Do companies like 7-Eleven often try to renegotiate rental rates before their option period?
Is it standard for companies like 7-Eleven to try and renegotiate a lower rental rate before their option comes up? A 7-Eleven real estate rep proposed going from 8k to 7.7k per month for the new period stating the option rate is much higher than market rent. The option period starts next year. Not really sure how to navigate through this as I definitely don't want to agree to it with inflation being so high but wouldn't want them to leave as the currently set base rent is probably higher than what I would be able to get for the space if I were to go to market at this time. I don't think they would leave as it seems to be a great location for them with lots of foot traffic. Should I hold them to the option rate and hold off discussions until next year? Any insights would be appreciated.
[{"id": "i77lfox", "text": "Personally I would hold off until next year to see what the market does. Also in my personal experience their leases are written weird and in a way that is typically a PITA for LL. I've had them as tenants twice and they suck.", "replies": [{"id": "i77o95l", "text": "Just curious what about their leases makes them difficult? I have no experience with them just curious", "replies": [{"id": "i7aczog", "text": "A lease heavily biased towards the tenant and often they don't want to use a LL lease template.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i7a8seo", "text": "Do you mostly just deal with local franchisees or corporate?", "replies": [{"id": "i7acw6m", "text": "Corporate. It's not that they are particularly difficult as people or anything, but their leases tend to be heavily biased towards the tenant and they don't often like to use a LL lease template. Upon move out their restoration efforts are lacking. \n\nThey also create an awful lot of negative impact on the site in terms of transients, garbage, and all the other things a business like that brings with them.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i7aylq4", "text": "I second this. Have them as a tenant now and have negotiated against them a few times personally and for clients. Not a fun experience", "replies": [], "depth": 2}], "depth": 1}, {"id": "i77ngkc", "text": "Options are tenant friendly only in regards to their choice to take it, or lose the right and negotiate outside of the option. This is happening I my market atm as vacancy is higher than the average.\n\nHard to advise without knowing your market. If it would be an easy space to fill with limited downtime and a better rate then let them walk. Or if there is market evidence to your option rate being fair then stay firm that that\u2019s the rate. Additionally if it\u2019s above market then you can expect the situation you\u2019re in now.\n\nTypically an option should have an exercise date where they lose the right?", "replies": [], "depth": 1}, {"id": "i77nsx4", "text": "Tenant needs to support their argument about rental rates with comps, and you may need to support your counter argument with comps. Your willingness to or not to negotiate at this point should be determined based on your needs. Sometimes a reduction like they seeking gives you a chance to ask for something in return, like a longer term if you\u2019re planning an exit, or a new expense structure, etc.  Talk to an investment sales broker who knows 7-elevens and they will know how tenant/LLs typically handles these situations.", "replies": [{"id": "i7a5bxd", "text": "With a tenant like 7-11, large national credit tenant, they don't have to provide comps.  Doesn't mean you can't ask, but don't automatically expect they have to provide in a market like this.\n\nRetail is struggling, and we're where we thought we'd be at the beginning of the pandemic.  It's about leverage, and for $300 / month, I would think twice about how hard I'd push back.  Make no mistake, he should push back, but the national guys don't have to play by the same rules, and they know it.", "replies": [{"id": "i7ajhul", "text": "&gt;Retail is struggling, and we're where we thought we'd be at the beginning of the pandemic.\n\nRetail struggled.  Convenience stores did not.  Their sales increased during the pandemic and 7-Eleven's new business model has increased sales over the last 3-5 years.", "replies": [{"id": "i7athy6", "text": "And I'm sure the fuel increase has helped.  I don't have insight into 7-11's current performance, but it's also about replacement tenants.  \n\nEither way, national credit tenants don't have to play by the same rules.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i77nt08", "text": "You need to make an assessment.  But if they are asking for reduction in rent, and you think it's higher than what you could get now, and they have relocation options, you could either have renew them for a shorter period of time since, or you can renew for a longer period.\n\nIf you go for the shorter period, say 1-to-3 years, you're banking on the market going up, and you can increase their rent in the future.  If you go for the longer period, say 7-to-10 years, you try to refinance now so you can cash out some of that term, or sell.\n\nThat said, since you think the rent is higher than what you can get now, I take this to mean you are in a more rural market, there's probably open white space for 7-11 to move into, and you would have a hard time backfilling them.  If that's the case, you should renew them long term.  If I'm wrong, then figure what's best.  \n\nBut I would think about how easy it is to replace them.  If the answer is that it's not, cough up the $3,600, and lock them in so they can't leave or renegotiate their rent.\n\nOn a side note, you can offer the reduced rent and put in % rent to cover the decrease if they end up having a great year.  But with reduced spending, increasing fuel costs, and inflation, whether they hit their break point is debatable.", "replies": [{"id": "i78osx2", "text": "I think this is the best answer. You don\u2019t want to take a rent cut because of inflation\u2026 but you also don\u2019t think you can do better on a new lease. Sounds like they have all the negotiating power except the hassle of moving locations.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i77pt5n", "text": "I have no experience with 7/11 specifically, but think about your break even timeline regards to annual escalations. If you agree to 7.7K, that\u2019s 3 years at 1.5% bumps to get back to original ask. If they sign a 10 year term and is above market anyways, it\u2019s hard to rationalize that opposed to going vacant, signing a new tenant at a lower rate, performing T.I\u2019s, etc. all for a new similar length lease. \nIdeal situation, show some good faith by splitting the difference on rate and offer some abatement.", "replies": [], "depth": 1}, {"id": "i77x36v", "text": "Are they trying to renegotiate the option rent before or after the expiration of their notification period??  