CRE X Missouri

A blueprint for closing the toughest commercial deals

Closing deals is far from an easy task when the national economy is as sluggish as it is now. Justin Kaufmann, a senior associate with LANE4 Property Group in Kansas City, Mo., knows this. In Lane4's latest Orange Report -- the company's regular look at the commercial market in Kansas City -- Kaufmann provides his suggestions for closing the tough deals.

Closing deals is far from an easy task when the national economy is as sluggish as it is now. Justin Kaufmann, a senior associate with LANE4 Property Group in Kansas City, Mo., knows this. In Lane4's latest Orange Report -- the company's regular look at the commercial market in Kansas City -- Kaufmann provides his suggestions for closing the tough deals.

Guest column by Justin Kaufmann, LANE4 Senior Associate

The economic recession has forced everyone to become more creative over the past few years. Businesses of all types are trying to create their own opportunities, refine their development strategies and rethink their entire platforms.

The retail real estate market has been one of the most affected industry sectors. Yet, if you look around at the overall market in Kansas City, it certainly is not void of retailer expansion. A major factor is the trend toward creative deal making, including the below alternatives:

Abating Rent in Lieu of Tenant Improvements (TI): Overall tenant activity has not fully rebounded to the level predating the recession, but many of the tenants actively expanding are doing so because they are relatively well capitalized and want to take advantage of the market. Therefore, in many cases the tenant has better access to capital than a landlord who may be facing pressure from a lender. In tough negotiations, landlords have “bridged the gap” with tenants by lowering the rental rate or giving an extended rental abatement period in lieu of contributing to their build-out costs (known as “TI”).

The Return of Percentage Rent: A great way for landlords and tenants to work in concert during this sluggish economy is by implementing percentage rent into leases. While landlords aren’t likely to make exorbitant discounts to rental rates in favor of percentage rent, adding it could help get a lease past the finish line. Percentage rent clauses do not apply until tenants have passed a certain sales breakpoint, therefore paying extra rent only if they are successful. In return, the landlord gets a chance to earn extra revenue while also having a hedge against inflation.

Focus on Tenant Retention: Many shopping centers appear to have remained perfectly healthy, but in reality landlords are working very hard to keep their tenants’ businesses viable. This includes becoming more involved in merchants associations, planning special events for shopping centers and leasing space to temporary stores. In some severely troubled centers, landlords might consider renegotiating leases, providing rent reductions or allowing rent deferrals.

Buying Out of a Problem: In rare cases (e.g. stalled large-scale retail developments), tenants have been enticed to sign leases at extraordinarily tenant-favorable terms, enabling landlords to avoid negative repercussions from other tenant leases. Most anchor tenant leases include co-tenancy provisions that reduce rent substantially if the developer hasn’t met a certain occupancy level. Sometimes a developer has so much to lose with this issue looming, that it makes financial sense to structure a lease with another retailer at unimaginable terms in order to resolve the matter.

Shifting to Value-Oriented/Daily Needs: Value-oriented and daily needs retail has gained a significant share of disposable income, spurring landlords to capitalize on this uptick in demand by replacing struggling tenants or filling vacant space with this retail type. When considering alternative strategies in tough economies, it is important to partner with a market-savvy, real estate professional to ensure a win-win situation for both landlords and tenants.