By Ken Ashley
(ATLANTA) September 6th, 2011
Ah, the economic malaise continues. This New York Times article (Fed Divisions Led to a Compromise on Interest Rates) starts with a pulse quickening statement: “No one knows what to do to fix the economy.” With the certainty of uncertainty continuing to be a daily
media subject, interest rates are trending near all time lows. Yes, one day, Ethel, it will be ok. The cycle will turn and joblessness will no longer be the headline de jour.
But with all the fun in the economy, there’s an unintended consequence of this “condition” we are in: bad real estate deals still have life (perhaps it’s an after-life at this point). Low interest rates propped up many a real estate deal in the darkest days of ’09 and ’10. And now, the low rate party continues right on into the 2011 college football season.
To put this another way, low interest rates cover up bad real estate like ranch dressing covers up a bad salad. Tenants need to be aware that over-leveraged assets supported by unnaturally low interest rates are ticking time bombs. You can certainly make some great deals these days as a credit tenant, but make sure you are doing business with a credit landlord, or else.
Can I Get A Witness?
Several years ago, the presumption was that landlords had great credit. Heck, they own this beautiful building, and the leasing agents look like a million bucks. Now, we advise tenants to perform as much due diligence on the landlord as ownership performs on tenants. Both parties are making an investment in the other. The landlord gets rent; you get improvement dollars and space in which to make your fortune.
Don’t Call Me; I’ll Call You
Checking the asset’s “credit stack” is important at the beginning of the relationship, but every tenant needs to have strong protection during the lease term as well. Work with your real estate broker and attorney to make sure that you have good language around the landlord’s responsibilities in the lease (it always bugs me that the tenant’s responsibility is many, many paragraphs long, but the landlord’s is two sentences).
Also, work on so-called “self-help” remedies that allow you as the tenant to perform certain landlord functions if ownership doesn’t live up to its end of the bargain. If things go bad during your lease term, you can always sue, but what you really want is a high functioning facility in which to conduct business. While there are very real limitations on what you can and should do as a tenant (as opposed to being an owner), keeping your space operating when the landlord doesn’t perform is vital.
I’m Outta Here
There are other legal devices you should ask your advisors about. One is the very technical sounding “subordination and non-disturbance agreement (“SNDA”).” To sum up an SNDA: you, as tenant, agree to recognize the landlord’s banker if the landlord defaults. The non-disturbance verbage means that the landlord/banker agree to let you keep your lease in force after a default on the building loan. SNDA’s are required by many lenders because if they take the building back, they need to know they can count on you, Mr. Tenant, to keep paying the rent. Just make sure that in return for agreeing to give protections to the lender, you are properly protected by the document.
Perhaps the most important legal issue is the ability to quit the lease if the landlord can’t or won’t do his/her job. Termination provisions for landlord non-performance are not the easiest to negotiate, but if you are a significant tenant
with good credit, you never know what you might get in this market. Besides, it would be a great feeling to tell your non-performing, no good landlord “You’re Fired!” You and The Donald can be one.
So, we hope the Administration, the Fed and the Congress can jump start things, because this economy is simply getting boring. In the meantime, watch out for capital starved landlords, and maybe a little black pepper will help that salad out as well.