Less is More

5 Ways to Protect Against Defaulting Commercial Landlords

Walt Batansky — Sun, 02 May 2010 17:37:16 +0000

A few weeks ago, one of my clients had an issue where a landlord gave them a proposal to lease space and the client accepted the proposal. The proposal was at an aggressive market rate with a significant, although not exceedingly unusual, improvement allowance. The landlord group is a large institutional investor fund with millions of square feet of prime Class A and B office space. The tenant is a large national firm with strong financial statements. This particular building happens to be about 40% vacant. "Send us a lease document for review", we told the landlord agent. We waited, and waited, and the document never showed up.

Finally this week, we called the managing partner for the landlord. "Our partners won't approve the deal", said the managing partner. Now this can only mean a few things:

The Only Two Ways to Protect Yourself on Operating Expense Pass-Throughs

Walt Batansky — Fri, 09 Apr 2010 20:17:00 +0000

I'm not crazy about condominiums. Here's why: Other people (the condo association - which is often controlled by a very small group of individuals) get to vote on how to spend your money. Some of those choices may not add value for you or to your property. Operating expenses on leased commercial property work the same way. The management company, which is the property ownership or someone under their direct control, gets to decide what expenses get passed through to the property tenants. So what expenses do they pass through? Every single one that they can possibly get away with. There are only two methods of protection for tenants, and I'd estimate that more than half of all leases don't fully take advantage of them.

Balance Sheet Blues

Walt Batansky — Mon, 15 Feb 2010 17:39:12 +0000

Just a quick mention in case you have not yet read your recent issue of CFO Magazine that had an article titled, Balance Sheet Blues, you can read it here.

Every finance executive and corporate real estate manager should be following and preparing for the upcoming change of operating lease to capital lease classification. See my prior posts.

The Accounting Rules, They Are a Changin' - Part 2

Walt Batansky — Mon, 25 Jan 2010 21:39:00 +0000

As a follow up to my previous post regarding the upcoming reclassification by FASB of operating leases to capital leases, which you can read here, I'll outline a general strategy that companies can use to minimize the reporting impact and unpleasant surprises. Here's what I recommend as a checklist of Top Ten Operating Lease to Capital Lease Actions:

The Accounting Rules, They Are A-Changin' - Part 1

Walt Batansky — Mon, 09 Nov 2009 15:50:00 +0000

For the last 35 years, public companies in the U.S. have reported lease obligations differently that other countries, not unlike the way that we stubbornly hang on to English measurements while most of the rest of the planet uses the Metric system. That is about to change, and change can be painful.

Here is the premise of the change: Virtually all leases will be treated as Capital Leases rather than Operating Leases. Lessees must account for their right to use a leased item as an asset and their obligation to pay future rental installments for that item as a liability. Simple enough, right? Remember, this is written by the Financial Accounting Standards Board. They do nothing simple. Fortunately they also move with all the speed of, well, the government. This will give proactive corporations the opportunity to position themselves to avoid pitfalls and structure their future transactions to their advantage. The discussion paper, which you can view here, is over 100 pages thick.

I warned of the impending issue back in 2007, in my article titled, The Death of Operating Leases. Here are some considerations:

The Great Depression Ahead

Walt Batansky — Sun, 23 Aug 2009 23:25:27 +0000

I had lunch last week with Harry Dent, the Harvard MBA economist and NY Times bestselling author, to discuss the impact that the age shift of the population will have on commercial real estate. For those of you not familiar with Harry's work, he's written a number of books including The Great Boom Ahead in 1993, The Roaring 2000's in 1999, and The Next Great Bubble Boom in 2004. Each of these books detailed well in advance the enormous gains in both stock and real estate markets that we experienced and their eventual collapse. While predicting the confluence of so many forces on the economy is not an exact science, Harry nailed the overall concepts and general timing of both the run up and downfall of these markets. Unfortunately for the U.S. economy, the title of his latest book, The Great Depression Ahead, gives away a bit of the plot of what is in store for us.

Another Great Thing About this Economy #47 - Corporate Politics

Walt Batansky — Wed, 29 Jul 2009 00:44:31 +0000

Even when the economy was absolutely booming, we advocated a lean and mean approach to real estate. That's why this blog is titled, "Less is More". Now however, many political obstacles to reaching Lean & Mean objectives have been removed. The corporate real estate director (in virtually all corporations large enough to have corporate real estate directors), now likely has complete buy-in from both the finance and operations executives AND field staff.

Cut Your Rent in Half - Blend & Extend

Walt Batansky — Thu, 16 Apr 2009 23:11:45 +0000

Many companies believe that either 1) They must live with whatever terms are stated in their existing lease until it expires or, 2) They can go to their landlord, tell them that they can't afford to pay their existing high rental rate, and the landlord will willingly drop their rent to current market rates. Which is correct? Well....generally neither, exactly as described. Here's how to get the most benefits:

Parting is Such Sweet Sorrow

Walt Batansky — Sun, 05 Apr 2009 20:08:16 +0000

In three separate incidents that I've witnessed recently, landlords have demonstrated their growing financial desperation. Two of the cases involved clients moving out of a property and debate over the "reasonable wear and tear" condition of the premises on vacating. The other issue involved a proposed new lease with a rider describing the required condition in which the space must be returned - in essence describing most of the preparation that a landlord would typically do to prepare a space for a new tenant.

The underlying issue here is not about the tenant's treatment of the space, it is about the landlord's increasing financial pressure to preserve precious cash.

The Paper That it is Written On

Walt Batansky — Wed, 11 Mar 2009 01:47:19 +0000

It is a great time to be a tenant, and here is another example. Because almost all lease renewal options are written with the assumption that rental rates will climb forever upwards, we're seeing some interesting effects as rates tumble. Like many stock options, some renewal options are literally not worth the paper they were written on. However, declining markets have made some usually unattractive renewal options have new value. Here's why: