By Katherine Field
 
(October 8, 2009) When it comes to negotiating a lease restructuring or rent reduction, not all tenants and landlords are alike, according to Bridget Grams, a principal in the real estate and financial restructuring firm Huntley, Mullaney, Spargo & Sullivan.

The Roseville, Calif., and St. Charles, Ill.-based firm has restructured more than $8 billion in leases and corporate debt nationwide, providing services for such retail clients as Blockbuster, California Pizza Kitchen and OfficeMax. And the number is rapidly growing.

“Over the last 18 months alone, our lease-restructuring workload has increased 115% over the previous 18 months,” said Grams.

Thanks to a tanked economy that has left retailers with downward-trending sales, more and more chains are revisiting their leases in hopes of taking a serious bite out of occupancy costs. But in order to make serious restructuring inroads, you have to know right where to start.

“It is important to, from the get-go, cut to the chase and evaluate whether your stores are cash-flow positive,” advised Grams. If they are, you just may have lost your leverage.

“Landlords are getting so many requests right now that their criteria have tightened,” she said. In other words, a cash-flow-positive store isn’t going to be a priority for a landlord evaluating lease-restructuring requests.

Second, Grams said, is to know your market. “Are there a lot of vacancies in your center? If so, that can potentially be leveraged. Are you paying market rent, above market rent, or below market rent? If you are paying above market rent, you have more leverage.”

In order to most accurately determine your negotiating leverage, you must look at each store in the chain individually. “Corporate distress is different, as that can be your leverage and then you would drill down to the individual stores from there,” said Grams. “[In lieu of corporate distress] look at your lease and look for a continuous operations clause, find out if you have the ability to get out of lease if sales fall below X amount, and check for a co-tenancy clause.

“Landlords are getting killed by co-tenancy clauses right now. And retailers are missing these because they’re so busy dealing with internal job and cost cuts,” said Grams.

What is most important to understand is what can be gained from a successful negotiation. “You can anticipate an increase in cash flow,” said Grams, “and certainly it will help you to remain solvent. But mainly a successful lease restructuring buys you time to rebuild and get back on solid footing.”

For OfficeMax, Grams and her team are spearheading a restructuring program that involves 200 underperforming locations. “Of the 200, 50 are completed with restructured leases in place, locked and loaded,” said Grams. Landlords overall are being cooperative, she said, and her firm is cautiously optimistic that the remaining leases will move successfully through the negotiation process.

“OfficeMax isn’t being greedy,” Grams said. “The retailer is looking for short-term rent reductions to put the business back on solid footing.”