By Tom Ellis
As the recession continues to squeeze the bottom line at retail outlets, rent relief is an option that could keep stores open and space filled. But Arizona retailers must proactively ask for help and prove they truly need it.
Rent relief is a topic that many real estate development and property management companies are not eager to talk about. The Inland Real Estate Group of Companies in Illinois has offices in Phoenix, but declined to be interviewed stating that, “we don’t publicly discuss rent relief issues.” One Valley developer, who spoke off the record, explained that most Arizona companies are not providing rent concessions because mortgage costs are climbing. He adds that his firm is struggling with tenants stirred up by national press coverage about rent relief.
However, there are two companies — Tucson-based PICOR and New York-based Kimco Realty Corporation — that offer rent relief for retail tenants in Arizona under certain circumstances. It can come in two forms:
* With rent forgiveness, landlords reduce the rent for a set period of time, writing off the reduction as a loss.
* Rent deferral also trims the rent for a specific timeframe, but the total dollar value of the reduction is amortized into the tenant’s lease once the reduction stops, allowing the landlord to recoup the money.
A common misconception is that TI is included with rent relief programs, however, TIs are not offered and tenants generally are not requesting them.
Help! We Need Somebody
PICOR, the largest commercial property manager in Southern Arizona, represents landlords in rent relief negotiations with local or regional tenants at strip and anchored shopping centers. PICOR does not have a specific rent relief program, taking each request for help on a case-by-case basis, says Rob Tomlinson, associate broker for retail properties. Most relief comes as deferment of a specific dollar amount per month with amortization lasting a year, he says. Tomlinson gave an example in which rent is reduced by $500 or $1,000 a month for six months and amortization starts the seventh month.
Negotiations are subjective and several things are taken into consideration. “They have to bring some evidence,” Tomlinson notes. “They have to show us their profit-and-loss financials and their sales tax receipts. They have to demonstrate they are in significant distress. They must be really hurting for very much to happen. We will give them the relief they need to stay open, but we will not give them the relief they need to make excess profits. When the economy improves, the rent will go back up.”
PICOR wants financials and sales tax reports for the last two years and for the year-to-date. All that paperwork allows the company to weed out tenants that don’t need help and are trying to take advantage of the recession, Tomlinson says. PICOR also looks at whether the tenant is important to the shopping center’s viability. It also examines the tenant’s competitive position in the local market to determine whether the store has a bright or bleak future.
Although tenants must ask for help to spark negotiations, many Southern Arizona landlords are volunteering assistance in one area. Most leases include an annual rent escalation clause and it now is common for landlords to waive the escalation for a set period of time without being asked, according to Tomlinson.
Help! Not Just Anybody
Kimco, which owns and operates shopping centers in Phoenix, has a formal rent relief program, but it is only for local tenants with one store and is almost entirely deferral based, says John Visconsi, senior vice president and designated Arizona broker for KRZ Property Management in San Diego, a division of Kimco. Tenants falling behind on rent payments are made aware of the program, but they must request help by filling out an application.
KRZ wants sales reports for the past three years and the year-to-date, one year of income tax reports and current assets and liabilities. “Based on that information, we do an occupancy cost calculation to see what percent of gross sales goes to occupancy,” Visconsi says. “If they have extremely high occupancy costs and we feel they are a good operator and they’re trying hard, they will probably get help.”
KRZ grants between six and 12 months of deferral in the form of a 10% to 20% reduction of minimum monthly rent, excluding other expenses that are factored into the rent, Visconsi clarifies. The reduction is amortized over 24 to 36 months. However, he mentions that fewer tenants are vacating and requests for rent relief are declining.
Getting Off the Ground
PICOR’s rent-concession requests have not abated, but Tomlinson expects them to begin tapering off in the fourth quarter of this year.
“We’re in the belly of the beast right now,” he says. “This is what we would call the bottom. There is going to be fallout from here but, in terms of leasing, this is pretty much as bad as it gets and as it is likely to get.”
Rent relief can generate positive outcomes for tenants and landlords, Tomlinson says.
“A lot of the benefit we hand out in these rent concessions is more psychological than anything,” he says. “They (the tenant) are not coming to us because they are losing $500 a month. They are losing thousands a month. That $500 is more of a psychological help. If that, coupled with some other cost-saving measures, patches them through these times, then everybody wins.”