Managing costs and optimizing real estate portfolios through lease restructuring

Third in a series

In the first two articles in this series on real estate strategies for newspaper and media companies the focus was on owned properties—whether core or excess. Not all newspaper companies own all of their real estate and in many cases, companies have a mixed portfolio of leased and owned properties. A typical scenario for a newspaper company is to own one key facility that typically houses a HQ and often includes a production facility. At the same time, if the company has extensive operations, such as in more than one market, it is likely that there will be sales/editorial/distribution offices separate and apart from the “mother ship.” In many cases, these satellite offices are leased and not owned. With financial pressure on newspaper and media companies on the rise and the continued shift to digital media consumption accelerating, profit margins have been under continuous pressure. One way of saving money and reducing expenses is to pursue a lease restructure program. This strategy has been successfully deployed by several companies in the context of a bankruptcy where tenant leverage is at its maximum. If the right circumstances exist and ownership is willing to be aggressive vis-à-vis a leased portfolio, savings can be garnered.

 Breaking a lease

Leases are contracts between landlords and tenants that give the tenant the right to occupy a specific space for a set time frame and at a pre-agreed price. Most tenants are under the impression that once signed, the lease cannot be changed. However, a cottage industry of firms act as intermediaries in the restructuring and or renegotiation of leases in industries where companies operate from a portfolio of multiple locations across narrow and wide geographies. Billions of dollars have been saved on behalf of clients who have pursued this money-saving strategy. A key determinant of whether a lease restructure program will be effective is the existence of some form of leverage enjoyed by the tenant. Leverage can be created in a number of ways, including: financial distress; pres sure by lenders; regulatory problems; declines in readership; and renewal risk. This last involves the worry of a landlord that a large tenant will not renew—thereby leaving the landlord, and lender, in the vulnerable position that the property’s loan may go into default. The leverage of a tenant must be accompanied by a willingness by that tenant to wield that leverage in a negotiation with the land lord. In certain cases this means sharing cor porate financial information to demonstrate distress. This process can be accomplished under the aegis of an non-disclosure agreement (NDA) to protect the tenant. Obviously, tenants who are newspapers will be circum- spect as relates to sharing such information with landlords, but in certain cases financial imperatives will trump the need for secrecy. 

Negotiating strategies 

There are several strategies to pursue with landlords if excess locations exist or the  amount of space no longer fits local staffing. Specifically, a tenant can seek a reduction in rent, a shortening of term, a termination of the lease or shrinkage in the amount of space the lease covers—or a combination of these. In the case of a termination, money will need to be set aside to extinguish the remaining liability. As with any negotiation, there will likely be horse trading until the parties can agree to a deal. Landlords, especially vulnerable landlords, can be open to a renegotiation midterm provided that they get something in return for a concession. A typical scenario is a tenant receiving a lower rent in exchange for a term lengthening. A common mistake made by companies is to have untrained or unsophisticated staffers attempt to negotiate these deals with land- lords. There is both an art and a science to this type of negotiation. One issue that can “poison the well” is if companies attempt to renegotiate on their own—and the effort fails. The effectiveness of a subsequent third-party negotiator is hobbled by such a failure, as the landlord then typically sticks to their guns. Ultimately, both Gatehouse and Dolan emerged from bankruptcy leaner, stronger and with capital structures that were sustain- able. Restructuring leases was one of several tools employed to achieve this important outcome. With that said, bankruptcy is NOT the only avenue to achieve savings through the lease restructure process. 

Restructuring leases after bankruptcy, a case study

Two prominent media companies that have successfully used the lease restructure strategy are Gatehouse Media and Dolan Media. In both cases, the private equity owners of large newspaper operations with leased locations in several markets across the country used bankruptcy to convert their debt into equity. In the case of Dolan, the new owner hired a Chief Restructuring Officer (CRO) to oversee the conversion of the debt to equity, and among other things, the lease restructure process. Dolan hired Zolfo Cooper’s Kevin Nystrom to effectively become the CEO and CRO through the bankruptcy process and company transition. Zolfo Cooper and Nystrom have long-standing experience in similar circumstances and are national leaders in the practice. In analyzing the newspaper industry, and their real estate predicaments, Nystrom commented that “many newspapers are moving to a model that outsources content, thereby reducing the need for office and production space.” Moreover, the move to more of a digital model and the ability of employees to work remotely “exacerbated the real estate issue.” Looking at the big picture, Nystrom commented that “many newspapers have a capital structure based on a business model that no longer exists.” While bankruptcy is not always the answer, he added, “newspapers clearly need to reset fixed and overhead costs” in order to survive and thrive. “Restructuring leases is but one of several avenues to pursue in that regard,” Nystrom said. As a matter of standard practice, Zolfo Cooper, in its capacity as CRO, hires vendors with particular expertise to handle specific tasks associated with their overall financial stewardship role. In the case of Dolan, Zolfo Cooper determined that many of the leased spaces across the portfolio were severely underutilized due to changes in the industry and company over the past decade. Part of Nystrom’s mandate was to rationalize expenses across the company, including real estate that was proving a significant drag on earnings. By restructuring the leases, Dolan would be able to simultaneously significantly increase both EBITDA (earnings before interest, taxes, depreciation and amortization) and enterprise value. To execute the real estate strategy, Nystrom reached out to a trusted expert in lease re-negotiations. Nystrom conferred with the vendor to craft a location-by-location strategy and desired outcome. Nystrom then appointed internal business staff at Dolan to work with the vendor to restructure as many of the leases as possible. To succeed, Nystrom made available finance, operations and legal staff to work with the vendor to execute the restructure strategy. Ultimately, more than 80% of the leases in the portfolio were amended—generating savings that exceeded seven figures. The EBITDA-positive outcome of this endeavor exceeded $1 million.  Using a similar process, Gatehouse emerged stronger than ever and has become a net acquirer of portfolios of papers across the country.

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Source: The Inlander