IncQuery: How to Renegotiate Your Lease

What you should do when your rent is too high, your bank loan doesn't come through, and you don't know how much inventory you're going to need.

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IncQuery

It may be true, as people say, that everything is negotiable, but coming up with the right negotiating strategy is not always so obvious. This month we hear expert advice about renegotiating a lease that's become an obstacle to your company's survival; dealing with an unexpected cash-flow crunch brought on by the rejection of a bank-loan application; and deciding how much inventory you should have when you're about to get a lot of good publicity.

Time to Change the Terms?
When my husband and I purchased our small retail bagel business, we realized that the rent was a little high, but we thought we'd have enough sales to cover it. Then came 9/11. Since then our company's sales have steadily declined. Do you think we should try to renegotiate our lease terms with the landlord? His minimall is now 50% vacant, and two other tenants are on the verge of collapse. We have loans that we have to pay, and we've already cut back everywhere else. A reduction in rent is our last hope. What do you think we should do? --Lynn

You should definitely talk to your landlord about reducing your rent. The question is, What approach should you take? "That depends on the landlord," says Jim Ansara, founder and chairman of Shawmut Design and Construction, a five-time Inc 500 company, who has worked with both landlords and tenants in the retail and restaurant industries. "Let's assume he's a reasonable and professional guy. In that case, you should figure out what you can pay and suggest making that amount your base rent. Go to the landlord and say, 'We really want to stay here, but we just can't make it at the rent we're paying. Here's what we can afford as a base rent right now.' And explain how you came up with the figure. Take him through the numbers, and show him why you'll be able to survive with the lower base rent but you'll go out of business if the rent remains at the current level.

"At the same time, I would make it very clear that you have no problem paying more as your sales come back. One way to do that is by offering to give the landlord a percentage of your gross sales over a base amount that you agree upon. That's a common arrangement in the restaurant business. It's not as common in retail, but there's no reason that some such formula wouldn't work there as well. In my experience, the landlord typically gets 5% to 6% of gross sales above the base sales level.

"Of course, if the landlord isn't reasonable, you have to take a different tack. Basically, you need to do a hardball negotiation. I'd go to him and say, 'We can't make it at the rent you're charging us, and we're going to be forced to close the store unless you give us some help.' Then see what he says. It's important to understand that you have a fair amount of leverage in this situation. Even if the landlord weren't facing tenant problems already, it costs him money whenever somebody leaves, in terms of lost rent, broker's fees to find another tenant, probably some demolition, and so on. My advice would be to hold out for a rent abatement of some sort. I think you have a good chance of getting one. For example, you can probably get the landlord to let you have a rent vacation, which would be preferable to rewriting -- and extending -- the lease. If you have problems with the landlord, you don't want to lock yourself into a lease agreement for a period that's any longer than necessary. You're better off keeping your options open."

All Cashed Out
My partner and I have been doing residential landscape installation for almost a year. We applied for a Small Business Administration loan and were told it was a sure thing. With that in mind, we bid on several commercial jobs and won them. We have contracts for a Lowe's Home Improvement Warehouse, a Sam's Club, a school, and several restaurants. In addition, we work with several home builders and a developer. Altogether, we have approximately $1.5 million in expected revenues over the next 14 to 18 months.

That is, we thought we did. For two months our bank and the SBA told us, "Don't worry about the loan. Everything looks good." Then, out of the blue, we got a phone call saying, "We're sorry. We can't do this loan for you." Now we don't have enough capital to purchase the plants we need just to begin the first round of commercial jobs. Most of the tree suppliers want 50% to dig the trees and the other 50% on delivery. We need $75,000 to $100,000 to get the first couple of jobs going.

I don't know where to turn, and I am desperate. The loss of the SBA loan was absolutely devastating. Any ideas would be greatly appreciated. --Roger

"In situations like the one you're facing, it's generally a good idea to look to your customers and suppliers for help," says Chris Davitt, chief operating officer of Ruppert Nurseries, who helped build Ruppert Landscape Co. into one of the largest and most successful landscaping contractors in the country. "I'd begin by trying to get your suppliers to give you better terms than those they're apparently offering you now. The arrangement you mention is not uncommon. It's even more common, however, for a nursery to let you pay in 30 days once you've established yourself as a credible contractor.

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.

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