Posted on Sunday, August 2, 2009
In the world of commercial real estate, it’s starting to rain cats and dogs. Winds are stirring from three inter-related directions; First, tenant stability, income and occupancy levels; Second, pressure from lenders; and, Third, preservation of asset valuation. But there are steps some property owners may be able to take in order to avoid being soaked. The degree to which a particular property can accomplish this of course depends on many factors, not the least of which is landlord and property size, funding, and condition.
More so than ever before landlords should be thinking of tenants as “partners,’ it’s going to be difficult to weather this storm without them. As with most partnerships, a two pronged approach works best; keep one eye focused on making sure they’re happy and the other eye on the look-out for a replacement in case they are not. More specific to our context, be especially diligent about avoiding potential issues for tenant dissatisfaction, for example maintenance matters, and quick about remedying them when they do arise. Make sure you’re up to speed on any potentially detrimental provisions in your leases tenants might leverage, such as co-tenancy clauses, and events that might trigger them. And review the forms you use for appropriateness in the current climate. Pay closer than usual attention to the health of your tenant’s businesses and monitor their competitors as well. When the pet store down the street closes, it could mean your own pet store tenant is having similar challenges. Conversely, if your ice cream shop tenant doesn’t make it, have a list of competitor ice cream shops who can benefit from the move-in ready space on hand to call without skipping a beat. And, as always, keep an eye on your own competition. What are they doing to keep current tenants and lure new ones? If the office building down the street is losing tenants, the owner may very well be thinking about targeting yours. Finally, be prepared for what seems to have become expected, tenants asking for rent and other concessions due to their own economy-driven revenue shortfalls or simply the fact that they know others are asking and figure they might as well too. Add value in a manner tenants grow to rely upon and other landlords find difficult to replicate or catch up to. Effective creative use of landlord marketing budgets, for example, can be a win-win in today’s climate.
In some ways, landlords have less control over the relationship with their lender than they do with tenants. And oftentimes lenders most certainly do not want to hear that a landlord considers them a “partner.” The only thing most lenders have to say to landlords nowadays is “show me the money.” With hundreds of billion in commercial mortgages maturing, little room for extension or modification and no new money in sight, most landlords are bound to have to face their lenders sooner, rather than later. In preparation, landlords are well advised to do the best they can to of course keep occupancy levels and revenues up and make sure the taxes and insurance bills are paid. Looking good on paper is critical for loan committee. Prudent landlords begin extension discussions or the search for new debt well in advance of maturity now, though often still unsuccessfully. Many are still waiting on baited breath for an answer from Washington. While it seems TARP money may actually someday end up in local projects, particularly those geared towards workforce housing or green construction, no one’s seen any of it to speak of yet. Fowler White Boggs is coordinating a get – together with FHA representatives this Fall to discuss exactly when and where some of those funds may become available for commercial property owners. But until then, when and how a lender is approached can be almost as important as anything else. The good news, if we can call it that, is that most lenders have far more problems on their plate then they can handle as it is. To meet new LTV requirements, if you’re in the position to do so, offer funding project updates and improvements as an incentive for a loan extension or modification. Unlike principal reductions or interest reserves at least the dollars will add direct value for you and your project. Positioning yourself to be the least squeaky wheel, coming prepared with realistic proposed solutions with some added tangible benefit to the lender (offering to pay back the money you already agreed to pay back if the lender will agree to extend the loan is not an added benefit to the lender), being able to prove that you’re leaving no stone unturned in the quest for a new loan or investor, will work more for than against you in th eyes of a lender even though it may still not be enough. Most importantly, think like a bank. Ask about the specific regulatory and reserve challenges your loan has raised for the lender and elements that will need to be built into an extension or modification to help your lender resolve those challenges. The bottom line is, if the lender is not able to resolve their own challenges with your loan, they are certainly not going to be concerned about resolving yours.
If the influencing lenders is difficult, then controlling asset value is next to impossible. Of course to some extent here’s where we circle back to where we started with tenants. Maintaining tenant quality and numbers is key as is proper maintenance of the project itself. But again, at least of portion of what we cannot control can be abated by being prepared. In particular, take the time now to bring yourself up to speed on the current market; sales, rentals, and occupancy rates at competing projects. The impact of low quality lender valuation methods has been front page news. Prepare your project in advance for the highest and best possible valuation. Even if the current LTV is not good, put yourself in the position to at least show that the project has held up better than area competitors.
Every cloud has a silver lining and the current market is no different. In this case, the upside is that you’re not alone.