Leaning on Landlords

It’s been said that “Desperate times call for desperate measures.”  We’re not sure who said it first, but we were certainly witness to this sentiment in 2009.  Although they range from the creative to the necessary (to put it gently), we thought it worthwhile to share some interesting ideas we saw used by our clients and prospective clients to wring some cash additional cash savings out of their landlords.  If you are a business owner with a large rent component in your expense structure, the examples below may be instructive:

The Consensual

Facts:  Company’s 5- year lease expires in Nov. 2010.  Company is a government contractor with a large contract starting in June 2010, but minimal revenues (and ongoing expenses) currently.

Solution:  Company rolls current lease into additional 5-years and obtains 6 months of rent abatement (next payment due July 2010).  Although the new rent was not reduced as much as might otherwise have been due to market conditions, the company was able to have its landlord effectively finance 20% of its operating cost structure (i.e. its rent expense) for the next 6 months.

The Strong Arm

Facts:  Company has 8 years remaining on 10 year lease.  Company recently lost its largest customer and reduced staff by nearly 50%.

Solution:  At the time the lease was signed, Company cleverly used a thinly capitalized subsidiary as the obligated entity – with no corporate or personal guarantees.  Left with the threat of the Company liquidating the subsidiary and walking away, the landlord agreed to move them into a much smaller space with materially lower rent – and a 6 month option to take back the original space at the now current market price (which is much lower than 2 years ago).  The main operating entity of the Company (including cross guarantees from other subsidiaries) is the obligated party on the new deal – but of course.

The Hard Way

Facts:  Company has 4 years remaining on 5 year lease.  Company provides staffing services and had client representing 60% of revenues go bankrupt.  Faced with the prospect of its own insolvency (due in no small part to its rent obligation), the company tried to restructure its lease but was rebuffed by the landlord.

Solution:  Company proceeded to set up a new company and began booking new revenues through the new company.  Employees of the old company were migrated to the new company and to the extent new company used old company’s equipment (i.e. copiers, computers, etc.) it paid an arms length rent.  New company retained the remaining clients of old company and used old company receivables proceeds to pay wind down expenses at old company.  After effectively liquidating old company into new company and doing so in a manner it believes was entirely legal, it handed the keys back to the original landlord.  No word yet on whether or not any legal claims have been filed, but the old cash rent expense is certainly gone – at least for the time being.