Due to the impact of the COVID-19 pandemic struggling retailers have caused landlords to see their collections drop from a once stable 90% to a teetering 70%. In the headwinds of the pandemic, many retailers are looking to reduce costs; while landlords simultaneously search out security and stability from their credit tenants..
Nick Tompkins, with 1045 Real Estate says, “At 1045 we understand restructures from both the retailer’s and landlord’s perspective. That’s important when bridging the gap in motivations and coming to an amicable deal.” Lease restructuring provides a unique opportunity for tenants and landlords to align—creating long-term stability for landlords and making a location more operationally efficient for the retailer.
Lease restructuring can provide other benefits to a landlord above and beyond surety of payment. During capital events, landlords may see significant value add opportunities based upon a tenant’s commitment. For instance, with historically low rates, a ten or fifteen-year credit tenant lease can allow highly attractive refinancing opportunities. Tompkins notes, “A number of landlords have come to us and used a restructure to pull money out of stabilized centers and then investing it into more opportunistic investments. The tenant’s rent covers the increased mortgage and the landlord can realize a 10 plus percent spread between the opportunities.”
Further, during a sale, buyers have proven to pay more for highly secure and stabilized assets. Long-term leases increase the inherent value of the asset, but also opens the property to a different buyer pool entirely—the coveted 1031 exchange buyer. These buyers have huge incentives to place money into secure assets with credit tenants—and can pay a premium for that. They also have tight timelines and typically a strong probability to close.
For the retailer, lease restructuring can offer a noticeable benefit in the form of a reduced rent or up-front payments. Stores that are restructured benefit as they become operationally better locations and can move from ok to a strong performer. Similarly, struggling stores can become long-term locations for an operator with the right restructure. Tompkins explains, “Some of the most exciting locations are the ones that we completely turn around. The rent is too high compared to the retailer’s interest in the location, and the store may close. But by both the landlord and the tenant coming together and aligning, we turn a money loser for the tenant into a money maker. Additionally, the landlords avoid the dreaded dark store scenario.” Restructuring has become a significant way for retailers to capitalize on their credit and commitment across a wide range of stores.
As a final note Tompkins says, “We believe tenants who engage with their landlords position themselves well for the future. Even small rent reductions can really add up across a portfolio of properties. Similarly, landlords who can align with their tenants are going to see the continued benefits of having less exposure to changes in the retail market—while achieving attractive commercial retail returns.”