Hilco Real Estate's Apter

GlobeSt.com: How did this myth get perpetuated?

Apter: When sales started deteriorating in late 2007, lots of tenants had a difficult time paying rents and getting profit on locations and portfolios. Companies were getting more and more desperate. The landlords understood the risks, and had no choice to cooperate. During the first half of 2008, they agreed to make concessions, landlords were cooperating without too much trouble, they figured they had to cover their own debt.However, this second level of retailers started hearing about this, these management executives of companies that were not in trouble or in bankruptcy. We received 75 to 100 calls from executives, saying they were talking to other companies who got a 20% discount, we should do the same. It became this myth that everyone qualified for special treatment. The truth is, other than that very short timeline, there's never been any opportunity to renegotiate rents without some sort of leverage.

GlobeSt.com: What does a company need to have to get a rent discount?

Apter: It can be that there's a limited lease term remaining and there's an option, or the landlord is in violation of the lease by not meeting certain requirements, or they are struggling, or a number of alternatives. When you have that leverage, coupled with a presentation that can make the landlord feel compelled to cooperate, then you have a restructuring opportunity. It's also all about if you can make your property sustainable. We've helped lots of clients through their bankruptcy, such as Bally's Total Fitness, Ritz Camera, Samsonite, etc., and the main thing is to help them weed out the under-performing locations, and help them renegotiate rents so a location is sustainable.

GlobeSt.com: So you have to have a good reason, and bankruptcy could be one of those options. What next?

Apter: Well, you have to have a clear, justifiable reason to get the landlord to cooperate. And part of it is how you communicate that they are better off working with you than not working with you, showing how that if you can't get the lease term to a different place, you're going to have no choice but to reject the lease. You're permitted to do this under the bankruptcy code; once notified about a possible termination, a landlord has about 15 days to come up with an acceptable deal. If that landlord ignores this timeline, the retailer is not compelled to keep that lease if they emerge from bankruptcy.

GlobeSt.com: Why is it smart for a landlord to cooperate?

Apter: Well, if bankruptcy is an option for the client, I would advise them to talk to their landlord and ask for a rent modification due to the site not working out. What needs to be communicated to the landlord is that if no change is made, my client can reject the lease and be out in 30 days, and the landlord can file for damages, and they may get some money—or they may get nothing. That's the leverage part, if a client paying market rent leaves, it can take months to find someone else and even more time to get them into the building, all this time the landlord is getting nothing. If our client, instead, is asking for a 25% decrease, just analyzing the savings will often prove a reduction is the better alternative.

For example, we had a client, a small grocer I won't name that we represented in early 2008. They were already set to declare bankruptcy, and they called me up to represent them in the bankruptcy, where they were going to close all 12 of their stores. I said hold on, what if I could get you out of half of those stores and renegotiate the rent on the remaining six, could you avoid bankruptcy? They said yes, so we put together a package that included financial statements, how they were doing at each location and a liquidation analysis showing each landlord how they would be affected if the client filed bankruptcy. On the underperforming stores, we offered five months rent and pointed out that if we filed, they could end up with nothing, while also paying thousands of dollars to fight a lawsuit.

GlobeSt.com: What about the ethical implications of this hard dealing? Couldn't forcing a landlord to receive less possibly cause a chain reaction that could put them out of business, thereby ruining the retail location?

Apter: It's true, it can become a vicious circle. That's why you need a clear and justifiable reason to get the landlord to cooperate. Landlords, to their credit, have learned a lot in the past two years on how to manage their portfolios. As opposed to the expansion view they used to have, they're now taking a more asset-management view. If they think you're doing this without absolutely having to, they're going to want you out the next time the lease term is up.

GlobeSt.com: Do you think tenants these days are having to pay more attention to how a landlord is doing financially?

Apter: It depends on the type of property. If you're in the best location in an area, with huge amounts of traffic, it's not that important who comes and goes around you. It's much more important in destination-specific retail, which needs foot-traffic. A good tenant negotiation will include a co-tenancy clause that provides potential outs, such as stipulating that if a mall owner is at, say, less than 80% occupied, there's the right to change the rent structure to a percentage of sales, or to terminate the lease.

GlobeSt.com: What is happening with those struggling locations out there?

Apter: I think the only expansion you're going to see these days are into the class A and B locations. If you are in a mid-level to horrific property, there's going to be limited options today. Some tenants I know who are sub-leasing space, they leased at $8 to $10 per square foot, but are only getting $2.50 per square foot. Not to mention that these properties are in many cases underwater, with too much debt to justify the rents.

GlobeSt.com: What do you think the future holds for retail tenants in 2010-11?

Apter: Well, I don't think there's going to be the level of distress we say a year ago, but the next piece we'll have to deal with is the debt piece. Right now there's an enormous amount of debt extended to companies, and lenders are pushing the termination dates back, but at some point it's going to have to come to a head.However, I think companies are already pulled back as much as possible, and have shored up their positions. If sales start to turn around, there could be a return to confidence.