What To Do If A Retail Tenant Is Struggling

If you see signs that one of your retail tenants is in trouble, the first step is to find out what’s happening. “You have to build a relationship with the tenant, both at the corporate level and at the store level,” says Noah Shaffer, senior director of asset management for Confidant Asset Management.

In the process, it’s important to review the lease and understand if you can recover damages. After that, you need to take a good hard look at the market.

“You need to ask about your property’s position in the market?” Shaffer says. “Am I double market rent? Am I at a good location? Are there 50 vacant buildings all along this road and I’m just going to be number 51?”

If analysis reveals that you’re at half the market rent and in a good location, you can let the tenant go. If not, Shaffer recommends the landlord preparing for its next tenant.

“We suggest that the landlord start building reserves for tenant improvement allowances to help incentivize tenants,” Shaffer says. “They need to start saving that rent instead of buying a new car.”

Shaffer recommends that landlords start taking stock of the condition of their building, forming a list of what they need to improve to attract new tenants and modeling what they can earn in rents with these improvements. “If you get a new tenant, you need to know what it’s going to cost,” he says.

If you look at the market, see there is a lot of competition and that it is going to be too expensive to renovate a building for a new tenant, it could still be possible to sell. “If you get out ahead of the news, there’s a potential for you,” Shaffer says. If the tenant does break the lease and the building is abandoned, a landlord needs to prepare for potential problems.

“From our personal experience, at one of the locations that Krystal’s closed, there was quite a bit of vagrancy with homeless people sleeping at the side and drug use,” Shaffer says. “We had to have the police on guard and we tried to work with local resources to get the people help. When that happens, that becomes a blight on as a community.”

Often the impact of a foreclosed retailer on the greater community depends on what is around it. In Shaffer’s home market of Tampa, he has found if troubled properties are near downtown or the University of South Florida, things are fine. “It’s not going to have that big of an effect because the rest of the area is good,” he says. “But if it’s in an area where 20 people are employed and only 80 people are in the town, it is going to have a huge impact if they close that location.”