Sunday, March 22, 2009

Renegotiating Leases

During economic downturns it is common for tenants and sub-tenants to attempt to renegotiate existing leases. This may be motivated by a need to contain costs or a desire to take advantage of lower markets to extend existing commitments at lower rates. In either event substantial operating cost reductions are possible, making the attempt worthwhile if not necessary.

In previous recessions landlords were sometimes willing to buy tenants out of existing leases in other buildings as a way of bringing them into their building, in order to increase occupancy and capture tenants who would remain in place after the downturn. At some cases this “buyout” included costs of exiting the lease, relocation, and TI development. That is not the case in this downturn, however, because capital is not available in the credit market. For CRE’s and FM’s in the position of having to renegotiate this removes one of their levers on the existing landlord.

Further, landlords are not going to agree simply because you say you need relief. Naturally they are interested in your financial health because it has a direct bearing on their own. If you really need relief it is likely that some accommodation will be made. But it will not be a short or easy process. Be prepared to provide financial statements going back several years and cash flow projections and scenarios for the next few years as well. This is important data for the landlord to analyze as they consider your request. They will want to understand how legitimate your claims of financial distress are and what affect it may have on their property should you be forced to go elsewhere.

Also expect them to ask what else you are cutting back on and be able to prove your claims. Landlords are in a difficult position themselves and must make sure that they have completed a thorough due diligence process before agreeing to any sort of financial relief. They will expect that you are making cost reductions in several areas, not just looking to them alone.

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