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 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

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

The “average” bookstore GM 40.32% COGS 59.51%

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

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

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.

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

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

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

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

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 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 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 Plan ahead

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

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 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 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 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 Make your case These costs can be substantial

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

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

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 Offer something back How an unnatural breakpoint works

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

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 Offer something back How back loading works

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

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. 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 Offer something back

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

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

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)

The End! Thanks for listening!

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