Why commercial real estate brokers insist that tenants look at the office building men’s rooms when presenting space for relocation is a bit peculiar.
Don’t landlords know that people look at restrooms? As a result, don’t most landlords pay extra attention and keep them clean, even if they might not properly maintain other parts of their buildings?
I guess office building men’s rooms are like getting your signature notarized. One only has a problem when you cannot get your signature notarized or when the men’s room is not clean and orderly.
Certainly, a clean men’s room should suggest the environment in which a company’s employees would work. However, is it really a true indicator of the quality of a building and how well it is maintained and managed? What about the building’s financial circumstance and that of its landlord?
In challenging economic times where good companies work diligently to avoid financial collapse and good landlords find it difficult to attract new tenants and retain existing ones, a well-maintained building suggests that the landlord may, in fact, be focused on more than just protecting its investment. However, essential to determining the long-term viability of any potential real estate transaction is a thorough investigation of the physical condition of any property under consideration, as well as, a detailed review of the landlord’s ability to perform, not only operationally, but financially in accordance with the intended terms of a lease.
About CFO Studio CFO Studio and CFO Studio Magazine deploy the best of new and traditional media to promote finance executives as business and strategy thought-leaders. Andrew Zezas, CEO of Real Estate Strategies Corporation, is the host and moderator of CFO Studio and the Publisher of CFO Studio Magazine.
Visit www.CFOstudio.com to watch interviews with New Jersey area CFOs, with new releases every Friday morning at 10:30 AM EST!
To read stories that have appeared in CFO Studio Magazine, or for subscriptions and advertising opportunities, visit www.CFOstudio.com.
Funding for CFO Studio and CFO Studio Magazine is provided by Real Estate Strategies Corporation and select advertisers.
Real Estate Strategies Corporation provides corporate real estate advisory and transaction services to CFOs, Management, and corporate Boards in New Jersey and around North America. Real Estate Strategies Corporation is a major sponsor of CFO Studio and CFO Studio Magazine, and is the sole real estate sponsor of the NJBiz CFO-of-the-Year Award, Financial Executives International – New Jersey Chapter, and the ACGNJ CFO Forum.
When seeking to sell their companies’ commercial real estate, CFOs can find themselves in very risky positions when they enter into sale agreements with speculative investors. Some speculative investors don’t seek to simply purchase real estate. Instead, they use purchase agreements as leverage and opportunities to achieve other results. This scenario may seem extreme, but it is a very common practice in how some investors acquire real estate. Now, after such a long period of lingering economic stagnation, itchy investors eager to capture opportunity are beginning to tap into the desires of equally frustrated property owners, and are making speculative plays with their properties, often with those property owners unaware of the increased risk they bear. As chief guardian of their companies’ assets and financial interests, it is imperative that CFOs be aware of the very real risks to value erosion that can occur when dealing with speculative investors.
When selling real estate to speculative investors, landlords, or developers, it is imperative for CFOs to understand, before entering into any type of purchase agreement, option, or otherwise, the specific events that will occur between the execution of a purchase agreement and the intended closing date. In a strong purchase agreement, the optimal transaction structure would include only a few clearly defined and achievable events intended to take place prior to closing. More importantly, the purchase agreement should contain very few contingencies that would permit the purchaser to terminate the agreement. One of the keys to protecting the seller from the perils of doing business with a speculative investor is the payment by the purchaser at the execution of the purchase agreement of a substantial at-risk down payment. In many cases, it is unfortunate that the way many speculative investors seek to control properties often places sellers at great risk even after the purchase agreement is executed.
Very often speculative investors seek to “lock-up” a seller’s property, so that the speculative investor has beneficial control of the property for a period of months. During this time the seller usually cannot sell the property to anyone else, nor enter into a contract with another purchaser. After speculative investors secure a purchase agreement, they often use due diligence periods to determine if their intended transaction will prove viable. It is during this time when they should be actively pursuing municipal approvals, based on a logical and thought-out plan for the property. Instead, during due diligence, many speculative investors often expend substantial effort to secure financial and other arrangements with development partners, investors, lenders, tenants, downstream buyers, or others. They basically use the property and the purchase agreement as currency to uncover even greater opportunities for themselves beyond the mere purchase of the property, often extending due diligence periods when they need more time. In many cases, lock-up provisions in purchase agreements often restrict sellers from doing much anything with their properties other than maintain them and await the results achieved by the purchaser during due diligence.
When speculative investors are not successful in achieving the opportunities they seek, they often use contingencies contained in purchase agreements, or they deploy other means, including legal action, to avoid closing on the purchase. As a result, at this juncture, many speculative investors will move to terminate the purchase agreement, expect return of their down payments, and will walk away from the transaction. In such cases, speculative investors experience little, if any, financial or other loss. By contrast, the impact on the seller can be devastating.
