Tuesday, November 24, 2009

Owner Pain = Tenant Gain

It has never been a better time to be a tenant. Assuming, that is, that your business is going well.

Commercial tenants are in the catbird seat, as my mother might have said, because they currently hold all the cards. Many building owners and management companies are facing economic struggles of their tenants, as well as their own. Keeping renters in office and warehouse buildings -- at a time when there is significant vacancy (depending on your geographic location) -- takes skill, creativity and an ability to think forward.

Many companies are in a tough time as sales are down, the economy is pretty rough, and the future is uncertain. As such, firms that have not closed may have downsized, and do not need as much space as they had previously. Building owners have had some tenant firms move for a better deal elsewhere, consolidate to fewer locations, or go out of business. The shedding of jobs, shelving of projects and hard look at space needs is creating opportunity for tenants.

Savvy tenants can capitalize on this recessionary period by taking advantage of attractive lease rates, thereby strengthening their long-term capital positions. End users increasingly are insisting upon the ability to audit leases as well as negotiate extensions and space give-backs, options that in the old days might have been categorized as "nice to haves" now being put in to the "must have" category.

Landlords increasingly are understanding this may be a long down cycle. And as they come under more lender pressure, there is more interest in coming up with flexible rent scenarios. In one case, I was at a meeting where a tenant -- another real estate company -- noted that the landlord came to them and asked if there was anything they could do to get them to stay, considering their lease was coming due. The real estate company said freeze rent for the next five years and to upgrade the offices. The landlord spent tens of thousands of dollars redecorating the offices.

If you are a tenant, you are in a stronger position to renegotiate the terms of your lease. If you have downsized and need less space, there is a lot of competitively priced space available. And this is in pretty much all parts of the U.S. But also, tenants should remember to keep in mind, or establish, worst case scenarios as they navigate this minefield. At issue, what to do in the unlikely event (though it is happening with with increasingly disturbing frequency) of the landlord turning the building over to the lender.

Of concern to building owners are new trends toward a more mobile workforce. Some companies are permanently shedding large office locations. In return they are utilizing smaller more flexible spaces where "road warriors" can come in, log on, hold a meeting, then move on.

It is a dynamic time for commercial/investment real estate. And for now, tenants can make themselves some incredible deals as building owners strive to be more creative and keep their occupancy rates high.

Wednesday, November 4, 2009

The Second Mortgage An Option In Tougher Times For Both Buyer, Seller

A lot of deals on commercial/investment properties of all sizes are including second mortgages these days. Why? Because there are fewer commercial lenders, and they are being tight-fisted about who they lend to.

They have that right. I wouldn't want to lend to anyone I didn't think was creditworthy, either. But the pendulum has swung too hard toward the "do not lend" side of the equation. As it sloooowwwwwwly moves back to the center, deals are getting done via other means.

The second mortgage, for example. And it benefits both buyers and sellers alike.

Here is the example. The seller carrys back a second mortgage for 10 to 20 percent of the purchase price, while the buyer obtains a new first mortgage. The buyer makes monthly or annual payments to the new mortgage company for the first, and a second payment to the seller for the second mortgage. Make sense? This approach makes it easier for the buyer to obtain a first mortgage, and the seller gets ongoing income in addition to the lump sum payment for the majority of the property.

In addition, there are "note brokerages" I have written about previously that have buyers for such private notes. In this case, the second mortgage is a note. You can sell the second mortgage to a third party at closing, or at some time in the future. The seller of the note would anticipate taking a much deeper discount on the second mortgage if they tried to sell it immediately. Unless it has "seasoned, the risk is higher for the purchaser of the second mortgage.

Just some points to consider as we hear from both buyers and sellers that they want to get deals done but cannot get banks to cooperate.