Colorado-Real-Estate-Journal_363396

Page 12 — Office & Industrial Quarterly — September 2023 www.crej.com OFFICE — TENANTS F or many office occupiers, especially those new to the intricacies of commercial real estate, the primary concerns when choosing a space often revolve around location, size, aesthet- ics and lease terms. Rarely does one immediately ponder the financial health of the landlord or the poten- tial implications of its loan default risk. On the surface, this risk may seem somewhat abstract, potentially even unrelated to one’s daily busi- ness operations. But, as with many things in the world of business, the devil is often in the details. n What is loan default risk? Simply put, loan default risk pertains to the chance that a borrower – in this case, the landlord – might be unable to meet the obligations of its debt. It can be a consequence of financial mismanagement, changing market conditions or a host of other factors. Regardless of the cause, the reper- cussions of a landlord defaulting on a loan can ripple out, touching even those who rent space from it. n Challenging marketplace. The past two years have presented office land- lords with dual challenges: a marked decline in property values as a result of the growing hybrid work trend and rising vacancy coupled with a sharp uptick in interest rates. To counteract the market risk, lenders are putting forward more stringent loan terms, with higher borrowing costs, and, in some cases, refusing to refinance without additional financial commit- ments from borrowers. As a result, operating budgets are strained, and even some of the most prestigious names in commer- cial real estate are considering hand- ing back the keys to underwater office properties to their lenders. n Why should office occupiers be concerned? A landlord’s financial challenges won’t necessarily stop at foreclosure. Its dif- ficulties can result in delayed maintenance, lack of nec- essary upgrades, or reduced security – all of which could adversely impact the value you get from the space. The office environment can play a significant role in staff morale, client perceptions and overall productiv- ity. When your office environment is compromised due to a landlord’s financial issues, it might end up cost- ing you in unexpected ways. 1. Possibility of eviction. The most immediate concern for tenants is the risk of eviction. If a landlord defaults on a loan, the lender may decide to foreclose on the property. Depending on the terms of your lease, foreclo- sure might mean you have to vacate the property, even if your lease has not expired. This can lead to unex- pected relocation costs and business disruptions. 2. Increase in operating costs. Some- times, to recoup its losses, a new owner (like a bank) might increase common area maintenance charges or other building-related costs. Such unexpected hikes can disrupt your budgeting and financial planning. 3. Neglect of building maintenance. Financial difficulties can lead land- lords to cut corners. This might mean reduced maintenance, security or other essential services, resulting in a less optimal environment for your business and potentially incurring extra costs if you need to compen- sate with your solutions. 4. Renegotiation of lease terms. If a property is foreclosed upon, the new owner might not be bound by the terms of your original lease. It could insist on renegotiating terms, potentially to your disadvantage, or it might honor existing terms but be less amenable to favorable renewals. 5. Reputation risks. If your business is concerned about staff retention or relies on client or customer visits, the specter of foreclosure – with poten- tial legal notices, public auctions, etc. – can have a large impact on your professional image. n Proactive measures for occupiers. Knowledge is power, and, in this case, foreknowledge can be a shield. By understanding that landlord default risks are a real concern and by tak- ing steps to mitigate potential fallout, businesses can stay ahead of any potential disruptions. Here’s what you can do to protect your interests: 1. Due diligence before signing. Before committing to a new or renewing your lease, investigate the financial health of your prospective landlord. This might include review- ing its credit ratings, checking for any liens on the property, or seeking insights about its reputation in the commercial real estate community. 2. Negotiate protective lease provi- sions. Try to include clauses in your lease that protect your interests in the event of a default or foreclosure. For example, a “non-disturbance agreement” can ensure that your lease remains in effect even if the property changes hands. 3. Maintain open communication. Establish a transparent relation- ship with your landlord. By staying informed about its financial health and any potential challenges, you can anticipate problems and plan accord- ingly. 4. Seek counsel. Meet with your bro- ker and engage with a legal profes- sional who specializes in commercial real estate leases. They can guide you on your rights and potential recourse in various scenarios related to a land- lord’s default. 5. Contingency planning. Always have a backup plan. Know the market, understand your lease’s termination conditions and be ready with reloca- tion plans or alternative spaces if things take a turn for the worse. n Conclusion. While the landlord’s loan default risk might seem remote or irrelevant when you’re looking to occupy office space, it’s a critical fac- tor to consider in the broader picture of business continuity, planning and growth. By understanding the impli- cations and preparing proactively, you can ensure that your business remains resilient and adaptable, no matter the financial challenges your landlord might face. s brian.mccririe@svn.com Tenants: Understand landlords’ loan default risk Call Us Today 303.219.5888 wheelhousecommercial.com Owning mid-market properties has its own set of challenges, especially in the current market. You need a partner with the experience and expertise to achieve the results you expect. Our clients from all over trust Wheelhouse Commercial with their mid-market commercial real estate. Mutual Respect, Integrity, Accountability Denver’s Mid-Market CRE Experts Brian McCririe, MCR Managing director, SVN