When Starbucks landlord Leon Brooks got a letter asking for at least a year’s reduction in rent for the company’s drive-thru store in San Clemente, California, the property owner knew his answer.
“I am highly disappointed, disgusted and angry,” Brooks wrote back to the global coffee chain. “Shame on you.”
Seattle-based Starbucks, citing the “staggering economic cost” of the pandemic, notified landlords in early May that it wanted to renegotiate rental arrangements across many of its 8,900 company-owned stores. The company has faced plummeting sales amid the temporary closure of many stores due to the outbreak of COVID-19.
“Effective June 1 and for at least a period of 12 consecutive months, Starbucks will require concessions to support modified operations and adjustments to lease terms and base rent structures,” read the letter, signed by Starbucks Chief Operating Officer Roz Brewer. “This is the worst recession since the Great Depression and far more devastating than the global financial crisis.”
Starbucks didn’t respond to Brooks’ letter. The company won’t say how such negotiations are proceeding. Nor will it say just how many landlords got the letter asking for a break — but commercial property owners from the tip of Florida to northwestern Washington received the letter.
Some landlords have said they won’t play along.
Brooks’ adobe-walled drive-thru has housed a Starbucks for just over a year, with 19 years left to go on the lease. Starbucks hasn’t yet asked him for any specific concessions, he said — but when it does, he plans to refuse.
“We have a contract and we will enforce the terms of the contract,” Brooks said. “If they want to go into default, we will get our remedies from the court of law.”
The tone of what appeared to be a form letter also rankled, landlords said.
“For a publicly traded company with a $90 billion dollar market cap to ask us for help? I was astounded,” said landlord George Bean. Starbucks is a tenant in his small retail strip in Fort Myers, Florida.
Starbucks has cash on hand, Bean noted. The company issued $3 billion of debt May 7, and held $2.75 billion in cash reserves at the end of March, according to Securities and Exchange Commission filings. The filings indicate Starbucks expected to pay $1.25 billion in rent over the next 12 months at its retail locations, roasteries, warehouses and offices.
Nearly 85% of the company’s U.S. stores are open, as of early May, with 90% of stores expected to be up and running by the end of the month, Starbucks announced recently.
The Starbucks drive-thru off 75th Street Southeast in Everett is sometimes so backed up that the line of cars stretches out onto the nearby arterial of Evergreen Way, neighbors say.
“I got my letter and about fell off the chair,” said landlord Jerry Goodman. The space seemed to be performing well, and he wasn’t sure why it needed rent relief.
But just a few miles south of the bustling drive-thru in Goodman’s building, the picture is much different at the two Starbucks locations in Lynnwood’s Alderwood Mall. Those stores have been closed on and off since late March, due first to the statewide stay-at-home order and later because of slow foot traffic, employees said.
Starbucks’ letter to landlords suggests the company is anticipating a longer recovery than some economists initially predicted. The chain’s 12-month ask took some by surprise — other companies have asked for shorter periods of rent deferral.
Starbucks’ quarterly earnings fell by half from 2019, to $328.4 million, it reported on April 28. On an earnings call with analysts, executives said the company anticipates even greater financial hits as the year progresses.
Demands for rent reduction from big companies with numerous locations such as Starbucks are rattling bankers and mortgage lenders. Commercial properties are financed in part based on the likelihood tenants will pay their rent. Starbucks has historically been seen as a safe bet, lenders said.
But, “the longer the pandemic goes, the less reserves everybody has. The longer it goes, the more stress it will have on everyone,” said Brent Beardall, president and CEO of WaFd Bank, formerly Washington Federal. Nearly 13% of the Seattle-headquartered bank’s loans, $1.7 billion, are mortgages on commercial real estate, according to SEC filings.
Lenders say they’re working closely with landlord borrowers on payment plans, should tenants ask for rent relief. Oftentimes, commercial landlords are required to get their mortgage lenders’ approval to make any material change to lease terms, especially for tenants that make up a substantial chunk of rent, said commercial property attorney Imants Holmquist, a partner at Seattle-based Holmquist + Gardiner.
Negotiating positions can also depend on how much time is left on the lease.
“In the middle of a lease, the landlord doesn’t have an incentive to give any concessions,” he said. “But if they only have a few months left anyway, that’s a different discussion. Maybe the landlord wants to incentivize some rent payments through the end of the lease.”
Bean said his lender has advised him not to give Starbucks a yearlong break on rent. He doesn’t expect negotiations with the coffee giant to be amicable.
“We’re not going to agree,” he said. “I need to go get a lawyer. That’s where this is headed.”