Work-outs for commercial tenants in today's economy

Today, commercial tenants are faced with a decrease in revenue while having to meet the same financial obligations as in a strong economy. The most significant financial obligation that a tenant struggles with in a receding economy is rent. In order to stay in business and avoid the pitfalls of eviction or bankruptcy, tenants should be pro-active and approach their landlords regarding rent reductions and/or deferments. Prior to approaching a landlord, tenants should prepare a lease summary containing the following information: (a) the total monthly and annual rent (inclusive of escalations); (b) the remaining term of the lease; (c) the type of tenant entity (individual, single asset, or tenant under multiple leases and locations); (d) type (cash or letter of credit) and amount of security held by landlord; and (e) the absence or presence of personal liability (i.e. guarantees). The more tenant favorable the terms of the lease are, the more leverage tenant will have in a negotiation with its landlord. Next, tenant should be prepared to disclose complete financial records for the past three years together with cash flow projections for the next year, a current list of all of tenant's accounts payable, including the creditor names, balance due, amounts in arrears and any information regarding tenant negotiations with its creditors. This information will assist in justifying the need for the rent abatement and provide comfort to landlord regarding tenant's ability to pay the reduced rent. A prudent tenant should not overlook doing its own evaluation of the financial strength of landlord. Specifically, tenant should consider the occupancy levels of the property, the price per rentable square foot of vacant space in the building (especially space similar to that occupied by tenant), and the status of landlord's financial obligations. To induce landlord to make a deal, tenants should be prepared to offer additional security for the lease either in cash or with a personal guaranty. Guaranties can take the form of a full guaranty or a "good guy" guaranty, which is more favorable to a tenant. A popular compromise between a full guaranty and a "good guy" guaranty is a modified "good guy" where liability continues for 6 to 12 months after written notice from tenant that it intends to vacate the space. Another inducement might be to shorten the term of the lease. Shortening the lease term will allow landlord to renegotiate the rent with tenant sooner or find a new tenant willing to pay a higher rent when market conditions improve. The bottom line with any negotiation for a rent concession is to keep in mind the competing interest of landlord and tenant by attempting to minimize tenant defaults and vacancies and maximize profits to the extent possible. As with any real estate transaction, it is critical that both parties be represented by experienced attorneys and any agreement reached be put in writing so that there are no misunderstandings in the future. Todd Lamb and Anthony Portera are partners at Hiscock & Barclay, LLP, New York, N.Y.