The market is stormier these days. Many of the lease rates presented by medical building owners today would previously have been considered anomalies, but they’re now more of a trend. Nonetheless, some medical buildings have stayed afloat maintaining their asking rates successfully. So is it worth it to seek to propose or consider a modification to an existing lease within a medical building? The answer at first is simple — it depends.
As with any investment, having and understanding one’s basis of using applicable data to support a position is imperative. Because of the looming distress in the financial markets, many notes are being sold that are secured by well-performing investment properties. However, even if a subject property owner is making timely payments on its mortgage, that doesn’t mean the note-seller is weathering the economic storm as soundly. In some cases, a note discounted by a troubled lender may translate into double-digit returns for the new note-owner. Logically in such cases, lease modification requests should be approved by the owner of the building, because of the superior return on the original note to the new note owner. Nonetheless, any loan modification allowing for additional flexibility is ultimately between the owner and current note holder, and not the tenant.
The aforementioned factors are part of today’s property investment philosophy, and consequently the nature of tomorrow’s tenancy. Even so, there are medical buildings out there today that may be considered “gems,” just as there were similar “gems” in previous recessions. This begs the question for owners and tenants alike — “Is my medical building a gem in this recession?” This answer will often dictate the likelihood of one’s success in the renegotiation or a workout of a lease.
Basis Breakdown
How does one know if their building is a gem? First off, it is important to have a basis for understanding the market and how the medical building fits within that market. What classification is the building? On what standard is this classification based — BOMA (Building Owners and Management Association) or just a general opinion of the owner? Secondly, it is important to compare similarly classified buildings, their locations and amenities. For instance, in comparing two similar buildings, one may offer superior signage, visibility and may have a higher rental rate, even though they both may be Class B properties. Overall, it is important to understand that building classification does play an important role, yet it doesn’t always dictate the rental rate.
Additionally, it is difficult for a tenant to support an argument for a lower rate if only general evidence is supplied to the owner, such as hearing something about the economy on the news, or using a building rate from a completely different class of building, or even a building from a completely different submarket. Sometimes poor business/practice performance may be the only supporting evidence in justifying the request for lease modification. However, it is important for tenants to understand their liabilities relating to guarantees, current business income, personal income, etc. That being said, the owner will be likely to seek evidence of such hardship before even considering a workout.
As a building owner, it is important to understand the nature of the tenant’s request. Probing questions may be asked and supporting evidence sought.If the building is a “gem,” maybe it is better off to let the tenant default under the agreement in order to replace the current tenant with a new tenant that presents less risk. However, if the building is not a “gem” per se, it may be better to take a closer look at what the tenant is proposing and attempt to understand the basis for his or her request.
Even though the economy is in flux, it is always important to seek an edge. It is important to seek and analyze trends in the economy and how they relate to your lease(s). Being a good steward to your investment and/or business is always important, regardless of the market conditions. Recessions come and go, but the persevering have a much better chance of reaching their goals.
