Expert explains how tenants like Geisha House might have gotten out of its lease

Shaun Weinstockindustry insights, real estate5 Comments

has a very ambitious and forward thinking

Did Atlantic Station approach tenants like Geisha House and American Eagle with a deal impossible to refuse?

Ever wonder how restaurant or retail tenants can get out of its 3, 5 or even 10 year lease, scot-free?

There’s no scientific method to the madness but there are definitely some logical scenarios.

Let’s look specifically at tenants at Atlantic Station that have closed recently (before its lease was expired or up for renewal) like Geisha House and American Eagle.

Atlantic Station’s new ownership group is very ambitious, forward thinking and recognizes the value of creating a sustainable and quality tenant mix versus just collecting rent on a month to month basis.

The quality of the tenant mix will ultimately drive Atlantic Station’s rental rates up, with the potential of making it one of the more desirable retail sectors in Atlanta.

As the Midtown development evolves, it has to go back to the basics and look at the entire picture and incorporate the cards (tenants) that were dealt to them in the purchase of the asset.

Rumor in the commercial real estate industry has it that Atlantic Station is (on an ongoing basis) approaching tenants that are not only struggling to pay rent, but also may not represent Atlantic Station’s envisioned concept and are giving them a “free” get out of your lease pass: no defaults, no additional payments (probably default of security deposit) or lawsuits.

But that offer is not two-way. Atlantic Station would offer the tenant a drop dead date and a definitive decision must be made by the lessee.

In my opinion, this is win-win scenario.

Tenants who are truly struggling to pay their rent, if paying at all (many of them were several months behind), have a small window of good fortune to make a business decision: either start paying rent on time and operate within the guidelines, rules, and regulations of the development or vacate the space without being held in default.

It presents an interesting scenario: a tenant, by electing to vacate, are closing their doors, accepting failure and walking away from their original investment of the capital improvements, marketing, etc. On the other hand, they have the ability to get out from under their lease obligations, which is typically in the top three expenses on a tenant’s balance sheet.

Outside of Atlantic Station, here are the four ways a tenant can break its lease:

1. Tenant defaults per the original lease terms:

Default — an ugly process often accompanied by a lawsuit — can occur from a myriad of occurrences. The main occurrence is a tenant’s inability to pay rent and associated charges. A lesser occurrence is for a tenants failure to operate under the specified use of the lease (Example: Sign a lease as a restaurant, but operates as a nightclub). A tenant in default is often a tenant who is about to go out of business and one who has failed to negotiate a buyout with the landlord.

2. Tenant Termination Option:

Often a special stipulation negotiated by the tenant. Tenant has the right to terminate at a specified period within the lease (Example; At year 5 in a 7 year lease). Tenant can terminate for any reason and often the tenant’s termination penalty (negotiable) is the unamortized tenant improvement allowances, commissions, and free rent. In retail, national tenants will sometimes have the right to terminate the lease after several years, if they are not hitting certain sale numbers

3. Tenant Relocation Clause:

Typically applicable to smaller tenants. Landlords will often negotiate for a tenant relocation clause, which allows Landlords to relocate tenants to a space of equal size and quality; the landlord will pay all associated costs with the move and build out of new space; should tenant not be satisfied with the relocation space, both parties can terminate. This could occur if a larger tenant wants to expand and the only contingent space is the smaller tenant next door; the smaller tenant becomes the casualty.

4. Sublease:

A sublease is not a break of the lease. The original tenant is responsible for upholding all of the original lease terms (rent, etc); if the subtenant defaults, the original tenant is still on the hook for the lease.

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Shaun WeinstockExpert explains how tenants like Geisha House might have gotten out of its lease

5 Comments on “Expert explains how tenants like Geisha House might have gotten out of its lease”

  1. Suburbanist

    One additional option is a co-tenancy clause- A common clause in a retail lease that allows a tenant to terminate their lease if other, specifically defined tenants in a shopping center close their doors. For example, if Best Buy goes bankrupt in a shopping center and another tenant, lets say T.J. Maxx, has Best Buy listed as a required co-tenant in their lease, then T.J. Maxx now has the right to walk away from their lease. Landlord’s hate these type of clauses for obvious reasons but they’re quite common for big box national retailers.

    This type of clause sometimes is also based on percentage of space leased. For example, the clause might require that the shopping center be 90% leased at all times and if not, subject to a cure period by the landlord, the tenant has the right to terminate.

