Updating Real Estate Docs Is More Important Than Ever

Retail was already challenged on many fronts prior to the pandemic. Now the industry is facing terrible realities that make the bankruptcies and store closures of the past few years seem tame by comparison.

Despite the federal stimulus efforts, the enormous economic damages will continue to force retailers and landlords to the negotiating table as both sides seek to protect their own financial interests.

What can retailers do to prepare for the triage? For starters, they should be game-planning a wide variety of best- and worst-case scenarios. But another, less obvious area of focus, while it may sound almost technocratic, is every bit as important: ramping up your lease-administration capabilities.

Even in normal times, when retailers are faced with a cash crunch and a strict timeline for closing and restructuring their leases, a surprising number of them come to the table with incomplete information about their portfolios. In particular, they may be operating with inadequate information about:

• anchor-store closings and co-tenancies in the portfolio;
• the current owners of particular shopping centers in which they lease space; and
• the status and accuracy of prevailing rent schedules and lease abstracts.

In the coming discussions with landlords, such uncertainties could weaken retailers’ negotiating position. Incomplete or even sloppy lease administration slows the entire process down—something that retailers will not be able to afford if we do end up in a V-shaped recovery that requires rapid adaptation. If your process grinds to a halt while your competitors are able to sail along, the results for your company could be devastating.

Given the current situation, retail companies need to redefine the lease-administration role into a much-more-critical part of their real estate operations. With so many anchors closing stores and filing for bankruptcy, it is more important than ever to know exactly what’s happening with each location within the portfolio and how this stands to affect other operators with co-tenancy provisions in their leases. The right response is to supplement and support lease administration and make sure this critical information is up-to-date and easily accessible.

It will be a major shift, because lease administration has slipped considerably over the past decade due to a continual churn of property ownership across retail real estate.

The pace meant that real estate execs at retail chains, and even some of the third-party real estate advisors they hired to manage their portfolios day-to-day, could easily lose track of important details. Now, the anchor-tenant shakeup and potential for the pandemic to cause even more disruption on the leasing front add urgency to the need for accurate and complete information.

Consider a situation in which a real estate consultant is negotiating on behalf of an inline tenant at a center in which a major, traffic-driving anchor has gone dark. For the negotiating team, it’s critically important to know whether that inline retailer is still the beneficiary of a co-tenancy clause that grants rent-reduction, or permits them to leave the center, in the event of an anchor vacancy. In a worst-case scenario, there isn’t enough time to get all the answers, and the renegotiation proceeds on the basis of rent and term alone.

Amid job furloughs related to the pandemic, retailers should retain staff responsible for regularly updating lease-accounting and property-history information. If they outsource such tasks, they should not assume that the third-party provider runs such updates. Insist on up-to-date information about the anchors and cotenants in the portfolio, as well as the status of lease abstracts, rent schedules, landlord and leasing agent contacts and other pertinent information.

Optimizing portfolio performance has always been a strategic necessity for retailers, but it is all the more so today. Making sure that your real estate documentation is accurate takes time, money and energy—investments that are not easy to make when things are harried, personnel are being cut and revenues are declining.

However, the survival advantages of making such investments could be highly significant as the current situation progresses.

Moreover, whipping documentation into shape almost always results in tidier processes that, moving forward, make handling these tasks faster and easier. This can sometimes require a change of culture—a shift toward a common understanding of the importance of maintaining accurate property and lease-accounting documentation across the portfolio.

Fortunately, some of the benefits of this are immediate: Having good real estate documentation improves your negotiating position regardless of whether the company is rapidly expanding or tightening up.

Peter Wilson is a Managing Director at A&G Real Estate Partners, which has worked with  hundreds of healthy and distressed retail  and restaurant chains on rationalizing their real estate portfolios, handling everything from stores and distribution centers to headquarters and back-office buildings. To learn more about A&G’s wide range of services for tenants, visit: www.agrep.com or contact Co-Presidents Andy Graiser, [email protected] or Emilio Amendola, [email protected]