Longer Leases Become Common in Rent Negotiations

There have been many anecdotal discussions about lease negations occurring between landlords and their restaurant and retail tenants.

In a recent post, JLL put actual numbers behind these trends. From July to October, JLL completed 463 lease restructures on behalf of retail and restaurant clients in the U.S. That resulted in $110 million in long-term occupancy cost reductions, which is more than double what it completed in the same period last year.

One  trend noted among these restructures is that landlords are offering rent reductions in exchange for lease extensions. It is a win for both sides: Cheaper rents give retailers a chance to increase their profit margins, while banks favor longer leases. That helps the landlord when it’s time to refinance and sell. 

“For landlords – it can prove accretive in the investment sales cycle because buyers & lenders alike value term coupled with a commitment to location narrative,” according to Alex Sharrin, managing director, JLL Capital Markets.

Extended lease terms aren’t the only option in lease negotiations. Strategies like typing rent payments to a percentage of sales (percentage leases) and revisions to a retailer or restaurant’s exclusivity terms are also occurring. By revising exclusivity terms, landlords can pursue new tenants that might have previously not been possible, according to JLL. Some companies are also waiving their co-tenancy clauses in exchange for a rent deferral. These clauses are agreements between the tenant and landlord to switch to an alternate rent if a certain percentage of stores in a shopping complex aren’t open.

The Need for Flexibility 

Overall, the best approach is to stay flexible, experts with experience in the field say. Omar Eltorai, market analyst at Reonomy, reports the pandemic has increased interest in flexible lease terms and highlighted the need for many leases to have a greater degree of flexibility.

But as landlords enter into negotiations, they need to have a fundamental understanding about the tenant’s balance sheet, cash position, debt load and maturity schedule before they can start offering such concessions, Brad Tisdahl, principal and CEO of Tenant Risk Assessment, tells GlobeSt.com. 

“If they have debt, has the tenant had any conversations with the lenders about potentially extending the period when they need to service it or move interest payments back on the calendar,” Tisdahl says.