If you own commercial real estate, at some point in time a tenant is going to ask you to reduce the rental rate for their lease. This is never a fun situation to find yourself in so you want to be prepared for when the time comes and you have to deal with your tenant asking for a reduction. The number one thing is to remember it’s a business transaction and try to keep emotions from getting in the way, then investigate as to why your tenant is asking you for the reduction. There are cases where the tenant may be looking down the road and sees a potential for a slowdown in their sales and wants to prepare or they may just want to try and get a reduction. No matter the reason it’s best for your investment if you can create a winning proposition for both yourself and your tenant.
The first thing you want to do is perform your due diligence, make sure you know the current market rates for your asset class and pull their lease to know how long of term they have left and if there any increases in rent set for the near future. The operating statement from the past two years broken out by month and a current Balance Sheet should give you the story of what has been happening and where the company is today. Check to see if this may be a seasonal change, bad business decisions, etc.; and be prepared to offer them advice on what you see may help them get back on track. If you have decided to work with them and try to keep them in your building you want to do your best to help them get their business back on track and performing at peak level. You might be able to offer insights to improvement as when they are in the middle of operating their business they may sometimes not see the full picture and if you can help them it’s best for everyone.
If you make the decision to offer a rent reduction and work with them to keep them in place you can offer them a few different options. (depending on their lease term)
- Temporary rent reduction for a certain amount of time;
- When looking at your lease rental increases, consider not increasing this year;
- With the rental increase maybe forgo this year and double the following year;
- Consider not increasing their rent, or even reducing it, but take a percentage of their sales for a certain amount of time
- Blend and extend- forego some rent for a certain amount of time and extend the lease and add the reduction to the extension.
Keep in mind — your goal is to create a winning proposition for yourself and your tenant. Understanding their business helps go a long way.