  2. Real E. State

    Your posting is interesting but at the same time amusing. To think any landlord (especially Atlantic Station) would allow a tenant to simply stop paying rent for multiple months and then just walk away without any penalties is absolutely ludicrous. If this were the case, tenants all of the country to simply stop paying rent.

    I’m sure if you ask Mr. Toro he will tell you that while certain Merchants may be (or have been) approached with the ability to “walk-away” they certainly are not going to give up their rights to go after back rent or lawsuits. If they did, they would be the stupidest landlords ever (not just Atlantic Station–but any landlord that did that).

    The more important thing that you forget to mention is the “replacement tenant”. Yes, getting rid of one less favorable tenant means the ability to replace it with a better tenant who may be able to make it… but if a new tenant is not already lined-up does having an empty spot actually hurt the ability to re-lease a space. Since you mention it, look at Atlantic Station and Geisha House. Geisha House left and the space is still empty. In my professional opinion, perhaps, Atlantic Station was better off waiting until they had a new tenant to go into that space prior to allowing Geisha House to walk away. Again, I would defer to Mr. Toro, but I doubt they let Geisha House go without the possibility of a future lawsuit for back rent.

    It would not surprise us if more tenants around Atlanta close in the coming months or weeks (look at the changes in Decatur). This truly is a Merchant Advantage with the economy. No tenant wants to be left with an empty space and no Merchant wants to be paying a rent that they deem as being to high. As an additional example, look at Copeland’s in Buckhead. Say what you want about the concept, but the Landlord raised the rent and the Tenant is no leaving. The tenant could easily find a place in the nearby area for a fraction of what the new rent would have been and with Tenant Improvement Monies from the new landlord it may make sense. So in this case Copeland’s wins with a lower rent and new location… whereas, the Old Landlord loses because they lost a tenant and mark our words, that place will probably sit empty for 8- 10 months if not longer.

    As our father always said… if something in life is too good to be… it probably is. No landlord would allow a Merchant to walk away scott-free.

    Oh, and as far at The Dolce Group goes, it would not surprise us if their other Atlanta Concepts close in the coming weeks or months, as they will certainly need every penny they have to defend against their new lawsuit brought by a former partner (did anyone else see it on TMZ yesterday)…

    TMZ Story: http://www.tmz.com/2011/08/03/big-brother-mike-boogie-malin-lonnie-moore-shereen-arazm-extortion-geisha-house-llc-hollywood-restraurant-group-marty-singer-lawyer-phone-tap-email-hacking/

    Copy of Lawsuit: http://images.eonline.com/static/news/pdf/ArazmSuit.pdf

    As far as the “response” by Mike “Boogie” Malin in the TMZ article in which he claims to be a “reality television” star, perhaps he should check out the ratings for his new show…

    “The series opened to a paltry 430,000 viewers and a 0.2 rating among adults 18-49 this past Sunday following a new “Celebrity Rehab” (1.123 million, 0.6 rating among adults 18-49). Said numbers marked VH1’s least-watched series debut of the year, falling behind the previous low set by “The X Life” (487,000 viewers, 0.3 rating among adults 18-49 on 1/10/11).”

    Perhaps if he and other operators focused on their actual restaurants versus being television shows, traveling for cookbooks signings, etc. than all their locations would be able to sustain the current economic climate.

  3. Shaun Weinstock

    @Suburbanist — That is correct and a great point. There are a few other clauses as well; there are so many creative clauses that are negotiable that can be worked into a lease with the right leverage.

  4. Shaun Weinstock

    This is all hypothetical. I do not know what occurred, WNA asked what MAY of happened outside the normal occurrences since there is the appearance of many stores closing at the same time. It is very possible, the tenants were already in default for quite some time, and action was just now finally taken against them.

    I’ve been very impressed with Toro and his team, and have a lot of faith in the changes and actions they are taking; I think it is very exciting for the development and overall city of Atlanta.

    I think another interesting point it brings up that you address is, if a replacement tenant is not lined up, are you better continuing to allow a tenant to operate who is not paying rent vs. defaulting on the tenant and having an empty space – I think having the empty space is better as it openly markets the availability of that space and shows the time of change.

    The old landlord for Copelands actually wins – rumor has it they already have a tenant lined up and signed up.

  5. Guest

    Expenses are not on a balance sheet; they are on an income/operating statement.

    Other than that I have no concerns.

    Good insight in the article though.

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