The New Tenant Creditworthiness Game

Landlords will forever insist on seeing financial statements before finalizing a lease deal with a tenant, whether they are a small business or a publicly traded company.  And they should.  But what does a tenant do if their ship has been tossed – and perhaps badly damaged – in the hurricane of the recent, extended recession?  And, I mean, who amongst us hasn’t suffered?

I represent tenants who, in some instances are looking to downsize for the sake of their very survival.  It is unlikely their financial statements are going to inspire many landlords to spontaneously break into song.  So, does this tenant need to resign themselves to rejection?  Absolutely not.

Landlords have suffered a parallel fate as their struggling tenants.  They naturally prefer tenants that have capital reserves that will better insure that their rent will arrive in the mail every month.  But today they are forced to look beyond the numbers, and brokers need to coach their tenant clients how to tell their story in a persuasive way.   That comes with taking the time to learn about the clients business and ask some difficult questions to get at the truth.

I recently  had a client – we’ll call him Stuart – who is a prominent interior designer for large homes and hotels.  His industry was decimated by the recession and the very fact that he survived at all was a testimonial to his reputation and perseverance.  We presented the landlord with a couple of years of personal tax returns (since the landlord would require a personal guaranty on the lease.)  This gave the landlord the facts.  They are what they are.  Starting off with honesty is always the best policy.  But what we submitted with the numbers was Stuart’s story: his long history in the business, his impressive resume of clients worldwide, and his nimble resizing of the company to insure its continued viability.  We worked together on the story so it hit what I knew from experience would be a landlord’s hot buttons .  We proceeded to final lease documents without a single question from the landlord.

The facts + a success story that reaches back to more robust economic conditions = the new creditworthiness. 

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

When “Triple Net” Isn’t Really Triple Net – Kellogg’s Swale Tale in Detroit

Can the landlord force their tenant to cure all latent defects at a property under a NNN lease?  The answer is yes…if you let them!  Tenants take this on the chin day in and day out without a good, experienced broker in their corner who can come out swinging!

Properties can have latent defects even if they are brand new.  The benefit of brand new is that there are construction warranties in place.  Did the broker make sure those warranties were addressed in the lease to protect their tenant against construction defects?  If not, the tenant just got the shaft!  If the warranties have long since expired, did the broker get wording into the lease that latent defects would be the landlord’s responsibility?  Admittedly, those assurances are hard to get, but you gotta ask!   Putting protections into the lease regarding premature and extensive repairs to a property that is being tendered in “good operating condition” is the stuff of another blog post, but I wanted to share an interesting story that involved my client, The Kellogg Company.

Kellogg was 3 years into a five year lease at a free-standing, single tenant facility in the greater Detroit, Michigan market.  This was a classic triple-net situation: the tenant was the only one using the property.   I got a email from Battle Creek: the Detroit distribution center manager was complaining that a broken concrete drainage swale running down the middle of their truck court was breaking up and causing damage to their trucks.  After reviewing their lease and finding what I expected – pure triple-net without any carve outs – I took a few minutes to reset the client’s expectations; after all, it was their truck traffic that caused the damage.   But before I came to any final conclusion, I asked them to take several photos and send them to me.

What the photos revealed was that the concrete swale was poured with the rebar very close to the surface which arguably caused the concrete to spall.  The rain and freezing temperatures took care of the rest.  I presented the problem to the landlord thusly: the faulty construction of the swale was the root of the problem.  And the tenant was considering their options with respect to renewing this lease.  Can you guess what the outcome was?  Problem solved…and at no cost to the tenant!

The moral of the story here is that the tenant or their broker must give these situations a closer look before incurring the cost of repair.  And if you think you need the leverage afforded by a Fortune 100 tenant, that’s not necessarily the case.  So long as the tenant has held up their end of the lease and paid their rent on time, they are golden.

Nothing is absolute when it comes to business.

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com