When a purchaser terminates a purchase agreement after many months, the seller is often left in a very challenging position, especially because the typical speculative investor will not provide the seller with a large at-risk down payment as part of the purchase agreement. Moreover, when the above occurs, the seller will have lost valuable time, might have foregone other more favorable sale opportunities, might have missed a market peak, may be saddled with future challenges resulting from local municipal authorities who feel that their time was wasted by an unrealistic speculator and a seller who was not careful in its selection of an appropriate purchaser, and the property could take on a white elephant status in the eyes of other acquirers. This series of events then often draws bottom fisher buyers, who seek to acquire seemingly distressed properties and those owned by frustrated sellers at low prices. This, in turn, further contributes to price erosion and creates additional challenges for the CFO seeking to dispose of the property in a reasonable time, with low cost and risk, and at a reasonable price. In the extreme, even if the seller does not return the speculative investor’s down payment, almost any amount of security, even if forfeited, would not likely provide adequate compensation to the seller for the damages it could receive.
As in any well thought-out business endeavor, for the CFO seeking to sell his or her company’s commercial real estate, beginning with the end in mind is the prudent approach. In this type of transaction, the means of the speculative investor will dictate the end, and much more.
About CFO Studio CFO Studio and CFO Studio Magazine deploy the best of new and traditional media to promote finance executives as business and strategy thought-leaders. Andrew Zezas, CEO of Real Estate Strategies Corporation, is the host and moderator of CFO Studio and the Publisher of CFO Studio Magazine.
Visit www.CFOstudio.com to watch interviews with New Jersey area CFOs, with new releases every Friday morning at 10:30 AM EST!
To read stories that have appeared in CFO Studio Magazine, or for subscriptions and advertising opportunities, visit www.CFOstudio.com.
Funding for CFO Studio and CFO Studio Magazine is provided by Real Estate Strategies Corporation and select advertisers.
Real Estate Strategies Corporation provides corporate real estate advisory and transaction services to CFOs, Management, and corporate Boards in New Jersey and around North America. Real Estate Strategies Corporation is a major sponsor of CFO Studio and CFO Studio Magazine, and is the sole real estate sponsor of the NJBiz CFO-of-the-Year Award, Financial Executives International – New Jersey Chapter, and the ACGNJ CFO Forum.
As your company seeks to reduce costs and preserve its cash, it is important to keep a careful eye on those other companies that provide services to you that can have a material affect on your ability to conduct business productively, safely, and profitably. Specifically, your company’s landlord could be experiencing financial or other challenges that, if unresolved appropriately, could hinder your company’s ability to enjoy a productive business environment, irrespective of your continued rental payments.
Watch for a number of issues that could signal your landlord is having difficulties, or may be headed for them. They could be signs that your landlord may be in danger of losing its building. While this list is not intended to be complete, some indicators may include:
1. Significant increases in vacancy in your building
2. Increases in vacancy in other buildings where your landlord has an ownership interest
3. Increases in vacancy in neighboring competitive buildings
4. Construction projects that start at your building but, languish unfinished for extended time periods (typically a sign that contractors are not being paid on time or at all)
5. Decline in response time and / or communications for service, maintenance, or repairs (a sign that staff has been cut or is stretched too thin)
6. Increase in equipment and system breakdowns, such as elevators, HVAC systems, etc. (indicates a decline in preventative maintenance, staff cuts, or more)
7. Fewer landlord or management company employees visible on site
8. Decline in security, life and property safety services
9. Consistent lack of consumable items in restrooms and other areas
10. Interior office, common area, or window cleaning occurs less often
11. Trash not disposed of in a timely manner or is stored in basements and other areas
12. Snow not removed from parking lots in a timely manner
13. Landscaping not updated or maintained and / or grass is cut less often
14. General deterioration of the appearance of the building, parking lots, and grounds
15. Reduction of tenant events
16. Deferred capital improvements
17. Preventative maintenance announced or planned but, not implemented
18. Floors, glass, and metal and other interior components not polished or maintained
19. Band-aid repairs being made in place of needed capital replacements
20. Unresolved mechanics liens from contractors and other service providers
21. Real estate taxes delayed or not paid
22. Mortgage payments delayed or not paid
23. Water, utility, or other payments delayed or not paid
24. Increase in unresolved or unpaid fines from the municipality and / or other governmental authorities
25. Substantial and / or unexplained increases in operating expenses and costs of landlord or management company provided services passed on to tenants
26. Landlord making multiple requests for you to sign estoppel certificates or lease summaries (suggests that the landlord may be scrambling for financing or attempting to sell the building)
27. Real estate brokers unwilling to show your building to prospective tenants (suggests that landlord is unable or unwilling to pay commissions – typically a sign of a cash crunch)
28. Contractors seeking payment from you instead of landlord (indicates a lack of confidence on the part of contractors in their ability to be paid on time, in full, or at all)
29. Contractors unwilling to work in your building (see above)
30. Multiple switching of leasing and / or managing agents, building managers, cleaning companies, security services, vendors, service providers
31. Landlord selling other assets
32. Landlord’s inability to sell or refinance your building
33. Change in landlord’s leasing program – agreeing to many short term leases to small, transient, and / or undesirable companies
What can you do to protect your company and assure that your environment remains productive, safe, and profitable, and that your company receives the services to which it is entitled?
