Office Tenants over the past two years that have relocated – or which were prevented from relocating – have faced the pressure of building owners being unable to bring the needed capital to the table to satisfy tenant finish and other capital needs to satisfy the office leasing market. Many buildings, faced with loan-to-value ratios extremely out of compliance with banking requirements, have faced a Russian Roulette game of banks forcing owners to bring more capital into the ownership just to renew existing loans.
With the loss of property values in commercial real estate hitting 27% in the year through June 09, and down 36% since since October 07 (Source: Moody’s/REAL Commercial Property Price Indices), owners have watched in horror as their property values plummet well off their peaks and well below banking standards. Many banks have also adjusted the ratios – to re-cook the loan – requiring owners to bring their equity up to as 60% or more from the hay-days of just 20%. SOme investors are required to bring massive amounts of cash to the loan renewal. The banks can no longer (and under the new rules cannot) bear the risk of under capitalized real estate – which would require the banks to increase their reserves for potential losses.
The banker’s risk had become, and is now for many, the investor’s risk. With the Fed tightly monitoring bank stabilities expressly by these ratios, owners had little choice other than to give the building back or file for bankruptcy. Many buildings have investors who have personal liability for the loan – making this a disastrous personal economic crisis – again. On the positive side – reflecting a bottom – the 1 percent drop in Moody’s index is the smallest monthly decline since February.
In a precise example, one 50,000 sq. ft. tenant considering a major modern urban tower, after numerous negotiations with the owner, has failed to secure even the basic needs of tenant finish for a ten or fifteen year lease. In one case, the lender required that in order for the loan to be approved the OWNER had to be replaced, or at least reduced in equity with other monied investors. Worries have abounded that another housing crash would occur in the commercial market – and take with it viable alternatives for office tenants.
TALF, while not a silver bullet to the problem – and many buildings will simply just not pass muster, does portend good news as many new instruments of commercial mortgage backed securities have been issued by numerous REITs. According to the Federal Reserve’s TALF Terms and Conditions, credit extensions under TALF will be in the form of non-recourse loans secured by eligible collateral. Substitution of collateral during the term of the loan will not be allowed. TALF loans will have a one-year term, with interest payable monthly. The term of TALF loans may be lengthened later if appropriate. TALF loans will not be subject to mark-to-market or re-margining requirements.
Office tenants now putting the recession behind them can use the the leverage of bringing their needed rental income stream to landlords as landlords seek stability for their lenders. Tenants should carefully evaluate the financial stability of each landlord – going so far as requiring the landlord to comply with a comprehensive credit check. Months of wasted negotiations can be avoided if you know that the financial instrument – the lender – behind the transaction is stable and structured to accommodate the tenant’s capital needs in the lease.