Who’s your landlord? Featured

7:00pm EDT December 26, 2008

Whether you are becoming a new corporate tenant or renewing your lease, the current state of the economy can help you gain some concessions. But be sure your landlord can afford those concessions or you might find your building going into foreclosure.

“Find a building with an owner who is on solid financial footing, and find a space that will be efficient for your use,”advises Russ Johnson, Senior Vice President of Office Agency Leasing at Grubb & Ellis Company’s Dallas office.“Make sure you know who the landlord is, so you don’t get into a foreclosure situation. If your building does get fore-closed, read your lease, and try to develop a relationship with the bank or the business that buys it out of foreclosure.”

Smart Business talked to Johnson about opportunities that exist for tenants in this economy.

What is the state of rent/lease prices and availability in the Dallas area, compared to last year?

Last year, the economy was great, the real estate market was strong and a lot of buildings were traded at high prices. Face rates were up and free rent concessions down. Obviously, today we’re not in the same place as we were a year ago.

However, rent today is still comparatively stable in the Dallas/Fort Worth market. Face rents have not gone down, particularly in the Preston Center and Uptown submarkets. We have lower unemployment rates than the rest of the country, and local companies are still doing well.

Typically, real estate will lag one to two quarters behind the economy. Many property owners are still holding their face rates and using free rent to lower the effective rent over the term of the lease to make new leases.

In this unstable environment, I would caution against choosing the cheapest deal. If you’re ready to make a long-term commitment to a new location, you want to know who the ownership is. Tenants need the confidence that an owner will provide working elevators, functional heating and air-conditioning, no leaks,etc. The cheapest deal is not necessarily the best choice if the building owner is not able to provide these services.

How does the financial status of the prospective landlord affect long-term corporate planning?

If you’re going to sign a long-term lease, you will want to make sure that the landlord will be there for the term. You want to avoid a situation where the landlord does not have the capital to maintain and operate the building or the bank will take back the building. Banks are in the financial business, not the real estate business. That’s why it’s important to understand from whom you’re leasing space.

In this regard, your tenant representative (real estate broker) can be a valuable resource. He or she will be able to tell you the landlord’s reputation, where the landlord’s capital is coming from and the landlord’s history in terms of maintenance.

How does the current ‘tenant’s market’affect a company’s approach to finding the right property?

Dallas is made up of micro-markets. In places like Preston Center and Uptown/Turtle Creek, the buildings are fairly full, rates are firm and tenants get few concessions. If you go over to Stemmons Freeway or Las Colinas, vacancy rates are higher. Those are ‘tenant markets’ where a prospective tenant can find five or six different options.

In this economy, tenants who want to renew in place can negotiate for shorter terms. Your landlord should be willing to do a one- to two-year deal. If you are looking for a longer term (five years plus), tenants have a reasonably good chance of getting one month of free rent per year of term.

If your lease is expiring, your current landlord will be highly motivated to keep you in the building, because it’s easier than filling a vacant space.

What should a tenant do if a building goes into foreclosure?

Realize that the financial institution that foreclosed on the building wants your rent income and does not want you to leave. A lease protects you somewhat, because the financial institution becomes the landlord, and it must performas stipulated in the lease — keeping the doors open, lights on, air conditioning on, and so forth.

Another level of protection is an SNDA(subordination nondisturbance agreement) that is typically a rider to the lease document. In general, the SNDA stipulates that if the lender takes over the building after a landlord goes into default, the lender agrees to honor the lease. In more robust financial times, a tenant of less than a full floor would have a hard time getting an SNDA. But today, landlords have to be willing to offer them to smaller tenants.

RUSS JOHNSON is Senior Vice President of Office Agency Leasing at Grubb & Ellis Company’s Dallas office. Reach him at (972) 450-3239 or russ.johnson@grubb-ellis.com.