Imagine planning and executing a well designed defensive operational and financial strategy, only to find out that the real estate your company leases may not be under your control and that the space may be pulled out from under you! That’s right! Your landlord may not be as good at pruning expenses and could lose your building, throwing into question your company’s rights to remain in its space.
“But, we have a lease with many years remaining; We pay rent and have never been late! They can’t take our space away from us….can they?”
The answer to that question is a resounding…..”That depends!” It depends on a number of factors, from whether or not your landlord will really lose its building, to who will end up with it, to what the process will be if the landlord does lose the building, to how thorough your company’s lease was negotiated in the first place and what protections that document affords you.
The first step is to read your company’s lease. Check all of the clauses that might impact your occupancy, including those pertaining to non-disturbance, landlord default, self-help, sublease, early termination, and others. Since your lease constitutes the rules of engagement, be certain to understand your company’s rights, privileges, and obligations, in the event of a serious landlord problem.
Make it your business to understand all lease components that could affect your company’s ability to remain in the building if the landlord were unable to support it financially. Specifically, does your lease provide for self-help (the ability to secure services that the landlord fails to provide) in the event that the landlord defaults in providing services to you? Can you contract for temporary cleaning and other services? Can you secure utilities directly from the utility provider? Can you do the above without putting your company into default of its lease?
What if the landlord actually goes bankrupt and ownership of the building reverts to the lender? Can the lender terminate your lease? Maybe! Does your lease require the landlord to secure a non-disturbance agreement for you from the lender? Has the landlord provided you with that document? A non-disturbance agreement, if written properly, will most often prevent a successor, like a lender, from terminating your lease.
By now, you’re likely asking: “Why would a lender terminate our lease? Wouldn’t they prefer to retain rent paying tenants?”
That, too, depends! It is possible that your building could have a greater value or a greater likelihood of being sold if it were vacant. Perhaps a larger tenant, or one that for some reason is more desirable, may want your space. Or, maybe your company’s use of its space is not conducive to the lender’s future plans for the building. Without a non-disturbance agreement, your company could receive notice to vacate and have little choice.
When commercial landlords experience financial difficulties, the tell tale signs may be easy to spot. In many cases, payments to vendors, service providers, taxing authorities, and others become delayed or are sometimes not paid at all. In others, the building shows signs of neglect.
If you believe you have reason to be concerned, do a little detective work. Check with the local property tax dept, utility companies, and other building services providers to confirm that bills are being paid in-full and on-time. Ask around, too. Are vendors, commercial real estate brokers, contractors, and others being paid in-full and on-time? But, be careful here. You wouldn’t want to spook anyone and create concern about your landlord if problems don’t exist.
Above, we discussed 33 Signs That the Building Your Company Leases May Be In Serious Financial Trouble. Gues what? There are more than 33 signs! Take a look around your building and ask yourself some of these questions:
34. Has building management or maintenance staff been cut?
35. Is the landlord any less responsive?
36. Are capital projects being delayed?
37. Is construction languishing in an incomplete state for extended periods?
38. Are repairs taking too long to complete?
39. Does the building look as good as it did?
40. Are the interior and exterior common areas being well maintained?
41. Is the landscaping being properly maintained, trash being removed and parking areas being plowed of snow promptly?
42. Are vacancies growing?
43. Are smaller, less desirable, and / or transient tenants taking space?
44. Has the landlord tried unsuccessfully to sell or refinance the building?
These are common indicators that a building and / or its landlord may be in serious financial trouble. So, how bad could it get? What could happen if your landlord DOES lose your building to its lender…..or, to the sheriff for non-payment of property taxes? It could get ugly…very ugly, with your company’s productive becoming the victim.
Do your homework…early and thoroughly!
About CFO Studio
CFO Studio spotlights New Jersey based senior finance executives, providing them with the opportunity to share their knowledge and communicate their perspectives on current economic, financial, operational, and business issues. By invitation only, CFO Studio promotes select finance executives, their ideas, experience, and insights, in a professional, tasteful, and low-key interview setting. Topics include current and future trends in accounting, banking, business, corporate strategy, employment, finance, IT, operations, real estate, risk management, the economy, and more. Watch interviews with noted area finance executives and learn how your peers are creating sustainable value for their companies! Join the conversation or just watch, listen, and succeed! We welcome your ideas for future interviews. If you would like to appear on CFO Studio, please email or call our CEO, Andrew Zezas, at 732 868 0000 x111.
When seeking to sell their companies’ commercial real estate, CFOs can find themselves in very risky positions when they enter into sale agreements with speculative investors. Some speculative investors don’t seek to simply purchase real estate. Instead, they use purchase agreements as leverage and opportunities to achieve other results. This scenario may seem extreme, but it is a very common practice in how some investors acquire real estate. Now, after such a long period of lingering economic stagnation, itchy investors eager to capture opportunity are beginning to tap into the desires of equally frustrated property owners, and are making speculative plays with their properties, often with those property owners unaware of the increased risk they bear. As chief guardian of their companies’ assets and financial interests, it is imperative that CFOs be aware of the very real risks to value erosion that can occur when dealing with speculative investors.