By Rebecca Pahle and Daniel Loria
A real estate renegotiation veteran of 30 years, Andrew Graiser of A&G Real Estate Partners recently sat down with Boxoffice Pro to discuss what theaters should know as they begin the process of working with a landlord to renegotiate their leases. With the Covid-19 pandemic continuing to financially affect the U.S. theater industry in substantial ways, going into a lease renegotiation prepared and informed, argues Graiser, is key to potentially securing a break on rent that can help a cinema—whether part of a big chain, smaller chain, or standalone location—make it through the next few months.
Below, Graiser offers five tips for theater owners entering negotiations with their landlords. The following is not meant to constitute legal advice from either Boxoffice Pro or NATO.
Treat Your Landlords Like “Sophisticated Investors”
“You’ll be much better ahead,” Graiser argues, by treating your landlords “like Wall Street analysts”—providing them a wide scope of what’s been happening in the exhibition industry in 2021 and explaining how that will potentially affect the theater business. Come ready to explain things like the shifting release calendar, when tentpole movies will start hitting theaters, and the potential impact of Warner Bros.’ HBOMax deal on your bottom line. “The biggest mistake theater chains make,” says Graiser, is assuming that a rent negotiation is a “dial for dollars” situation, where you can call your landlord up, make your requests, and either get them or not. “But most of these landlords have made these big investments. Overall they’re very sophisticated. They need to they need to understand what’s going on.”
Be Transparent with Data
The more a landlord is “educated on what’s going on from a macro standpoint and a micro standpoint, it creates a better opportunity not just for the theater operator, but also for the landlord, to get their consent to work with the theater operator,” says Graiser. That means not assuming your landlord knows about industry developments, as explained above. It also means being transparent with data about one’s particular cinema or cinema chain.
“I don’t want to oversimplify it, but you need to be able to talk [candidly] about [your] business plan and how [your] company operated pre-Covid [and] how they’re operating post-Covid. What are the monthly numbers? What they’re projecting out, and when [will] they start seeing where this turnaround is? And at what level of occupancy” will a theater’s financials reach a breakeven point? Corporate financial data and projected financial data is key to present to landlords, who have lenders who will be requesting that sort of concrete financial data from them.
Understand Your Lease Clauses
Landlords often look at renegotiations as an opportunity, says Graiser, “to strip away some very important lease clauses that these theater chains have. And since a number of these theater chains have their hat in hand, effectively asking for short-term relief to get them through this Covid situation, they have to be really, really careful on making sure that they’re not giving away the store.” Graiser cautions against waiving co-tenancy rights or “certain approval rights that you may have, because you’re an anchor and landlord the has to come to you for certain approvals relative to the shopping center or the mall. Those rights could be really valuable. Sometimes they’re not valuable, and maybe it is okay to trade it. But you have to look at the lease clauses that you can trade away and where you can’t trade away. And if you can’t trade it away, at least try to put a value on that, to see exactly what that could mean to the landlord. Because that could be in exchange for a nice rent concession.”
Graiser recalls a period of time that saw a wave of department store closures, noting that “you would see these operators trade things like a ‘no-build’ clause, which gave them substantial control over a portion of the property, and then watch the landlord build a 12-story building worth millions of dollars on that parcel.”
“It’s Really Important to Understand Where Your Leverage Is”
Depending on each operator’s specific situation, a theater ceasing operations could have profoundly negative effects on the landlord, whether in triggering a default in their loan agreement or giving other tenants whose leases are tied to the operation of the theater—a restaurant in the same shopping center, for example—the ability to reduce their rent or even leave.
In some cases, Graiser says, “there’s a lot of money that the landlords have put into these [cinemas], into these build-outs. That could be $8 to $10 million. I’ve heard as high as $15 to $20 million,” helping to outfit the theater with things like stadium seating or PLF screens. If the theater ceases operations and reverts to the landlord, “there’s really nothing else the landlord can do with that box except try to get another theater operator to run it, which may be difficult. Or number two is to scrape the property and lose the entire investment. Certainly, in most cases, it’s in the landlord’s best interest to at least try to work with the theater operator, to try to keep them afloat. Because the repurposing opportunities may be slim for a landlord.”
An exception, says Graiser, is older theaters, in the case of which “some of those landlords are okay with the theater operator closing, because it allows them an opportunity to put in some of the newer concepts that are out there, like the dine-in theaters, etc. So [with] the oldest theaters [closing], depending on where you are, that could be an opportunity for the landlord. But overall, landlords do not want to see theater operators closing.”
Theater Chain Size Doesn’t Matter
Asked whether the opportunities and red flags to look out for in a rent renegotiation vary based on whether a chain is large or small, or even just an independent location, Graiser answered in the negative. “To me, you’re doing the same thing… You have to provide the information, be transparent. When we’re working for our clients, this is the playbook that we work from. And it doesn’t matter whether it’s smaller or large. You have to make sure you understand the real estate, understand the lease clauses, understand what you can trade with a landlord, understand what you can’t.”
Consult an Expert
Graiser cautions that his final piece of advice is “going to sound self-serving, but it really isn’t.” Sometimes there’s “too much history” between landlord and tenant that can hamstring the renegotiation process. That process should be looked at as a restructuring, he argues, and as such the theaters “need to bring people in that have restructuring experience and have the credibility to get through a process.” The theater team will then be free to focus on daily operations. Having people on-board who know the restructuring process “is really important,” says Graiser. “That’s where mistakes happen, where [theater operators] become penny wise and dollar foolish” by trying to do everything themselves.