Landlord Default From A Tenant's Perspective

The financial health of commercial Landlords has been a topic of conversation on MidtownSouthDaily.com for many, many months, and stories of Landlord default in one form or another seem to hit the news weekly. Just yesterday, I saw this story on 29 West 35th Street, where it is alleged in a lawsuit filed last month that an investor in the property defaulted on a $29.2 million mortgage loan and the building could be facing foreclosure. The story talks about the problems this situation obviously creates for the holder of the mortgage, and how brokers involved with the building are allegedly claiming non-payment of commissions. But what about the tenants?

Not having spoken to tenants at 29 West 35th Street, I cannot address what issues, if any, they have specifically experienced as a result of that building’s alleged financial troubles. However, generally speaking, tenants with unstable owners or owners in unstable positions could face a myriad of problems:
• Non-payment or non-reimbursement of tenant improvement allowances for construction
• Unfulfilled or unfinished construction on tenant’s behalf
• Inferior construction as a means of reducing capital expenditures
• Delayed or non-delivery of base building work such as HVAC units and bathrooms
• Diminishment of building services, including reduced hours for heating and air conditioning and less frequent cleaning of common areas
• Unresponsiveness to tenant requests for services or unresponsiveness to complaints due to a reduced work staff

Ultimately, tenants with a pending lease expiration have to take the responsibility, along with their brokers, of investigating the financial well-being of the buildings they are considering. Crain’s New York Business ran a good article of February 15, 2010 titled “Tenants scoping landlords’ fiscal risk,” which is worth a read. The article outlined not only some of the problems Landlords are currently facing, but also some of the remedies my colleagues are proposing to help protect tenants.

Included with the article was a list of the top 10 danger signs tenants should look out for. Here it is:
1. Debt service, maintenance costs exceed the rent roll
2. Significant debts are coming due by 2012
3. Vacancy rates are exceptionally high
4. The mortgage exceeds the building’s current value
5. The building was purchased in 2006 or 2007
6. Brokers’ commissions are being paid late
7. Lobby, common spaces are dirty; maintenance poor
8. The landlord is unresponsive to tenant’s needs
9. Tenants’ spaces are being remeasured frequently
10. There are surprise recalculations of electric rates