As a prudent means of reducing risk and cost, on both a cash and P&L basis, many commercial tenants have turned to renegotiating real estate leases. Lease re-negotiations have become common, and can result in a company’s ability to reduce cost, mitigate risk, secure favorable terms, eliminate undesirable terms, secure cash and free rent, and achieve other financial benefits. It is typical for commercial landlords to derive benefit from such transactions, as well, by virtue of extended lease terms, vacancy and risk reduction, recapturing of valuable space, and more.
Since many lease re-negotiations include short term space or cost reductions for tenants, renegotiated leases can also place greater financial strain on both a commercial building and its landlord.
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, prior to renegotiating 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 transaction costs, such as cash and construction allowances, capital and leasehold improvements, legal and administrative fees, commissions, free rent, 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?
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 your 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 prior to engaging in lease renegotiation discussions with your landlord would be prudent. And, such intelligence would provide guidance as to how, or even if, you should proceed in renegotiating your company’s commercial real estate lease(s).
If your landlord gets a bad report card, that may not be the end of your lease renegotiation efforts. At the very least, your approach may change and you might win more favorable and reliable terms, as a result. Or, you could decide not to attempt a renegotiation, and that it might be time to more seriously consider relocating. Either way, advanced planning and some solid investigative work will surely 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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