The Under-Water Office Building Owner

by CoyDavidson on June 3, 2012

Tenants Must Evaluate Whether a Building Owner has the Financial Resources to Meet their Occupancy Needs

During any office lease negotiation it is standard practice for a building owner to request financial statements from the prospective tenant, as any prudent Landlord will underwrite the creditworthiness of a company for the ability to meet the financial obligations of the lease. How much the Landlord will invest in the transaction (i.e. leasehold improvements, design fees, commissions, etc.) is impacted by the tenant’s financial stability.

In today’s market, tenant’s that are looking for new space should be asking their tenant representatives to provide some background on the financial strength of the Landlord.

Loan Delinquency Rates on the Rise

Despite generally improving market conditions in most major markets, loan delinquencies for office buildings are on the rise. Trepp, LLC, the leading provider of information, analytics and technology to the CMBS, commercial real estate and banking markets, recently released its May 2012 U.S. CMBS Delinquency Rate. The delinquency rate for U.S. commercial real estate loans in CMBS jumped 24 basis points in May to 10.04%. In the process, the rate broke through the 10% threshold for the first time ever.

Asking the Sensitive Questions

Landlords and their leasing agents are not always receptive to such questions about the financial situation of the Landlord, but in today’s market it is critical to ask questions about the building loan and where the capital comes from. Over the past few years due to the economic downturn an increasing number of tenants have experienced issues in situations where reputable and well-intentioned office building owners are over-leveraged on the property and lack the available capital to sufficiently maintain and operate the building.

Tenant’s that are looking for new space, tenants and their brokers should be conducting their own due diligence on the ownership of candidate buildings. In many cases the tenant representative can provide you with background on other properties the owner controls in the market. A good practice is to tour these buildings and talk to existing tenants in the building your are considering, and other properties in the owners portfolio.

When looking for office space tenants and their brokers typically carefully evaluate many factors for buildings under consideration, but often make assumptions as to the financial strength of the Landlord. The lure of a great economic deal in a high quality building can be negated if the building owner lacks the financial capital to adequately operate the property or might relinquish the property to the Lender in the coming months.

Selecting a Landlord with adequate financial resources and a track record of utilizing conservative levels of debt can a long way in ensuring you will receive a high-level of service throughout the life of a lease.

  • Great post, this is definitely an issue I seem to be coming up against fairly often.  As a tenant, it really pays to have a solid tenant representative who is aware of the market and the status of the buildings in a particular sub-market.

    I have recently closed three deals in which there were issues that needed to be worked through.  One property being in Chapter 11, one property had been given back to the bank through foreclosure and was now for sale, and another property in pre-foreclosure.  Often times it is possible to get an aggressive deal in buildings like this, but it is very important to consider all variables and outcomes when working through the lease document.

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