In a recent Globe St. article Ms. Terry Sheridan sheds light on the Co-Tenancy lease clause that was so prevalent in the last decade or so.
While the article sheds light on the subject for those who were unaware, it gives no specific information as to how to combat the problem. Getting current tenants to remove those clauses from their leases in this economy is not very likely to happen without some compelling reason for them to come to the table. Retailers I'm familiar with are using that leverage as a hammer to keep up the pressure on Landlords. Most (tenants) are immune from Landlord BK's and unless a mall loses a significant number of tenants there is no reason to consider re-negotiating on their part. Even with that scenario, it probably makes more sense financially for the tenant to close its doors than to stay and anchor a declining mall.
So how do Landlords stem the flow of upcoming Co-Tenancy issues? In my opinion Landords need to begin researching how those clauses will effect the bottom line at each property BEFORE it becomes an issue. Landlords who are proactive in this approach will fare better than their conterparts.
The most significant part of the Co-Tenancy clause is the negotiated rent reduction or "alternative rent". Landlords and their Property Managers should be analyzing and projecting adjusted cash flows using a worst case scenario. Assuming the worst case as a starting point will allow for strategic planning to begin earlier and anticipate changes before they occur.
The next step would be to fully investigate cost centers to understand what makes up the operational expenses of the center. Managers need to know not only what the expenditures are currently, but need to drill down to fully comprehend what makes up those individual numbers.
Using this information as a baseline, Landlords and Managers can now work backward and formulate a management strategy to keep the property stabilized through the downturn. Using the theory for "every action there is an equally opposite reaction", a plan can be formulated to adjust expenditures accordingly to meet revenues.
While this is easier said than done, the landlords first priority is to keep the lights turned on and the mortgage paid. It may be necessary in dire circumstances to curtail all discretionary expenditures including basic upkeep such as landscaping and janitorial etc. Some of this can be
overcome through effective planning assuming you have been providing routine maintenance to this point in time.
The sooner management gets a handle on Co-Tenancy the better prepared they will be to weather the economic storm that is about to ensue.
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