Tenants dial for dollars on a regular basis trying to renegotiate rent prior to their notification date. It\u2019s a game of chicken and who blinks first. It cost them absolutely nothing to try to renegotiate before their notification period.  Because no matter what is said, at the last second prior to the notification period they can just send you an option notice.   If you really think you have leverage tell them you\u2019re not willing to discuss anything with them unless and until they miss the option notification.  Your company policy requires that.  (PS:  how many days ahead is the notification?  The longer the better, because you have time.  If it\u2019s 120 days or less, that\u2019s usually trouble for you). However if they have balls enough to miss it that means they have balls enough to relocate or close the store. So be careful, it all depends on how busy you think the store is and whether or not you think they\u2019re paying market rent and whether or not you have leasing alternatives at the same or higher rent. I would send also a covert person to talk to a manager and see how the stores doing. You\u2019d be surprised sometimes they sing like canaries.", "replies": [{"id": "i786k9t", "text": "So send them to voicemail.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i78ruuy", "text": "One thing I learned in residential is that it's better to have the rents coming in than risking losing a tenant.  I mean imagine it take a month to get a new tenant at 8k, you would have missed out on on $300 x26.  \n\nWhat if takes a month to find a new tenant only to discover the current rates are 7.5k for your property?\n\nBasically if you're a in a good position on cash flow even after the discount, I wouldn't sweat it.", "replies": [], "depth": 1}, {"id": "i78v79q", "text": "Don\u2019t negotiate until they have missed their option notice or are willing to waive their option.  Otherwise you are negotiating against yourself.   If their threat is they will leave if you don\u2019t reduce the rent then they will not exercise or will be willing to waive.   If they are not serious they won\u2019t risk the location over $300/month.", "replies": [], "depth": 1}, {"id": "i78znss", "text": "Yes, this is common. They just proposed 50% of market rent to a client with a fmv option that has current rent significantly below market. It was a joke. Their goal is to get the best deal / occupancy cost for their business. \n\nHow long have they been there? Are they freestanding with gas or without? How many locations within 1-mile radius? Are there high barriers to entry in your market or are there better locations available? Any new sites in development in the market? Have they made any improvements to the property or is there a ton of deferred maintenance? \n\nEvery property is different and will dictate how you respond. Some locations you don\u2019t do anything others you do whatever you can to keep them.", "replies": [], "depth": 1}, {"id": "i790fo4", "text": "Think about the hassle to get the space ready for lease, months without any rent + TI $ for the new tenant + commission. If you did the math, sometimes it\u2019s just cheaper to play ball. 7/11 has a sophisticated real estate team. They have done their due diligence as it relates to market availability, and they have run their comps. I assume we are discussing a 5 years fixed rate option. If you take their offer, you\u2019ll be losing $18,000 ($300 x 60 months) vs. having to pay broker commission of $28,800 ($8k x 60) x 6%. Consider yourself lucky that they didn\u2019t ask for additional $ for painting or redecorating allowance. \ud83d\ude02 Take the money while it\u2019s green and move on to the next deal.", "replies": [], "depth": 1}, {"id": "i7aj8zc", "text": "I have four 7-Eleven Tenants.  The person who contacted you, were they from corporate or a brokerage firm?  There is a tactic from brokerage firms where they try to negotiate new terms on behalf of 7-Eleven.  If they are successful, they receive a % of the savings.  **However, they are not associated with the corporate office.**\n\nAs each option period nears for my properties, my office receives these ridiculous calls.  You have a lease in place with agreed terms.  Do not accept any changes.  They go away once the option is executed.", "replies": [{"id": "i7djx7a", "text": "If 7-11 has a broker to represent them, you should be working with them. You're just going to piss off 7-11 if you're a difficult landlord who won't work with their broker. They hired them to have a much more efficient, centralized process when they have hundreds of leases to negotiate all over.", "replies": [{"id": "i7f38t1", "text": "No, these are not brokers who work for 7-Eleven.  They are third party brokers who try to negotiate with the Landlord to get 7-Eleven a deal.  There is a lease in place.  Renegotiating terms in favor of the Tenant is not smart, particularly when they are performing.  If a Tenant is performing very well can a Landlord demand additional rent?\n\nIn regards to 7-Eleven, I've known their real estate team for decades.  I know who to deal with.  Not to be blunt, but you don't know what you're talking about in this situation.  I have over 80 properties with dozens of credit Tenants.", "replies": [{"id": "i7fj40t", "text": "If they are random brokers who don't actually represent them then of course you don't need to deal with them. I'm referring to when companies have engaged outside firms to handle their real estate across a portfolio (which I also have significant experience with as well). Glad to hear you have lots of experience! The beauty of the internet is that you have no idea who you're engaging with or their experience.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i7djc0u", "text": "Most large companies or companies who have good representation will negotiate their lease extension well in advance of the option notice date instead of leaving it to the last minute. It provides much more leverage because the landlord knows they could also look at moving elsewhere if their landlord isn't willing to play ball.", "replies": [], "depth": 1}, {"id": "i7yfwz1", "text": "Its a blend and extend.  Look at extending them an additional 10 yrs and see what the math says. Lets face it, the chances of you getting another tenant to perform as well as 7 Eleven are slim.  If you are dealing with corporate now, give them a good term and watch them sell it off to a franchisee, so make sure your lease will cover assignments.  They are great tenants, despite what others say here.  I own 17 assets that they occupy and have developed another 22. As long as they can compete in your market place, they are golden. Don't over look your opportunity to extend the lease and then sell it either.  Typically you would pick market CAP at 6yrs to derive a value.  Their are plenty of investors out there looking to place capitol.\n\n&amp;#x200B;\n\nTH CCIM", "replies": [], "depth": 1}]