Monday, February 8, 2010

Damned if you do and damned if you don’t………………what’s a landlord to do?

Posted by: Dave Simonsen
Industrial Specialist
775 336 4667

Dave has more than 21 years experience as a commercial real estate broker. Dave exclusively works with industrial tenants, buyers, developers, landlords and land owners. He has represented companies such as AT&T, Barnes & Noble, Converse, DHL Worldwide, Delta Industries, Hawco Development, Lucent Technologies, IBM, Hopkins Distribution, Nextel, NEC, Sherwin-Williams Company, and UPS.

Many landlords find themselves in the troubling position of what to do with a vacant building in a falling rental and value market. Market rental rates have fallen 20 to 40% and building values have fallen further due to low rents coupled with rising capitalization rates. A landlord with a vacant building is faced with lowering rental rates to entice a tenant even though the contract rent might not cover the building mortgage. If that tenant wants a long term lease, the owner must pay improvement costs and commissions up front to lock in a money losing transaction in hopes of stopping the immediate monthly pain. The alternative is to not sign the low market rent lease and continue to pay on a vacant building in hopes of the rental market improving in the future. Looking at current inventory, waiting for the market rents to rise does not look like a good option. The final option is to sell the asset. This is also not a very attractive option seeing as values are depressed due to low rents, high cap rates and a poor lending environment. In many cases, the value of the asset has dropped below the loan amount forcing a cash infusion to sell out of the building. It is bad enough when an owner loses their down payment equity, now they are faced with paying additional funds just to relieve themselves of the continuing obligation. In addition, some owners simply do not have the money to make up the difference of loan to value so they can sell. So, what is a landlord to do? Selling is not a good option, waiting for market rents to improve does not seem to be a good option, so the selection is made to do and pay whatever it takes to sign a close to break-even lease to ride through the storm. The good news with this option is the hole is filled and once the up-front cost of getting the tenant in the space is paid, the on-going loss is minimized. However, signing a low rent confirms the loss of value in the building and if you have a loan coming due in the near future, your lender will be asking for another 35% of the reset building value out of your pocket just to make the loan. So, should a landlord sign a low rent deal to fill vacancy in today’s market…………….their damned if they do and damned if they don’t.

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