I have been working recently with that rare retailer – one who has been doing reasonably well even during the horrible pandemic conditions.  I found him a fantastic location and both the landlord and tenant wanted to make something happen.  But they were not seeing eye to eye on the rent methodology.  Each had a concern with the other’s approach and they just seemed uncomfortable jumping the divide or even meeting half way.  Let me tell the rest of the story by sharing the email I sent to both of them as a last ditch effort to bring them together (changing the names to protect their privacy)…

 

Bill and Maurice,

 

It is very unorthodox for me to send an email to both potential tenant and landlord.  But the circumstances are a little out of the ordinary, too.  Both parties like what the other has to offer and both maintain optimism about how Maurice’s business would perform on at this location.  But uncertainty over the current pandemic conditions has both parties guessing at what the future holds. 

 

What we have here is an excellent location on one of the few truly pedestrian-intensive retail districts in Los Angeles and a retailer who has a proven track record of generating excellent sales in tourist-oriented retail districts.  But the landlord is nervous about percentage rent and the honest reporting of sales by a new tenant that they do not really know (very understandable) and the tenant is nervous about the pandemic’s impact on traffic and sales activity evidenced by the number of large vacancies on the street (also understandable.)  While we have not fully and finally agreed to terms, the issue is not really the rent but the expectation of sales given the current retail environment.  Maurice is prepared to take the space as-is and invest $40,000-$50,000 to decorate, illuminate, and stock the space, they have proposed a very generous percentage rent figure, and they have offered to open their books and discuss how sales would be honestly and accurately reported.  Bill has suggested a very reasonable possible fixed monthly rental that would be achievable if Maurice hits a fairly conservative sales target.  But we seem to be at an impasse – unless we can agree on the method of rental payment, we will part ways without a deal.

 

There may be creative ways to bridge the divide:

 

• Start with a reduced fixed rent for a few months while the tenant gains sales momentum

• Go with percentage rent for a few months and give both parties a right to cancel the lease if sales fall short of everyone’s goals.  If minimum sales targets are hit, the rent can convert to a fixed amount that is agreed upon up front.  The landlord gambles on expectations and will naturally be unhappy if the tenant terminates in this scenario but the tenant has much more at stake given their startup costs and would be reluctant to just walk away unless sales fall way short of their expectations. 
• Some combination of these two, or…

 

Neither tenant or landlord have asked me to tender these ideas.  They spring from my imagination and are offered only as food for thought.  The decision to move the dialogue forward or to part ways (as friends, of course!) is up to the tenant and the landlord at this point. 

 

Thank you both for your time and sincere consideration.  I am standing by to help in any way I can.

 

I’m sorry to report that they remained immovable.  As the old saying goes, “You can lead a horse to water but you can’t make him drink.”  I fear they will both find themselves thirsty in an economic drought that does not appear to be ending soon.