Commercial Tenants in the Driver’s Seat

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Nine years ago, my employer (a software company in Burlington, Mass.) was nearing the end of the 10-year lease term for its headquarters building.  This was just about the time that the software industry was beginning to decline, for two reasons: all of the Y2K bugs had been resolved, and investor money was no longer flowing to Internet start-ups.  However, our landlord hadn’t gotten the memo.

They quoted my employer terms that were more than double what we had been paying, and we left.

Now here’s the funny part.  I still find myself driving by 174 Middlesex Turnpike in Burlington once or twice a year, and that building is vacant.

It has been vacant for nine years!

174 Middlesex Turnpike is an extreme example of a very important point – commercial tenants are like gold.  Treasure them and do whatever is necessary to keep them.  If you lose one, it may be a very long time before the next one comes along.

In the best of times, in the best of markets, it is often harder to find commercial tenants than residential ones.  We know that a three-to-six month vacancy is incredibly expensive for any unit.  However, three-to-six month vacancies are common for commercials.  Vacancies can last a lot longer than that, as we’ve seen.

Now we’re in tough times and the commercial real estate market is really tough:

• Hundreds of thousands of businesses (counting individual stores owned by chains) have closed – each leaving a vacancy.
• Many businesses that have had layoffs are now trying to sublet space – adding to capacity.
• Some commercial space is still being developed – typically in projects that are too far along to stop.

As a result, commercial vacancy rates are expected to climb over 17% this year.  An average market will have about a 9% vacancy rate.

Keeping your own commercial tenants

Typically commercial tenants have multi-year leases.  As a result, your tenants’ leases may not come due for a very long time.  However, your commercials are likely still thinking about their options.  I have seen articles showing ways that a commercial tenant can break its lease.

The first thing to do is to schedule a meeting to see how they are doing, and what you can do to help.  Make sure they understand that you want to help while still maintaining your interest – but that you can’t do anything if you don’t know what’s going on.

“We’re in serious trouble.  We’re probably going to close by the end of the year.”

The only thing you can do – if you choose to do it – is to offer the tenant several rent-free months – if they agree to let you look at the books.  This could be handled as a gift or a loan with a payment schedule.  However, your chances of saving the tenant this way are pretty low.  Closing a business is often a personal, as well as a business decision.  Your tenant may decide to close even if they are technically “making it,” if the struggles are causing personal problems.

“We have to cut back some.  I don’t know how bad things are going to get.”

In this case, you have some freedom to move.  Perhaps you can offer a reduced rent, or offer to help them sub-let some space if that would help.

“We’re okay, but this really isn’t a good location for us.”

If you have another vacant location that would work better, great!  Otherwise, you don’t have a lot of options.  On the other hand, neither does the tenant until their lease expires.

“We’re having a couple of issues with security in the parking lot, lighting, and utility costs.”

Fix the issues that are within your capability.  This is a time to over-deliver on customer support.

“We’re doing fine – don’t worry.”

Happy news, but don’t get complacent.  Press the client for any assistance you might be able to provide.  Keep checking in.

As I understand it, if your tenant files for bankruptcy, any unpaid rent will be unsecured debt.  That means you probably will not be paid if the business closes because of bankruptcy.  (If there was money to pay, the tenant wouldn’t have filed.)  You cannot evict a bankrupt tenant. 

However, if the tenant is reorganizing, not closing, and wants to stay in the space, he will be obliged to pay.  A reorganizing business still needs a place to conduct business, so you have a good chance here.

I found this article very useful in my research.

Photo Credit: PhotoDu.de

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.