Lease Renegotiation Begins with Discovering Frequent Floor

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The COVID-19 pandemic has weighed on many commercial property leases. Landlords face difficult questions across all industries. Is Forbearance A Way To Keep Tenants In Real Estate? Are rental deferrals a short-term solution to disruptions in retail, multi-family, hospitality, and other sectors?

One example of how quickly things can change is Pinterest, the picture sharing social media service that allows users to categorize their posts. In March 2020, the online giant signed a contract for 490,000 square feet of office space in San Francisco for a total of $ 440 million in payments. By August 2020, Pinterest decided to pay the landlord $ 89.5 million to terminate the contract.

To prepare for lease negotiations, think of the four parties to a typical lease – landlord, property manager, tenant, and lender – as stools that rely on each other to stay operational. Successful renegotiation means these actors must work together to maintain the income and value of an asset.

1. landlord want strong revenues that are offset by cost recovery and other tax benefits to generate annual income and positive pre- and post-tax returns (internal rate of return). However, in the event of a disruption, both the returns and the future value of the property can be jeopardized.
2. Property manager strive to generate the highest annual income (net operating income) for the landlord and control expenses while at the same time handling the day-to-day running of the property and keeping tenants happy.
3. Tenant take care of property maintenance. Even if they find themselves in distress and need help during a disruption, they are still concerned about the property's operation and profitability.
4. Lender are not all the same. You can either stand by a property owner during difficult times or hinder the process due to inflexibility. The willingness of lenders to renegotiate with local or national banks and private institutions varies.

With every renegotiation, tenants and landlords want to receive the income and continue to be able to meet all obligations. However, tenants hope to keep the business income and control of the location, while landlords are interested in maintaining the building's value and property.

The most effective CRE professionals identify opportunities to assist with lease changes – and understanding everyone's perspective is an important first step.

This article was taken from the course “Rent Change Strategies and Solutions” of the CCIM Institute.