Current commercial real estate recession will be remembered for Lenders, landlords and tenants working together.
In May 2006 I appraised a modern, multi-tenant, office building in the metro Phoenix area. Like many good quality office buildings at that time it was nearly fully occupied, and enjoyed a healthy tenant demand. To ensure that the rent was paid on time, the lease agreements for the building included severe late payment fees. The leases also included a provision that allowed the landlord to sell off a tenant’s furniture and equipment to offset its rent deficiency. The property manager for the building explained to me that he had no problem evicting tenants, since he could easily lease the office space at higher rents. He also professed that the landlord did not offer any concessions to cash strapped tenants.
Now fast forward to March of 2009 when we appraised the same property in the midst of the present economic and real estate recession. I interviewed the same property manager who curiously had developed a fond appreciation for the tenants in the building. He also praised the landlord for empathetically working with those tenants experiencing financial problems during the recession. It’s almost as if both of them had undergone a religious experience. Perhaps the newfound love affair with the tenants is attributable to the building’s occupancy level of only 70% or the fact that prospective tenants are nowhere to be found!!!
The property manager recounted a recent negotiation between one of his tenants who was in default. The tenant solemnly described his financial hardship and loss of business due to the recession and then casually mentioned a nicer building across the street that offered rental rates 15% lower than what he currently pays.
After discussions with the anguished landlord, the property manager placed a friendly call to the delinquent tenant to express his empathy and desire to help his business survive during these tough times. While gritting his teeth, the property manager asked, “If I reduce the rent by 25% for the next twelve months will you continue to occupy your space?” Don’t worry about late penalties and forget about paying the upcoming rent escalator. We love you as a tenant and really want you to stay.”
After all, the landlord had received a default notice from his mortgage holder in February prompting him to call his lending officer and ask for financial concessions. Ultimately, the bank decided to modify the terms of the loan which allowed the property owner to pay his installment payments. The workout also enabled the lender to avoid a foreclosure that would have placed another REO (real estate owned) asset on its balance sheet.
It appears that lenders, property owners and tenants are struggling and working together during the current recession in order to stay alive. However, I am certain that as soon as the economy improves, we will be back to the good ole days when a default in the lease or the mortgage really meant something.
By Gary Ringel, CGREA