Lease Restructuring Strategies During COVID and Beyond
Tenants should understand that leases can be constantly mined for value creation, and that landlord outreach is an ongoing practice, not just an exercise during unprecedented times.
This story originally appeared in the Winter 2021 print edition of the Middle Market Growth Outlook Special Report. Read the full report in the archive.
COVID-19 has presented unprecedented challenges for operating businesses throughout the country. Companies are trying to stop losses/revenue decline, while navigating new guidelines and restrictions. Cutting costs is a necessity and real estate obligations including rent, taxes and upkeep are a major part of that burden.
The results of the ACG survey show that 50% of the PE firms that owned portfolio companies asked their landlords for rent deferrals or abatements. (See chart on p. 46). Of those operating companies that sought relief, only 14% used a real estate advisor or seasoned real estate consultant. The majority of firms utilized their in-house staff (financial controllers, counsel) to reach out to landlords even though these employees have little to no knowledge or experience of leases or general market conditions surrounding their own real estate. This took away the employees at the most inconvenient time when the operation of the business needed their attention the most.
Property owners and their asset managers were bombarded with outreach during the months that followed the COVID shutdown. Many of these conversations took the approach of simply asking landlords for help. Very few tenants understood the landlord’s situation and how these negotiations could potentially add long-term value to the landlord. This is most likely the reason that only 36% of the respondents achieved any type of rent abatements or deferrals. Professional real estate advisors recognize that understanding who the landlord is and their profile and how to speak their language is the key to getting short-term and long-term results. From interviews with many tenants and sponsors who took on these initiatives on their own, we found of the 36%, most achieved only a short-term deferral. Although these deferrals seemed helpful during the lockdown with no potential relief in sight, they only shifted this additional burden over to the next several quarters or fiscal year; abatements or restructures would have been a permanent help.
Firms that engage a real estate advisor with a prudent strategy for rental abatement and overall lease restructuring are much more likely to get both permanent abatements and long-term rental savings. Understanding who the owners are and how they view the property and addressing the overall market condition helps the advisor work through what may otherwise be a period of unproductive negotiations and grandstanding. Knowledgeable real estate advisors understand the situation of the landlords, who are also in the business of making money through collecting rent. An advisor can help work through the landlord’s emotions, which can highjack productive conversations. The restructuring process may be less about dollars and cents than most tenants or business owners think.
Tenants should understand that leases can be constantly mined for value creation, and that landlord outreach is an ongoing practice.
Real estate advisors understand the lease and property fundamentals, as well as how landlords’ financing situation can impact the outcome. Additionally, advisors enable landlords to benefit from improving the financeability of the assets to ensure long-term value. Qualified real estate advisors have capital markets teams that can help provide landlords with refinancing options, further creating a win-win option for the landlord and the tenant.
In conclusion, sponsor firms benefit by hiring a professional real estate advisor over the long term to understand the tenant’s business, the underlying real estate, and the profile of the landlord. The firms that engaged real estate advisors pre-pandemic, as well as during the pandemic, were able to achieve the most beneficial outcomes. The pandemic was unprecedented, and companies did whatever they could, and quickly. It seems the firms that hired professional advisors pre-COVID were more equipped to mobilize quickly with their landlords than others. Tenants should understand that leases can be constantly mined for value creation, and that landlord outreach is an ongoing practice, not just an exercise during unprecedented times. As real estate advisors, we cannot stress enough how important it is to secure a long-term solution for value creation. As we start to see light at the end of the tunnel in regard to the pandemic, it is not too late to engage an advisor to obtain long-term rental savings.
