Most companies that manage more than a handful of retail, restaurant or commercial leases will be forced to make tough decisions about the bottom 20 percent of locations in their portfolios. An unbalanced occupancy cost-to-sales ratio (OC/Sales) is the primary reason, which can be brought about by declining sales, above-market rent, a contractual obligation to sink remodeling dollars into an under-performing store, or a combination of these factors. And to make matters worse, this can all be compounded by a bleak economic forecast.
The most common strategies for managing underperformers in the portfolio are listed below:
- TERMINATE – When it’s time to “cut bait,” the preferred recovery method is to terminate low-performing leases. Negotiating this type of exit is the cleanest and most risk-averse. However, it typically requires a lump sum payment equal to a percentage of the remaining rent obligation. Skilled negotiators may even entice landlords to accept termination payment in installments.
- SUBLEASE OR ASSIGN – The next preferred option is to sublease or assign the property, but that can take several months to execute a marketing plan. Subleasing carries some risk exposure with subtenant performance and credit, but can preserve capital in contrast to a lump sum termination payment. If rent is under market, assigning the lease is a great option. This removes an element of financial risk and would likely generate an assignment fee for the assignor.
- RENEGOTIATE – Renegotiating lease terms can be effective, especially when the tenant can demonstrate a reasonable hardship due to changing market conditions like surrounding vacancies, never-ending construction projects and rising crime rates. In the case of a required remodel, landlords also may be willing to reduce or abate the rent, provide a longer lease term and/or contribute improvement funds.
Managing the bottom 20 percent of a portfolio can be more labor-intensive than most in-house companies can effectively resource. In fact, internal negotiators can spend 80+ hours of preparation, dialogue, correspondence and execution for each property. However, an experienced, dedicated team of negotiators with a national marketing network in place can drastically shave critical time off the process.
If your company is actively seeking to restructure its portfolio, see how the team at Property Works Advisory Group can shorten the time to recovery, and manage projects with a high level of accountability and success.
For more information or to schedule a time to talk, contact us today.