail Merchants Association First Friday Forum February 6, 2009. Introduction.

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It s negotiable cost savings for business in a difficult economy

IT’S NEGOTIABLE:Cost Savings for Business in a Difficult Economy

Retail Merchants Association

First Friday Forum

February 6, 2009


Introduction

Introduction

  • In more normal economic times, when businesses enter into long-term contracts, they expect to hold each other to the agreed terms until the end. But in today’s downturn, small businesses are finding that almost everything is negotiable.


Background

Background

  • The Wall Street Journal recently reported that a survey by the Small Business Research Board found that around 15% of surveyed businesses had recently renegotiated long-term fixed-cost contracts

  • For example, customers are asking their vendors, suppliers and subcontractors to take price cuts. 10-15% is not uncommon


What we are experiencing

What We Are Experiencing

  • At Wilson Stoyanoff, our clients are seeing contract renegotiations involving buyers, sellers, landlords and tenants.

  • We have found that in today’s environment, whether by necessity or opportunity, nearly everything is on the negotiating table

    So what can you do to reduce your costs?


Your lease it s negotiable

Your Lease: It’s Negotiable

  • After labor cost, one of the biggest expenditures for most retail businesses is rent

  • Landlords recognize that the market is soft and they are becoming more willing to reduce their rents and modify other lease terms

    So how do you renegotiate your lease?


Why can t we be friends

Why Can’t We Be Friends?

  • Contrary to popular belief, commercial landlords are not all evil

    • They are business owners who realize that an occupied property with a tenant who is paying something is better than an empty space


Relationships are everything

Relationships Are Everything

  • Landlords generally appreciate a cooperative tenant with a good history

    • You should be current with your rent or have a plan to get current


Case study 1 3 way

Case Study 1: 3-Way

  • Subtenant is leasing a former auto dealership

  • Rent is $1500 less under the sublease, so the main tenant makes up the difference. Main tenant is behind in rent and wants out.

  • Result of three-way negotiations:

    • Release of the main tenant (who must get current and pay $500/month through end of lease term)

    • Subtenant takes over lease with $500 increase with no escalation and lease term extended 2 years

    • Landlord drops rent by $500


Timing is everything

Timing Is Everything

  • Approach your landlord early and make him part of the process

  • “Going Dark” is almost never a good idea

  • If you wait until you have been served with a notice to vacate, it is probably too late

    • For a good example, check out a story recently broadcast on NPR: “Housewares Retailer Struggles in Downturn”

    • Link at www.WilsonStoyanoff.com under “Resources”


Case study 2 good tenant bad tenant

Case Study 2: Good Tenant, Bad Tenant

  • Our firm is currently representing two retail tenants in the same mall. Both are suffering from devastating sales declines.

    • “B” is months behind on his rent, and owes $25,000 before penalties and interest. He told the landlord that he absolutely could not pay and would have to file bankruptcy if forced. He offered $1,000 and asked to be released from his lease.


Case study 2 good tenant bad tenant1

Case Study 2: Good Tenant, Bad Tenant

  • “G” was also months behind, but notified the landlord about his financial problems in the first 30 days. He made partial payments on time each month. He asked for reduced rent and no variable CAM charges for 2 years.

  • Results: B was asked to “Quit or Pay” and has vacated the premises. He has been sued by the landlord and is contemplating bankruptcy. G is still open for business, paying the reduced rent.


Do your homework

Do Your Homework

  • Understand your lease provisions (you would be surprised how many commercial tenants have never read their lease)

    • Default provisions usually call for acceleration of rent

    • Waiver of jury trial

    • Attorney’s fees awarded to the prevailing party

    • A personal guaranty means you may not avoid liability if your corporation or LLC goes under

    • Defenses are few. Most leases favor the landlord


More homework

More Homework

  • Gather information on rents for comparable properties in your area

    • An experienced commercial realtor can help

  • Present this information to your landlord along with your proposal


Make your case

Make Your Case

  • Have your best arguments ready and sell your position to the landlord

    • You may have to agree to extend the lease term. This gives the landlord more certainty for a longer term (see “3-Way”, above)

    • Consider agreeing to “percentage rent” so when things turn around, the landlord can share the upside with you.

      • In normal times, typical percentage rents run 6-10% of sales over a set breakpoint (floor)

      • In NPR example, tenant offered 30% of gross receipts


Make your case1

Make Your Case

  • Consider asking for temporary rent abatement (12-24 months) to get you through the current downturn (see “Tenant G”, above)

  • If you can’t get the rent reduced, ask for the landlord to drop the escalation and pick up some or all of the CAM and maintenance costs (“3-Way”)

  • Consider taking less space in the current property

  • If you have to vacate, arrange a sublease. You may still have to make up the difference, but this can be better than a significant court judgment.


Moral

Moral:

  • Take action before it’s too late

  • Consult with the experts

    • Commercial realtor to help with researching comparables

    • Business attorney to help with negotiations


It s negotiable cost savings for business in a difficult economy

Questions?


My background

My Background

DAVID J. STOYANOFF has over 25 years of business experience, most recently in the positions of Assistant Vice President of Compensation and Benefits, and as Senior Tax Counsel, both for CSX Corporation. He was admitted to the Nebraska State Bar and the Virginia State Bar, and the U.S. District Courts of Virginia and Nebraska. David is a graduate of Wayne State College and received his J.D. from the University of Nebraska College of Law. He is also a CPA.


Contact information

Contact Information

David J. Stoyanoff

Wilson Stoyanoff, PLC

3741 Westerre Parkway, Suite D

Richmond, Virginia 23233

Phone: 804.747.7555

Fax: 804.622.6891

E-mail: [email protected]

www.WilsonStoyanoff.com


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