The Housing Chronicles Blog: Commercial renters now worrying about defaulting landlords

Wednesday, March 4, 2009

Commercial renters now worrying about defaulting landlords

For awhile now, I've been warning would-be renters of homes and condos to do some of their own sleuthing to make sure they won't get a knock at the door in the middle of the night from a Sheriff armed with orders to vacate the premises. If a deal is good too good to be true -- such as a four-bedroom home renting for the same or lower price as a typical two-bedroom apartment -- then perhaps additional research is warranted.

Now it seems that tenants of office properties are starting to wonder about the financial strength of their own landlords. From a story in the New York Times:

Office landlords have always scrutinized the financial stability of prospective tenants, but now they are finding themselves under the lens.

Prospective tenants are asking for financial statements from landlords, hoping to avoid companies that might default on their mortgages and leave tenants at risk of losing the space. Tenants are also more wary of subleasing space, and are tending to flock to buildings with stable owners...

During the recent era of cheap money that led to the real estate boom, many investors bought their office buildings at high prices with extensive debt, hoping to flip the building quickly. Some landlords calculated their cash flow too optimistically, intending to lease poorly performing office buildings at high rents to maximize their profit, and are having trouble paying their debt, in some cases falling behind on payments...

Marisa Manley, president of Commercial Tenant Real Estate Representation, said there are reasons for an office tenant to worry about a landlord’s losing the building. Money given by landlords to tenants to customize their office space, generally paid as an allowance over a period of time, could be lost, and in the current market, brokers said that money from landlords could be equivalent to $70 a square foot. Also, services in the building could deteriorate, Ms. Manley said.She suggested that tenants demand that landlords offering tenant improvements put the funds in escrow or in a letter of credit, which means they could not be seized in a bankruptcy proceeding...

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