Dot-Com Tenants Lose Some Luster

ORANGE COUNTY-The beating that some high-technology companies are taking on Wall Street has prompted some Southern California landlords to think twice before leasing them space on Main Street.

Local building owners know how all the dot-coms and related firms have driven OC’s commercial real estate market over the past few years. But lately, owners and brokers alike have become more skeptical when such firms begin trolling for new space.

Just as Wall Street has punished many Internet firms for not turning a profit, devalued their stocks and made it difficult for them to tap new sources of capital, so too have landlords tightened their credit requirements. Many owners now ask to see not only financial statements, but also business plans and other information once off-limits to all but company insiders.

“The problem [with prospective dot-com tenants] is that you don’t know whether they will be around next year, let alone next month,” John Hall, a Lee & Associates broker, tells GlobeSt.com. “It doesn’t take a rocket scientist to see what’s going on with the stock market.”

Hall works in the Irvine office of Lee & Associates and has represented landlords in negotiations with several dot-com tenants. He says that to protect themselves, some local building owners have begun requiring dot-coms to increase the amount of their security deposit, either in the form of outright cash or letters of credit from banks.

Parker Properties, developer of the 1.7-million-sf The Summit office complex in Aliso Viejo, is one landlord that goes beyond a company’s financial statements in determining whether to lease it space. “We want to understand their business, who the sponsors are, what is the expected ‘burn rate’ of the capital raised and the prospects of raising additional capital,” says Lee Redmond, a Parker principal.

“To the extent they don’t have an operating history or [record] of generating revenues or profits, or if they are still uncertain as to what their future will hold, we start to look at ways to enhance the lease” to protect the developer if the dot-com fails, Parker adds.

Among the issues that landlord must consider: How much rent will be lost if the tenant breaks the lease agreement, the cost of readying the space to attract a future tenant, and the cost future brokerage commissions.

To cover such costs, Redmond says Parker Properties may require a tenant to provide a year’s worth of rent plus future tenant improvement costs, as well as leasing commission outlays. That compares to a security deposit equal to only two or three months’ rent that a landlord might charge to a more traditional company with a long history of revenue and profit.