Reed Law Monthly - January 2010
Top 3 areas you should address in 2010
Don’t let the markets take complete control! Address these three areas in 2010 and start preparing for an eventual recovery.
Leasing. Whether you’re a tenant or landlord, a lease is the key component to your property use or investment. For tenants whose underlying businesses are struggling, don’t wait until the rent is past due to approach your landlord regarding financial difficulties. If you’re hoping your landlord will grant additional time to make payment(s) or permanently modify your lease, then you first must understand the legal obligations pursuant to your lease and craft a practical proposal prior to appealing for relief.
For landlords, the need to identify tenant problems early is more important now than ever. It’s best to proactively identify tenant financial risk by using any means at your disposal. In some cases, the lease may require tenants to provide the landlord with financial statements at regular intervals. Enforce this provision. In good times, this reporting feature is often overlooked or not utilized to its full potential. If a tenant has breached their lease, consider the complete costs of eviction (i.e., legal costs, marketing expense, downtime, potential tenant improvement allowances, and leasing commissions) prior to serving notice. Depending on the local leasing market, some rent may be better than no rent; and one less vacancy may be advantageous to your other tenants’ businesses and morale. Understand if granting modifications to a lease, without lender’s prior consent, can trigger non-monetary defaults under financing agreements.
Capital structure. If you have debt expiring in the next 12 months, then you should be planning now how to handle the loan maturity. Mortgage professionals have seen application and underwriting times increase by factors of two to three times those from the recent past. Start early and be realistic. Besides the obvious change in property market conditions, lender underwriting criteria has become incredibly stringent, with many lenders more than happy to say “no” rather than find commonsense reasons to say “yes”. Also, there may be a need for additional equity contributions to fund working capital deficits, pay down debt or bridge the gap in refinancing shortages.
Portfolio. Conduct buy-sell-hold analyses on a regular basis. If you wouldn’t buy your property today at its current basis, and someone out there will, maybe it’s time to sell. You should be thinking of any and all employable defensive strategies in these difficult economic times. They will not only allow you to weather the storm, but also may enable you to take advantage of distressed acquisition opportunities. Just like a stock portfolio, the assets in your portfolio should be adjusted, by disposition, acquisition or recapitalization, if the overall portfolio is no longer consistent with your risk-return profile and/or investment strategy.