As the Great Recession of 2008-2009 continues, its effects are felt in the commercial real estate market and submarkets of South Florida in the form of increased vacancies, lower rents, reduced income and cash flow to landlords and owners of investment properties. If landlords, owners and their leasing agents are not agile enough or willing to bend, blend and extend existing lease agreements, then we will see this segment of the market go through what has happened in the housing markets. However, no matter what action ownership takes the combination of short term loans coming due, the new rules of higher equity requirements, increased capitalization rates and appraisal values might still tilt the balance downward. But no matter, the mortgage debt side of the equation is a subject of a later newsletter. We will discuss here the ownership side.
What is a landlord and it’s representative to do when approached by a large major tenant with several years remaining on their lease term, to reduce rent and/or give up space back to the landlord? There are various concessions and amendments that can be offered and considered. The main element has to be to save the tenant and keep them from vacating the space and moving to another location. Other questions are: How much space do they occupy? How long have they been a tenant? What is their track record in rent payments? Also are they willing to give the landlord financial records of the past 12 to 18 months and a projection of their income for the next 12 to 18 months? Will their request to give back seriously affect the cash flow of the property? And lastly, what is the future of their business? And most important are they going to survive?
Answers to these questions and the willingness to disclose their present and future financial condition will greatly affect the landlord’s ability to bend, blend and extend. Help can take various forms: rent abatement (free rent) for short periods to give them breathing room, rent deferrals with accrued deferrals repaid at a future date with interest, reduced or eliminated rent escalations to provide “breathing room” for a period, give back of space with or without a future take back, updating of base year for operating expense pass-thru to a current year or eliminate it entirely. More help can take the form of paint and new carpet to “refresh” their space in return for extended lease term, say two or three years remaining extended to five to ten years.
Finally, a rent per square foot reduction and some parking rate concession for a short term (12 to 18 months) can go a long way to help a tenant survive these rough economic times. The key is, will you as the landlord or his representative be able to make the value judgment: “Will the tenant survive?” If you have strong doubts, do not play the bend, blend and extend game. Let the space go vacant and find a tenant to occupy the space at a rate where you as the landlord can survive!
CALL US, WE KNOW HOW TO BEND, BLEND AND EXTEND. WE ALSO KNOW HOW TO SURVIVE!
by Steve Magenheimer