Craig Peters, executive vice president with CB Richard Ellis who specializes in the North Los Angeles County region, has worked with a dozen clients lately to meet with landlords and renegotiate their lease terms. These clients, seven of whom are retailers and five of whom are office users, have been hit hard by the recession. They’re seeking lower lease rates as one way to ride out the tough economy. But Peters said not all of the negotiations were successful. Just because the economy is struggling, average lease rates have dropped, and vacancies increased in many Valley markets, tenants should not assume landlords are eager to renegotiate terms. “There’s a proper way to talk with landlords and you have to craft a win/win situation,” said Peters. “As a tenant you also have to understand that landlords are struggling too. Playing the ‘poor pitiful me’ defense doesn’t work.” Peters said tenants looking for a rate reduction need to wear their marketing hats because landlords are going to want something in return. For example, a landlord may reduce the rate in the near term as long as he/she can recoup the reduction in future payments. Landlords are getting hit with a flood of requests to renegotiate, he said, and some of those requests are from businesses who may not really need it. “A lot of renegotiating a lease agreement boils down to opening up the kimono and saying, ‘Here are my financials,’” said Peters, adding most landlords are willing to work with good tenants who have a plan for making it through the hard times. The guys who may be out of luck are the ones who pay late and are generally bad tenants to begin with, he said. Michael Goodman of the Building Owners and Managers Association of Greater Los Angeles (BOMA) echoes Peters’ statements. He said it’s tough to make broad brush strokes about whether or not a landlord or building owner is going to be willing to renegotiate. Each property owner is in a unique financial position, some better off than others. The decision boils down to two issues: common sense, meaning the request needs to be realistic for the short- and long-term health of the property owner and business; and quality, meaning the tenant needs to be a quality business that takes care of the property, pays bills on time and is likely to stay around for the long-term. “Many of the decisions are made on the ability of the company (tenant) to have a solid business plan and roadmap for how it’s going to make it through the tough times,” said Goodman. Landlords value good tenants, because the last thing they want in this market is to have more vacant space, he added. A building’s value is based on the rental income that it’s generating. But there’s give and take. Landlords may reduce rent in exchange for a longer lease term. If a tenant is downsizing, they will be responsible for payment on the unused space until the landlord can re-lease it. And confidentiality agreements are a common practice to reduce the chances of other tenants getting word of the renegotiated lease terms. If a tenant breaks the confidentiality agreement, the concessions are voided and the lease returns to its original terms, said Goodman. One thing many tenants don’t understand, he said, is that reducing rents can trigger a series of negative events with a building owner’s lender. That’s because most lenders have requirements that the rental income stream meet a certain level of performance. “Sometimes tenants forget the fact that landlords are a business too,” said Goodman, “and they want to operate the best they can.” Rickey Gelb, general partner of the Encino-based Gelb Group, a property management and development company, said the subject of lease renegotiations comes up all the time, and he looks at each request on a case by case basis. He asks the tenant to prove his/her profits have dropped. And Gelb wants proof that if he decreases rent or restructures the lease agreement the tenant plans to stay around. “Lately there have been fewer requests, but five or six months ago I was getting one or two a week,” said Gelb. “More people have been looking to downsize, so there has been a lot of musical chairs.” Most of the requests are coming from tenants renting spaces from 1,200 to 2,000 square feet. They’re often business consultants, mortgage brokers, and other small operators. He is also seeing many older long-term tenants decide to retire and move-on Gelb said he will absorb some of the loss if a tenant has a good track record. If the lease is coming due, he may ask for an extension. And he often requires confidentiality agreements, especially in the case of short-term agreements. Gelb also uses his property’s abundant free parking as a negotiating point. But many of his tenants are lawyers, healthcare providers, accountants and businesses that rely on state contracts and have no desire to move. “Today it’s a lot harder to move than five years ago, with the amount of time it takes to install DSL lines and everything else,” said Gelb.