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Weekly UpdatesIT'S NOON ON FRIDAY AS YOU WALK INTO ANDRE'S ATTITUDES, A FULL-SERVICE HAIR SALON IN THE NEIGHBORHOOD SHOPPING CENTER YOU LEASE, INTENDING TO TALK WITH ANDRE ABOUT HIS OVERDUE RENT. Andre is nowhere to be seen, and another stylist tells you he is not only out of the salon for the day, but is out of town for an undetermined period of time. The usual receptionist, who also handles the bookkeeping, is out sick; and no one else seems to know when--or where--you will be able to pick up the rent check.
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This is the second month you have had to chase after Andre for the rent and the shopping center's owner wants you to put him in default, today. You have no idea what Andre's current monthly sales are because you can never seem to catch up with him to find out. While you're waiting for someone to provide assistance, you look around and realize things are looking kind of shabby. Although it is mid-day on a Friday, the salon is not very busy, and there are only two hairstylists. Your heart sinks and your brain goes into panic mode. What should you do?
In situations such as this one, you probably want to do something, anything, to resolve the issue immediately. However, let's start by discussing some of the things you should not do:
Don't keep your owner in the dark. Most owners don't like surprises, especially big ones such as a merchant who is in default or who may soon vacate his space. For an owner, there is nothing worse than learning of a tenant's unforeseen move-out from an article in the local newspaper, the TV news or from the tenant himself. It's always best that you immediately share such news with your owner, even if it's negative, along with your recommendations for resolution.
Don't wait until Monday. Pay attention to your gut. If you sense that a bad situation is about to get worse, you're probably right. Your concerns at this point should be 1) to get payment and 2) to make sure the tenant does not unexpectedly close his store or move out. The chances of a "midnight move" are less likely with a hair salon, restaurateur or other tenant with expensive fixtures and equipment, but it's still a concern. It's important to get the tenant in front of you, cashier's check in hand, sooner rather than later.
Don't make an immediate decision. A merchant who is in dire straits will often try to get the landlord to immediately agree to rent relief or rent deferral. What should you do? Even if you're lucky enough to get a tenant like Andre on the phone, don't let him persuade you to make an immediate deal to delay, defer or relieve rent, unless you have already discussed these alternative plans with the owner. Your task is to make sure the rent is paid and the tenant is a viable one.
So, how can you tell whether a tenant is about to go south or whether it's just a temporary glitch in the road? Here are four telling signs that will help you discern whether your tenant is headed for trouble:
1 Lack of focus and disorganization. Have you ever walked into a store and just as quickly walked out because you really had no idea what the merchant was selling? Sometimes merchants erroneously believe they can succeed by selling a little bit of everything, when focus and a theme are really what make the sale. Additionally, a merchant whose display areas, counters and clothing racks are messy and in disarray may lose customers who cannot find what they are looking for. Even in today's tough economic times, merchants who haphazardly put items on sale without rhyme or reason should closely examine merchandising and sale strategies.
2 Late payments. Gertie's Gifts just called you to say that rent will be a few weeks late this month. This is the second month in a row she has been late. Foot traffic isn't all it should be, she tells you; she's had some turnover and sales are down. Warning bells should start ringing in your head when this happens! After doing some homework on this situation, you find that Gertie's efforts and sales have been diluted because she has opened another store not far away. The reason for the "turnover" is that she has moved several employees from your location to her new store. You realize too late that Gertie's lease does not include a radius clause, which would prohibit Gertie from opening another store within a certain distance (and impacting yours).
When considering late payments, it is important to keep in mind that small mom-and-pop merchants typically cannot afford to make up past due rents once they have fallen a few months behind. Your job is always to probe for the truth and to get the money. It's a good idea to periodically review your tenants' Web sites for important news that may indicate a change in status, proposed expansion or compression.
3 Customer service issues.. Top retailers understand how crucial good customer service is, especially in tough times when exceptional service can be the point of difference for a customer. All too often, small retailers overlook the necessity to train and motivate their employees to not only attract, but also keep, customers. If Gertie suddenly begins keeping shorter hours or runs a skeleton crew, watch out. It could mean that greater problems are on the horizon, such as lack of cash flow to pay employees. And, if cash flow is low, guess what might happen when next month's rent is due?
4 Unusual behavior. It may not happen often, but when your tenant behaves in an unusual manner, it is usually indicative of a larger problem. Take the once placid, grandmotherly Italian restaurant owner who begins throwing rave parties in the shopping center parking lot without the owner's knowledge or permission. When asked about this behavior, the tenant states that the restaurant's sales have decreased, and she is trying to attract customers. Clearly, hosting rave parties is not part of this tenant's use clause. Although this activity on the part of the tenant does increase traffic, it does not increase sales for either the tenant or the shopping center. In fact, the raves also affect the owner's liability and the shopping center's reputation.
Once you do determine that something really is amiss, here are five guidelines to follow:
1 Listen to the owner's goals. Before you do anything, make sure you understand what the owner wants to achieve. I used to work for an owner whose directive was that we send a notice to any tenant (according to his lease, of course) who did not pay rents and other charges on the stated due date. His reasoning was simple: he wanted his money, he wanted to get the tenant's attention and he wanted to head off possible collections problems. He also figured that we could rescind a default notice when and if the tenant paid the amount due.
In troubled times, the impetus may just be to keep tenants in the center. I've worked for an owner whose first priority was to maintain his current tenants and avoid rocking the boat. Because of this, he was more likely to entertain alternative solutions when dealing with troubled tenants. Of course, bear in mind that an owner's circumstances and priorities can change.
2 Trust your instincts. While facts and figures round out the story, if you're an experienced manager you'll know when a tenant is stalling or providing incomplete information. If you are less experienced, this may be the time to consult with your peers or supervisor. As mentioned earlier, if you think something is wrong, it almost always is; and it's worthwhile to bring it up.
3 Pay attention to your tenants. While we all know we should get out from behind our desks and visit our merchants, we don't always do it. There are many reasons for this--we are busy, monthly reports are due, we are working on budgets--the list goes on and on. Most likely, more frequent visits to a merchant will result not only in better communication with the tenant, but also in quicker identification of potential problems on the horizon. Visiting your merchants' stores regularly is a key ingredient to success. It is important to view every trip to your center as an opportunity to pay attention to and evaluate your tenants.
4 Consider the impact. Remember that when you offer a tenant a rent reduction, it affects the face value of the rent and negatively impacts the value of your center. There are other "costs" to consider as well. While giving one tenant rent relief may not mean the end of the world, you may soon have other tenants knocking on your door with similar requests.
5 Determine the reasons. Once you're armed with the facts, it's time to figure out exactly why your tenant is going downhill. It is not uncommon for a tenant whose sales are sliding to immediately blame the landlord for lack of traffic and consequently request rent relief. However, a wise manager will keep on top of merchant sales volumes, noting any categorical trends in the shopping center. It is important to ferret out the causes for decreasing sales before making any decisions. The reasons for declining sales can be varied: poor business practices, a weakening economy, lack of traffic, nonexistent customer service, inadequate inventory and poor merchandising are just a few.
I'll leave you with a final example that illustrates the potential complexities of a tenant's decreasing sales. I once had a small gift shop merchant located in an upscale specialty center in a tourist area. This merchant had a variety of merchandise centered on a certain theme, a well-merchandised store, good customer service and a built-in customer base, as his shop was located directly across the street from a popular tourist attraction. By virtue of an unfortunate family tragedy, this merchant also had the kind of publicity money can't buy from day one--there were local and national newspaper, magazine and television stories about the shop, which of course created buzz and attracted visitors.
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