Is the Building Your Company Leases in Financial Distress?
Commercial real estate markets remain in turmoil and are expected to continue that way for some time. Substantial risks exist for tenants and landlords. As a prudent means of measuring and mitigating risk, CFOs should engage in discussions with their current landlords to assess the sustainability and long term viability of existing leases.
In a recent article, entitled “18 Important Questions CFOs Should Ask Before Renegotiating Commercial Real Estate Leases”, I provided a list of key issues facing commercial tenants when renegotiating leases. In considering the need for finance executives to evaluate the risk profiles of existing commercial real estate leases, I realized that those same eighteen questions apply to this topic, as well.
Accordingly, finance executives, and their real estate and legal advisors, should conduct thorough due diligence on both the condition of the building and its landlord, in order to accurately assess the risk associated with commercial real estate leases.
Some important questions to be asked and answered, include:
1. Is the building solvent?
2. Is the landlord that owns the building also solvent?
3. How will the landlord guarantee its ability to fund on-going operational costs, capital improvements, legal and administrative costs, and others?
4. Is the landlord behind in the payment of the building’s real estate taxes, mortgage, utilities, or payments to service providers or vendors?
5. Has the mortgagee extended payment deadlines, permitted the landlord to make lesser payments, reduced the interest rate or monthly debt service amounts, or permitted anything that would otherwise put the landlord into technical or other default?
6. Has the lender threatened or begun foreclosure proceedings?
7. Has the tax authority threatened or begun property seizure proceedings?
8. Are any building tenants experiencing financial challenges that may put their solvency and / or tenancy into question, and negatively affect the building’s finances?
9. Are any building tenants planning on vacating or reducing their space?
10. When will the leases for the largest building tenants expire?
11. What is the building’s current value in relation to its debt?
12. When does the building’s debt expire?
13. Will the lender extend or renew the debt for an extended time period?
14. Is the debt on the building encumbered by any other property?
15. Does the landlord have the funds to make-up any difference between previous debt and current lender loan-to-value ratios?
16. What is the landlord’s planned exit strategy?
17. Has the landlord or its affiliates experienced a foreclosure, tax seizure, or been involved in a deed-in-lieu-of-foreclosure arrangement?
18. Have nearby buildings recently experienced significant vacancies?
Answering most, if not all, of the eighteen questions above would be prudent for any CFO whose company occupies commercial real estate. A bad landlord report card won’t necessarily spell danger. At the very least, such intelligence could provide guidance as to those steps a company might consider as a means of protecting its interests.
Engaging in conversation with landlords alone will not suffice. Prudent CFOs will insist on landlords providing high-level access to their lenders, as well.
Solid investigative work by the company’s finance executive, its real estate and legal advisors, could win the day!
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About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Follow CFO Studio at http://www.Twitter.com/CFOstudio.
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