| IOREBA PANEL: TENANTS AND THIRD PARTIES SHOULD QUESTION LANDLORDS’ FINANCIAL CONDITION It was Once a Rarity, but Times Have Changed and Stability is Sought Across the Board |
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 HACKENSACK, N.J., March 3, 2010 – Tenants’ financials have always come under close scrutiny, but in the current economy, more tenants are trying to determine if their landlords are financially sound as well. Third-party participants should also be concerned – that was the message delivered by a panel of attorneys at the monthly meeting of the Industrial and Office Real Estate Brokers Association of the New York Metropolitan Area (IOREBA).The title of the presentation was “Protecting the Tenant, Real Estate Broker and Service Provider in this Distressed Real Estate Market.” Paul D. Drobbin of LeClairRyan, moderating the panel of Real Estate & Bankruptcy Attorneys, asked, “Should a tenant investigate the financial condition of the landlord?” The answer was direct. “Yes,” replied David C. Freinberg of LeClairRyan. “It was rare a few years ago. The tenant should also look at the strength of the landlord’s lender to determine how the build-out is going to be funded. Does the landlord have the cash to do that?” “We had a recent instance where we represented a landlord of a property that was only 20% mortgaged, and a sizeable tenant actually requested that the landlord put up a letter of credit to secure the tenant improvement allowance,” noted Jan Alan Lewis of Cole Schotz. “It certainly gives a new perspective on just how much the pendulum may have swung in this market.” Ongoing performance of a property is also an issue. “Does the landlord have sufficient income to cover maintenance costs, improvements allowances and operating expenses?” asked Iryna Lomaga Carey of Cole Schotz. “Many landlords have significant debt coming due by 2012 and may have a difficult time recasting loans if their tenant base and associated income are not sufficient to meet operating costs and debt service.” Staying power is an issue as well. “Look at how long the landlord has been the owner of the building,” suggested Todd M. Galante of LeClairRyan. “The longer the ownership, the greater the comfort level. A letter of credit is absolutely your best friend when it comes to build-out obligations and other performances by a landlord.” Other issues raised by the panel included due diligence. “There is a tremendous amount of fraud being committed in this challenging economy. Make sure you do your due diligence,” said Galante. “Check and recheck the information – it is better to be safe and secure going in to a property than have to clean up a mess later.” This was focused on environmental issues and industrial buildings. “The condition of title, violations, environmental reports and overall building condition,” noted Carey, “are some of the basic due diligence elements that should be considered by any significant tenant.” “With all of this, how do third parties, particularly brokers, protect themselves?” Drobbin asked. “In a recent lease, we inserted into the ‘brokerage’ provision that the ‘broker is to be paid in two installments: one on term commencement and the other one at six months’ rent,” said Lewis. “The landlord was late in paying the second installment and was in the process of refinancing the building. The estoppel certificate received by the tenant from landlord’s prospective lender said that the landlord was not in default under the terms of the lease.” Query, was the landlord in default? “It's something new and novel to think about.” “A practice tip for brokers is a standard provision that the landlord will agree to allow the tenant to offset its rent if the landlord defaults,” Freinberg said. “And separate escrow provisions will ensure that commissions are paid.” With roots dating back to 1927, IOREBA is one of the nation's largest regional commercial real estate groups; the group has grown to more than 300 members that conduct business in New Jersey, New York, Pennsylvania and Connecticut. To assist its members in difficult economic times, IOREBA has cut costs for events and membership to ensure members are able to take full advantage of everything the organization has to offer. For more information, visit http://www.ioreba.com. << back to news |
