You’ve hacked away at the obvious variable costs to get your company through the downturn. But for every buck you’re saving you’re losing another to falling traffic and revenues. It’s time to cast a wider net and look at fixed costs, the biggest of which can be rent.
Non-negotiable, you say? Not so, counter operators and real estate experts who are parlaying the economic crisis and softening real estate market into bargaining chips with landlords. Bottom line: leases, even mid-way through their terms, are ripe for renegotiation.
“We have many landlords who have agreed to a 50 percent reduction in rent,” says Frank Easterbrook, president and ceo of Juice It Up! Franchise Corp., Irvine, California. “Sometimes a portion is deferred, but we always try for straight rent reduction and have had great success in getting it. We just completed one deal that totals $124,000 in savings for the franchisee over the contract term.”
Jerry King, principal at Rent Research Consultants, a Boston-area firm that specializes in negotiating rent reductions, says reductions he’s secured have averaged a little over 14 percent the past year. “There’s money to be made,” he says, “but it’s not for everyone. If you’re a good tenant who’s struggling right now, most landlords are willing to deal. If you’re already three months behind and in real trouble, however, there might not be much incentive to save you.”
Make it a win-win
Incentive is the key to rent renegotiations, King says. “Your odds of succeeding are much greater if you don’t just go in whining, but offer landlords something of value in exchange for a reduction.”
What landlords value are full spaces, so exercising renewal options is one strong bargaining chip, he says. “Letting them know that in exchange for lower rent you’ll sign on for another five or 10 years is appealing, particularly if they’re trying to refinance or if they’ve lost other tenants,” he notes. “Before you go in, find out what the landlord’s situation is. Then figure out what you can offer in exchange for help.”
John Wadham, vice president of real estate at Bruegger’s Bagels, Burlington, Vermont, says the best time to strike is near renewal time. “The tenant at that point has control because he can either renew or not,” he says. “It’s in the landlord’s best interest to make sure he stays.”
Bruegger’s favors a market-based approach to rent-reduction negotiations. Wadham suggests researching other rents in the marketplace, vacancies, physical changes in the area, changes in the condition of the property, loss of an anchor tenant or other traffic drivers. “When you can point out that conditions have changed from when you signed up, that gives you negotiating power,” he says. “Don’t just talk about the bad economy; get specific about how it has impacted your trading area. Tap brokers and public records to find out what you need.”
He suggests also looking beyond rent to other parts of the lease, such as rent escalation, improvement allowances and pass-through costs—i.e., charges for common-area maintenance and utilities. “Each of those adds up, and each is more negotiable today than they were six months ago,” he says.
While more difficult, getting mid-term reductions can be done, as well, he adds. “It’s tougher, but if your landlord acts like a partner he may bend. In this economy, you can point out that the rent is now out of synch with sales. You can offer to move up the lease renewal in exchange for a reduction. That protects the landlord farther out and helps secure lower rent now.
Juice It Up! draws heavily on sales data, too, in its negotiations with landlords.
“We monitor our stores’ performance closely and contact landlords when we see the ratio of rent to sales getting out of balance. We show that sales are down and profits are being impacted. We suggest that we need to work together and show what we’ve already done at the corporate level.”
Negotiating rent reductions is a tough process, he concedes, but it is effective. “Every situation is unique, but in our experience sticking to the facts, keeping it unemotional, and stressing that it’s best for all if the store stays open works phenomenally well."