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Renegotiating a Lease

Renegotiating a Lease. BEA 2005 NEW YORK, NEW YORK JUNE, 2005. ABACUS. ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations. The numbers generated by the ABACUS study were used to create…. THE 2% SOLUTION.

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Renegotiating a Lease

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  1. Renegotiating a Lease BEA 2005 NEW YORK, NEW YORK JUNE, 2005

  2. ABACUS • ABACUS is an initiative to create a benchmark for the measurement of independent bookstore operations. The numbers generated by the ABACUS study were used to create…

  3. THE 2% SOLUTION • Discussed an achievable means of moving from negative profitability (loss) to positive profitability (a gain) • Isolated the prime movers affecting profitability • Suggested that progress comes one small step at a time

  4. THE 2% SOLUTION Identifies four prime factors on which to concentrate: • Sales • Margin • Compensation • Occupancy cost In this session we’re focusing on Occupancy cost

  5. The “average” bookstore GM 40.32% COGS 59.51%

  6. The importance of occupancy cost Occupancy cost is a bookstore’s second largest expense

  7. The importance of rent Most of occupancy cost is rent Rent includes common area maintenance charges, real estate taxes, insurance, etc.

  8. Isn’t Rent a Fixed Cost? • Your rent is determined by your lease, and your lease is a binding agreement between you and your landlord. So yes, rent is a fixed cost. • But… • Your lease is a contract, and given the right set of circumstances, any contract can be renegotiated.

  9. Reasons to Renegotiate a Lease • Your current lease is coming due • Your rent is significantly higher than the current market value of your space • Your occupancy cost is higher than the benchmark for profitable bookstores • You can’t afford to pay it

  10. Some general principles of negotiation • Know your “opponent” • Plan ahead • Leave room to compromise • Don’t say no, offer alternatives • Give the impression you have other options • Stay cool,don’t be too anxious • Know how to close the deal

  11. Steps to renegotiate a lease • Plan ahead • Do your homework • Make your case • Be realistic • Offer something back • Close the deal

  12. Plan ahead Know that rent is going to be a problem before it becomes a problem • Project sales and expenses (P&L) for the coming year • Know your rent for the coming year– check your lease for scheduled rent escalations • Remember to include additions to base rent: • Common area maintenance (CAM) charges • Real estate taxes • Insurance • Calculate how much rent you can afford to pay Example of a projected P&L statement

  13. Plan ahead Give plenty of notice that you want to renegotiate the lease • No business person likes surprises • Property managers need lead-time to get approval from owners • Giving notice shows you’re a responsible tenant • Leave yourself time for an alternative plan if the renegotiation doesn’t work out • Stay current on your rent leading up to the negotiation

  14. Plan ahead Do your homework • Talk to real estate brokers and neighboring tenants to find out: • The market rate for your space • If your landlord has given rent concessions to other tenants • Collect articles/studies on the retail environment in your area • Find out the vacancy rate in your area • Ask real estate brokers

  15. Plan ahead Know your lease • Does your lease: • Allow you to sublet all or part of your space? • Give you the right to renew your lease at below market rent? • Guarantee “quiet enjoyment”? • Include a non-compete clause? • Is your landlord required to: • Preserve a “first class” building? • Carry out regular maintenance? • Keep other retail spaces occupied? • Not disturb your business? …these points may be critical in your negotiations

  16. Make your case • Approach the negotiation as a partnership • Explain why you want to renegotiate • Focus on causes that are outside your control (e.g., a superstore opening) • Focus on causes within the landlord’s control (e.g., you’re in a mall that’s gone downhill) • Explain what you’re doing to help yourself • Show your plan to: • Increase sales • Increase margin • Control compensation Present your landlord with a concrete plan

  17. Make your case • Show how much rent you can afford to pay • Use industry benchmarks (ABACUS) to show how much rent bookstores pay • Use a projected P&L to show how occupancy costs affect your business • Focus on additions to base rent if these are substantial • Challenge maintenance charges that do not benefit your space • Ask your landlord to contest real estate taxes if you think the assessment is too high

  18. Make your case Suggest ways your landlord might help • Improve the building • Do more maintenance • Make sure adjoining spaces are occupied • Advertise more • Enforce non-compete clauses • Stop disturbing your business

  19. Make your case • Challenge the methodology for calculating rent escalations • If you have stepped-up rent escalations and think the step-ups are too steep, ask the landlord to re-consider them or switch you to indexed rent • If you have indexed rent and think you’d be better off with step-ups, propose a step-up schedule • If you have indexed rent and think the index is inappropriate, ask the landlord to use a different index • Challenge the landlord’s calculation of the size of your space

  20. Make your case • Landlords don’t like vacant space • Stress how responsible you are being in addressing the issue before it becomes a “problem” • Mention the vacancy rate in your area • Mention the cost of finding a new tenant if your business fails • Lost rent while the space is vacant • Brokerage fees • Build-out” costs These costs can be substantial

  21. Be realistic • Don’t ask for an unrealistic rent reduction…it makes you look less credible • If your landlord won’t reduce the scheduled rent, ask for a temporary “abatement” • Know whether your problem is temporary or permanent

  22. Offer something back Suggest a percentage rent arrangement • The advantage of percentage rent • You pay less rent when business is bad • The disadvantage of percentage rent • You pay more rent when business is good How percentage rent works

  23. Offer something back Suggest a percentage rent over a higher than natural breakpoint • In a typical percentage rent arrangement, the landlord stands to gain, even when business is relatively flat • One way of compensating for that is to set an unnaturally high breakpoint How an unnatural breakpoint works

  24. Offer something back Notes on percentage rent arrangements • Your landlord will have access to your books • Be careful what goes into the definition of “sales” What to exclude from percentage rent

  25. Offer something back Suggest “back loading” rent • Advantages of back loading rent • You get immediate rent relief while the landlord still gets the same amount of rent over the lease term • Disadvantages of back loading rent • If sales don’t improve, you could be facing an even worse rent problem in a few years time How back loading works

  26. Offer something back Offer to give up some space • Allow the landlord to take some space back • Sublease some of your space to a complementary business The effects of giving up space

  27. Offer something back Offer to make improvements to your space • The improvements will benefit your store, hopefully increasing sales (and maybe even alleviating your rent problems!) • The improvements will be capital costs not expenses…which means that your cash flow should improve, and your P&L may look better • Remember, you’re only offering to make improvements in exchange for rent relief.

  28. Offer something back • Offer to extend your lease at a new rent • This also gives you an opportunity to re-negotiate CAM charges, and other terms of the lease • Offer to give up some rights • Renewal rights • The right to not have competing tenants

  29. Close the deal • Don’t allow your landlord to put you off • End your negotiation with clear agreement on all relevant terms • Tell your landlord when you need the new terms to start • Follow up in writing • Get a signed agreement

  30. Steps to renegotiate your lease • Plan ahead • Do your homework • Make your case • Be realistic • Offer something back • Close the deal

  31. Renegotiating your lease And if you can’t renegotiate your lease but you have a good location that you want to keep… Think about buying your building (but that topic will have to wait until a future seminar)

  32. The End!Thanks for listening!

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