The Woes of a Tenant

Much has been written about the position of lenders and owners when it comes to distressed real estate, and their trials have been well documented. But what about the other key player in real estate: the tenant? The process for a tenant occupying real estate that is going through one of the many phases of distress can be extremely challenging. Keeping up with the changes and notifications requires attention and diligence on the tenant's behalf. Those who maintain occupancy through an entire foreclosure process, and are patient with the situation, can ultimately reap the benefits, including a solid lease deal.

First Signs of Trouble. The initial signs of distress from a tenant's perspective come via marketplace rumors, a decline in services and slow response from the management company. All of these can be unsettling. Tenants begin talking about a potential failure of the property as they see the decline in tenant services and quality. This will include obvious changes to exterior maintenance and landscaping, with a reduced level of attention paid to cosmetic updates or fixes.

Notices Begin. Next, tenants will begin to see notices. Sometimes these take the form of estoppel agreement requests from the lender, where the tenant will likely be directed to send rental payments to an account the funding body controls. Again, these can be very unsettling. These items take staff time to research, and internal tenant processes need to be reviewed and redirected. Also, at this point it becomes clear that the current building owner may be having some difficulties.

There may also be notices of appraisers, lenders, consultants, inspectors and repair estimates requiring visits to the premises, which can be a distraction to the tenant's business. Moreover, most of the professionals touring the premises are oft en obligated to share little information about the purpose of their work. These notices and meetings create additional concerns for tenants, who may not be given the full background of the situation because the lender may have asked both the management company and building owner not to provide information related to the property's financial condition.

Receivership. Oft en, the next phase will be receivership. Tenants will receive notices naming a receiver and, oft en, a new property-management company. At this point, any tenant fears of the asset's stability will be validated. Tenancy may also have concerns about the wisdom of keeping its business in the destabilized building. Actually, certain services at the property may improve since, generally, a receiver and new property manager will respond to requests, even though only repairs impacting safety or liability are typically made. The asset is usually in a holding pattern with respect to any general repairs, TIs, capital improvements or other activities that incur costs. At this point, most tenants will feel stuck, with no recourse or ability to change the situation.

The Sale. The last part of the distressed cycle would be the marketing and sale of the asset by the lender after the receivership process is complete. This step requires more tours, more notices and more uncertainty. At this point, most tenants are skeptical of any representations made regarding their building or tenancy.

Usually the sale process, if successful, is beneficial for tenants. Most of the time, new ownership is enthusiastic about its investment and genuinely interested in helping its tenants. There is a fresh vision and a new longer-term outlook for the property. Moreover, a new owner is generally interested in discussing lease renewals and longer tenancies with the good tenants of the property. The Upside. The pot of gold for tenants willing to stay at the property may be a favorable lease deal with the new owner. Our experience has been that new owners approach their tenants with the goal of creating value in their properties. This can oft en mean restructured leases, especially the good ones, and the availability of new capital for improvements to both the building and the tenant spaces. The longer-term outlook of the new owner provides some confidence to tenants. And, while longer lease terms are generally the goal of the new owner, and this requires more commitment from tenants, the restructured deals we have seen have been very favorable for all involved.

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