Option negotiation: Tenant wants rent reduction

[Nikolas Engel]

Hello all,

I am in negotiation with a small business tenant (beauty sector) of a commercial retail property we bought last year. The property has several suites, tenant leases 1,200sf, initial lease term comes to an end in Summer with one 5 year option at 10% rent bump. Tenant now requests a reduction citing a slow down in business. At same time, tenant wants another option written in agreement. 

I am not sure if there is substance to tenant's request or not. In general, I am open to support small businesses through hard times but I do not want to be taken advantage off.

How do you deal with a situation like this? Do you request financials from tenant to prove claim of slower business (If so, what kind of documents)? Do you consider offering a different schedule for rent increase , e.g. offer to remain at current lease level for 2 years, followed by a significant raise (larger than 10%) for remaining 3 years?

My overarching goal is to have the property perform at peak in about 4 years when a refinancing is scheduled. 

Thank you for sharing your experiences!

[Tiffany Colvert]

In this case, I always ask for financials, P&L and Balance Sheet. You want to show the tenant you are willing to hear them out, if they have an okay history of paying it may be a better option than them vacating and then having to release the space with new TI $ and brokerage commissions. 

Without seeing their lease there may be a provision to notify of renewal 60-90 days prior to expiration so now may be a good time to start the discussion anyway. You have room to get creative here. Maybe allow the 5-year option but compromise with year 1 at the current rate as a concession and show of good faith and scale up from there. This is a good time to look at the lease and see if there are other provisions you might want to add or take out as the new landlord. Best of luck.