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4 Tips on Renegotiating with a Commercial Real Estate Tenant in Default

Posted by Rocky Mackintosh on June 30, 2011 Leave a comment

In some sectors of the Commercial and Industrial leasing markets, landlords face unique challenges with existing leases.

4 Tips on renegotiating with a commercial real estate tenant in defaultThis past week I received a call from a former client for whom we placed a tenant in a flex industrial condominium building about 3 years ago.

Having only this piece of investment real estate, the landlord chose to handle his own property management to save on costs, as he and his wife depended on every cent of the revenue for personal expenses.

Due to the economic downturn, about 18 months ago the tenant began to experience a dramatic fall in revenue.  At the same time, the vacancy rate in the industrial complex began to rise.

The tenant’s rent payments began to come in late, and after a few months the landlord made contact and inquired about the situation. The tenant stated that things were a bit tight, but was confident that his business was about to turn up for him in a “few months.”  Until that time came, he requested that the landlord defer the monthly pass-through charge for the real estate taxes and Common Area Maintenance (CAM) fees.  The landlord verbally agreed to this as well as a waiver of the 5% late fee.

However, after those “few months” instead of his business getting better, things got worse.  Even with the verbal agreement of deferred taxes and CAM, the tenant’s rent checks returned to a pattern of tardiness.

With the serious softening of the industrial flex space rental market, the landlord began to worry that he may loose the tenant in a climate of high vacancies. More discussions ensued with the tenant which yielded more concessions.  This time a verbal waiver of the annual 3% rent escalator.

Be that as it may, the promises continued that all deferred amounts owed would be made current when business bounced back… and the tenant insisted that was just around the corner .

Finally, at the point that the tenant was well into tens of thousands of dollars in sums deferred, the landlord thought it may be a good idea to seek some help. So I got a call.

He made it clear that with vacancies all around he didn’t want to loose the tenant, but at the same time he believed that he was being taken advantage of.

He asked for some advice and I gave him the following four tips:

  1. Don’t go it alone: It is important to connect with your commercial real estate professional and ask if avoiding profession property management is/was really a wise call.  An important move is to engage a real estate lawyer to assist in the review of current circumstances with the existing lease, and drafting the terms of the revised documents.
  2. Do a reality check: In times of high vacancies, leases executed in boom times may now be above market real estate value- which could mean a renegotiation of terms are in order. But things may not be as bad as they appear, so landlords must ask themselves whether it is the tenant’s problem or getting fair market return?
  3. Identify your leverage: In any commercial real estate lease renegotiation it is best to deal from a position of strength.  Before you start giving a little here and some there, look at the big picture and possible outcomes. Review the existing lease terms- both your goals and the risks you are willing to take, the tenant’s situation and the climate of the real estate market. Use these points to recast a deal that is in your best interest, but fair to all concerned.
  4. Get it in Writing: Even when a commercial real estate landlord allows the tenant to delay monthly rent payments they should get it in writing.  In this case, from the start, a deferral of real estate taxes, common area and even late fees should be acknowledged through an addendum and/or an interest bearing note with the appropriate guarantees.  It’s all about protecting what is legally yours. Verbal agreements in a commercial real estate transaction rarely carry much weight if things end up in court.

These are trying times for the commercial real estate leasing market. Landlords are finding that in order to avoid vacancies, renegotiating the terms of a lease will often yield a win-win outcome for both parties.

But, without professional guidance a landlord may discover that he may have renegotiated when it was not necessary or given away too much.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes for TheTentacle.com and Want2Dish.com.

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Topics: Commercial and Industrial Real Estate Ashleigh's Fields Notes