Restructuring Existing Commercial Leases
Many big real estate investments will have financial restructuring this year, but not a lot of ownership transfer. The lenders do NOT want the property, and DO need someone who knows the property to operate it as well as the market sustains. That person “in the know” of institutional grade properties is usually going to be the REIT, ownership LLC, or existing Asset Manager. OK, so we aren’t going to get to participate in most of that restructuring.
One way we CAN participate is in re-structuring the leases with existing tenants.
1.) Reduce the rent to comparable, competitive space that is actively on the market for lease. You can find the “availables” easily on your local CIE, Loopnet, CoStar, Comredex, Catalyst, or PropertyLine.
2.) Keep in mind while negotiating that there are several significant costs to the existing tenant if they move:
a. Actual packing and moving costs
b. New utility deposits
c. Loss of productive staff time while pre-packing, and unpacking instead of actually working.
d. Loss of customer or client contact.
e. Belief on the part of customers or clients that your company is not doing well, so they had to move. You could lose business just based on the unspoken underlying suspicions of your customers.
f. Customers can’t find you.
g. Customers go to your competition. (“Time for a change anyway.”)
h. Cost of re-contacting, several times, your entire customer database. Huge time for “sales” staff to recover.
i. Adverse effect on staff morale
3.) Flatten the rent for the next 3 years, and then use a formula to recalculate rent.
a. Do NOT just use the phrase “rent to be determined at that time” or anything short like that.
b. Have the wording prepared by a real estate attorney.
c. Most common procedure: landlord’s broker and tenants agent are to each prepare a rent survey at that time, and submit them to a commercial appraiser for final determination.
4.) Either give the tenant a rent credit for the cost of some TI upgrade, or, if the owners actually has some money or credit, replace some interior finish items, such as carpeting, or paint, or add some convenience electric receptacles; computer network cabling, etc.
5.) Offer a temporary rent credit if the tenant will change to a 4 day 10 hour work week, thereby reducing building operation overhead.
6.) Allow the tenant to sublet to a customer or supplier of theirs. (Or suggest one yourself, and get a leasing fee.)
Be sure to invoice the owner for the rent over the new term, with a credit for commissions you already earned for any overlapping term that is replaced by the start of the new term.
Mike Moloney, President, www.Commercial-Real-Estate-Institute.com
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