We have all nearly drowned in the unrelenting flood of bad economic news, but the ultimate ending to this story need not be so gloomy. Now is the perfect time to invest some effort toward positioning your real property for the years ahead, well beyond the end of this crisis. Despite our fears at present, the crisis will definitely come to an end; the question is will you have laid the best possible foundation for the better days to follow?
If your business owns the real estate from which it operates, you should examine the degree to which it is possible to restructure and improve the underlying mortgage financing for the property. If you lease the property, you may be in an excellent position to lock in additional years on the lease term at a more favorable rent than you are currently paying. On the other hand, if you are a landlord, you need to be well versed in market conditions and available alternatives so you are able to navigate the fine line between granting sufficient concessions for the tenant to stay, and cutting into your profits to such a degree that you put yourself at risk of defaulting on your own financial obligations.
An Owner’s View.
For an in-depth discussion of many of the credit-related issues facing property (and other business) owners, please see Michael Ruh’s article titled Managing the Debtor-Creditor Relationship.
A Tenant’s View.
Tenants who negotiated what were great lease deals only a few years ago are all too aware that the rent levels they are now paying may be well above market. In addition, for leases where common area costs (CAM), insurance, or taxes are passed through to the tenant, in many cases those costs have escalated far faster and higher than anticipated. But, if you still have years left in your lease obligations and no built-in options to change these problems, you just have to gut it out and wait until the term ends, right? No.
Although your landlord may not want to see you coming through the door asking to renegotiate a lower rental rate, in this market there are things landlords are even more worried about – your leaving at the end of that term or your filing bankruptcy in the middle of it. The landlord knows that its ability to succeed is tightly connected to your success or failure. Therefore you may be in an excellent position right now to negotiate a more favorable lease.
What do you have to offer that is valuable enough for your landlord to agree to rent or other concessions? The most common answer is your agreement to stay in place for a longer term than your current lease requires. Of course, there is no “one size fits all” approach to rebalancing the economics in commercial leases, but if you are fairly confident in the long-term viability of your business, you may want to agree to extend your current lease term another five or more years and in return improve other business and legal terms in your lease. Rental rates or the rates at which they escalate can be reduced. Older premises can be remodeled with a landlord improvement allowance. Other amenities may be added for use by your business (improved parking rights, use of conference centers, better signage, etc.). You may even negotiate a move to a better location within the building. In addition to these types of business terms, there are many nuances in the legal provisions in your leases that can and should be made more fair. Any time you are amending a lease is a great opportunity to accomplish these changes.
A Landlord’s View.
Every contract is the product of two or more parties using their respective leverage and negotiating skills to obtain the best possible deal. Leases are no different. While a tenant may desire to seize the current economic climate in order to solidify a better long-term leasing situation in a building, a landlord’s business IS the leasing of that building. If you are a landlord, you are all too aware that the very concessions a tenant may seek in a lease negotiation may prove difficult or impossible if your own business is to succeed.
Landlords are caught between the downward pressures on their revenue stream on the one side and the unprecedented difficulties of obtaining and keeping in place affordable mortgage financing on the other. This issue is not just a question of whether a landlord will have short-term credit available to be able to respond to a tenant’s demands (e.g. a line of credit with which to finance the tenant improvements), a landlord may not be permitted to allow any substantial changes to lease economics without its mortgage lender’s approval. And if you are not already aware of this important restriction: note that most mortgage financing documents state that the transfer of the secured property (this would include leasing) without lender consent constitutes a loan default. Obviously the current credit crisis is the wrong time for you to be in a default situation with your lender. Therefore, long before you bind yourself to any agreement with your tenant for substantive lease changes, be sure you understand the part your lender will play in the matter.
Perhaps the best action a landlord can take in this market is to stay in close touch with tenants and know their concerns long before they send you notice that they don’t plan to renew a lease. Inviting a discussion with a tenant does not bind you into a concession, and it may just be the move that shows the tenant you are concerned with their business as well as your own, fostering long-term loyalty.
A Lawyer’s View.
Most people would never assume that because they have watched knee surgery on a documentary on television, they are ready to take a shot at performing it on themselves. An exaggeration, perhaps, but the point is that, like a leasing broker who knows intimately the market in which he or she works, an attorney experienced in commercial leasing has acquired many insights into ways that the interests of both landlords and tenants can be brought together for a mutually acceptable lease deal. If an attorney on either side of such a negotiation ignores the needs of the other side, the only one who will benefit will be that attorney. Consider the long-term costs that will be saved by taking a few minutes to make sure that you are represented by experienced counsel. Then, having found the right attorney, recognize that if you feel you cannot afford to involve them totally in the negotiation, their counsel is most valuable to you at the beginning, to help you write the script for what will follow.