Wednesday, March 4, 2009

Commercial Renters Have a New Worry: A Landlord’s Default

Article Posted By Andrew Cho
Office landlords have always scrutinized the financial stability of prospective tenants, but now they are finding themselves under the lens.
Prospective tenants are asking for financial statements from landlords, hoping to avoid companies that might default on their mortgages and leave tenants at risk of losing the space. Tenants are also more wary of subleasing space, and are tending to flock to buildings with stable owners.
“We have to be more attentive to the finances of our landlords than we’ve ever been to get a sense of their financial stability and ability to service their debt,” said David N. Feldman, a managing partner at the law firm Feldman Weinstein & Smith, a 12,500-square-foot office tenant at 420 Lexington Avenue near Grand Central Terminalthat, with a lease expiring in 2011, will soon start looking for office space.
During the recent era of cheap money that led to the real estate boom, many investors bought their office buildings at high prices with extensive debt, hoping to flip the building quickly. Some landlords calculated their cash flow too optimistically, intending to lease poorly performing office buildings at high rents to maximize their profit, and are having trouble paying their debt, in some cases falling behind on payments.
“Today, we have this environment where we know that anyone who bought a building in the last few years is at jeopardy of losing that building,” said Howard Fiddle, a vice chairman at the commercial real estate brokerage CB Richard Ellis. “So, just from a purely operational perspective, you want to know who your landlord is.”
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