Know your landlord and gain some real estate advantages 

Posted: 10:00 am Fri, April 30, 2010
By admin

One of the reasons that commercial real estate is a process — not a commodity — for end-users is that one of the key steps to the process is understanding the landlord.

Who is the landlord? It could be a single individual who’s owned the property outright for a long time. More likely, it’s an entity, as small as an LLC consisting of local partners or as large as a public real estate investment trust.

Moreover, the landlord is also its listing agent, asset manager, property manager and lender(s). Each of these individuals has a particular role in protecting the landlord’s interests — and not only is each landlord different, but also each type of landlord has unique pressure upon them that you need to understand.

Here are some basic things to keep in mind regarding a few of the most common landlord types:

Pension Funds

Many people don’t know that school teachers and other state government employees own much of the commercial real estate in America.

Their ownership comes in the form of tax-exempt pension funds administered by each state to pay benefits for retirees. Commercial real estate had long been considered a long-term stable asset for these portfolios to grow and make payments to retirees. You may have heard that many states have had their funds significantly eroded (by about 20 percent in the cases of Maryland, Virginia and the District of Columbia).

In some cases, funds are “oversubscribed” to real estate; in other words, the value of other investments have collapsed, so while their real estate has actually held up relatively OK, they’re forced to sell off portions of their real estate portfolio to reduce the percentage of investments tied to real estate to comply with their own rules.

What does this mean for you as an existing or prospective tenant? Stable cash flow is critical for both fund stability and disposition values of the assets, so you have unprecedented leverage to reduce costs, improve your facility and mitigate risk in your lease.

Real Estate Investment Trusts (REITs)

These public entities have probably received the most attention due to their declines both during the early part of the decade as well as now toward the end of it. REITs have their own requirements, most especially debt-to-equity thresholds and generally accepted accounting principles (GAAP) rules.

The tighter credit market — seen with increased deposit requirements, lower loan-to-value ratios and expiring debt that’s much harder to refinance — has forced some REITs to raise money and to comply with their own ratios.

The GAAP rules have a couple of important implications: willingness to accept a lower base rent and less willingness to agree to rental abatement. REITs report average rental rates (straight-lined over the term of the lease), so accepting a lower initial rental rate doesn’t impact them as much, if they can make it up with the escalation. For the same reason, free rent brings the average rent down, so it’s better for the REIT to wait for the next deal, lower the initial base rent or offer other concessions (such as tenant improvements).

Additionally, another requirement is looming for REITs that may reduce the value of their portfolios. The Federal Accounting Standards Board (FASB) is considering changes that would, among other things, more strictly require REITs to mark-to-market their assets. The changes, given the current market, could create more urgency for REITs to secure new leases to avoid having to take write-downs on properties that have technically declined in value, even though the REIT may have no intention of selling in the current down market.

Private Equity

During the real estate boom, real estate had a certain appeal, and “knowing” your landlord was something people actually used to brag about at cocktail parties. Back to reality. Your landlord (or the person managing the asset on behalf of an equity partnership comprising your landlord) is just another investor. The way in which that landlord has financed the property, structured their equity and managed the asset may expose some weaknesses that, with the right due diligence and experience, you can leverage to not only save money, but also strengthen an otherwise unfavorable lease well into the future.

Whether you’re considering a renewal, renegotiation, relocation, lease-liability takeover or expansion, the importance of understanding the landlord, the type of landlord and the people working for the landlord is critical to the success of the project. It takes the right process coupled with experience.

Mike Norris is vice president of Bethesda-based Scheer Partners and leads the firm’s Virginia office. He can be reached at