Do you attack your occupancy costs as aggressively as you do your cost of goods sold? As your labor and overhead costs? Very few companies do, but increasingly some of the most successful companies in the world are aggressively determined to reduce occupancy costs to improve profitability. Restructuring your leases can make a material impact on your bottom line and get you back to, or help keep you in a strong financial position.
Here’s three ways we can reduce your real estate cost structure:
1. Why tolerate losing money? There is no reason why you shouldn’t attack the occupancy costs of any location that is unprofitable. But, a lease is a binding contract, and you’re probably thinking – “I can’t get out of it without severe consequences – right?” Well, not entirely. Lease terminations and lease shortening are both strategies that retailers can negotiate for under-performing locations. “Lease terminations allow companies to stop bleeding money on sites that have negative cash flow, but it’s not something to be taken lightly – it is hard to do. There is a lot of planning for lease terminations and when retailers close locations this can impact their purchasing, marketing and operational budgets,” shares Bridget Grams, EVP of JLL’s Restructuring Services.
But, if your store location is losing at or more than its occupancy cost, making the losses unsustainable, then you should consider cutting your losses by terminating a lease. Lease terminations are pursued when a tenant wants to relocate within the same trade area, or close all together. Grams adds that usually she’ll approach the landlord for a consensual lease termination first. “If the termination is declined by the landlord, which often happens, we frequently will suggest shortening the base lease term as a compromise for both parties. This allows the landlord to quietly market the property and it allows the tenant to work towards a firm exit date.”
Real-life example: By negotiating favorable buyouts and shortening lease expirations to end lease liabilities, we saved a fast-casual national restaurant chain over $49 million through 47 lease terminations in just over a year. By closing the underperforming restaurants, the chain strengthened the financial position of the company, impacting EBITDA significantly.
2. Blend and extend, the newest smoothie option? Not exactly, it’s actually a way to reduce your rent for an immediate positive financial impact. Blend and extend is used when you extend the base lease term – so you have a space for, say, your current remaining term of 3 years, and you lock in that rental rate or a lower rate for an additional 5 years or so. “By doing a blend and extend, your rent projection is immediately reduced, making a direct impact by lowering the store’s occupancy cost. In many cases, when you exercise a future option early you’ll get a reduced rate – blending the term and the rate,” added Tom Mullaney, Managing Director of JLL’s Restructuring Services. This is an option is almost always a win-win because a landlord locks in firm terms months in advance, and the tenant gets a rent reduction for extending their lease early.
Real-life example: During 9 months, we were able to save a chain of party supply stores over $9 million dollars through 23 lease restructures by obtaining rent reductions for viable locations and negotiating extensions in exchange for savings at profitable locations. The savings obtained in this on-going project allow the company to lower occupancy cost as a percentage of sales and increase overall profitability.
3. Ready for a remodel? The remodel cycle seems to be getting faster and more expensive every year. But by obtaining landlord capital contributions for upcoming store remodels, JLL can help retailers to remodel more locations while not increasing their overall budget. Grams shared, “One of the simplest ways to optimize your liabilities is to ask your landlord for contributions for a remodel program. When asking for dollars, landlords usually ask for something in return like additional lease length so they can amortize their contribution over time.” It’s a win-win for both the landlord and the tenant. Both parties are contributing to improving the space and extending the term to monetize the investment.
Real-life example: We helped a national movie theater chain negotiate store remodeling contributions from its landlords totaling $40 million for 40 locations. The successful remodel program for this chain allowed them to stay a step ahead of the competition in providing the ultimate theater experience for the consumer. The remodel included installing state of the art projection and sound systems, large reclining seats and bars in many of the locations.
To learn more about how JLL can help you start 2018 off right, contact:
Managing Director, Restructuring Services
+1 805 259 9486
EVP, Restructuring Services
+1 816 678 8812