What Office and Industrial Tenants Need to Know About Foreclosures and The Impact on Your Business.
As a business owner with a vested interest in your commercial real estate (CRE) lease, the possibility of your landlord defaulting on their loan or the building entering foreclosure can be concerning. In the Denver-metro area, where the commercial real estate market, especially the ‘office’ market, is experiencing fluctuations, being informed about these situations is critical to safeguarding your business.
CMBS loan delinquency rates have continued to increase nationally over the past year as noted in the article linked below:
2024 CMBS Delinquency Rates - Commercial Property Executive (commercialsearch.com)
Recognizing the Signs of Landlord Default
For established business owners who value integrity, hard work, and financial prudence, staying vigilant about the financial stability of your landlord is essential. A landlord in financial distress may delay maintenance, become less communicative, or make unexpected management changes—each of which could indicate potential default. To protect your business, regularly monitor public records or consult with experts at Fountainhead Commercial to identify any notices of default or foreclosure filings.
The Impact of Foreclosure on Your Lease and Business
If your landlord defaults and the property goes into foreclosure, the impact on your business will largely depend on the specific terms of your lease and how advanced the foreclosure process is. Here’s what you need to know:
- Lease Security: Ideally, your lease includes a "non-disturbance clause," which ensures your tenancy continues even if the property changes hands due to foreclosure. If this clause is absent, the new owner might have the legal right to terminate your lease, which could force your business into an unexpected relocation causing massive disruption to your business operations & employee anxiety.
- Rent Payments: Despite the foreclosure, it’s crucial to maintain your rent payments as stipulated in your lease. However, confirm with the property’s lender or the new owner where these payments should be directed to avoid any potential legal complications.
- Renewal Options: Foreclosure can complicate lease renewals. A new property owner will likely be obligated to honor your renewal option. However, if the option has ambiguous language, the new landlord might try to wiggle out of the obligation if they have different plans for the building. Engaging in early negotiations with the property’s new lender or potential new owner can help secure your position. With that said, it’s likely that if your office building is in foreclosure, it is due to lack of tenancy (high vacancy rate) and the new landlord & their lender should be highly incentivized to stabilize the asset by renewing credit-worthy tenants.
With proper guidance from Fountainhead Commercial’s real estate brokers, the business owner should be able to leverage this ownership change, during lease negotiations (to renew or expand the lease space), to the economic benefit of the tenant.
Potential Business Disruptions
As a successful business owner who has built a thriving enterprise, you understand that operational disruptions can be costly. Foreclosure introduces several risks:
- Operational Stability: Transitioning to new ownership can disrupt property management and maintenance, affecting your business operations. Staying proactive and maintaining open communication with the lender or new owner is key to minimizing these disruptions.
- Property Value and Perception: A building in foreclosure can suffer from a decreased perceived value, which might reflect negatively on your business’s image, particularly if your clients or partners are sensitive to the location and condition of your premises.
- Relocation and Cost Implications: Though it is unlikely if a tenant is 100% compliant with the lease, rent payments, etc., should the new owner decide not to honor your lease, the costs associated with relocating—such as moving expenses, business downtime, and finding a new location—can be substantial. Planning for these contingencies is advisable.
Opportunities During Foreclosure
Despite the challenges, a foreclosure scenario can present opportunities, especially for savvy business owners who prioritize maximizing their financial resources:
- 1. Lease Renegotiation: Lenders or new owners often prefer retaining credit-worthy, non-disruptive tenants to keep the property occupied & rental income maximized. This might provide you with leverage to renegotiate lease terms more favorable to your business, such as reduced rent or additional benefits like tenant improvements in exchange for extending your lease term. Keep in mind that lease expirations & economic/business cycles rarely align.
Should your business have a need, regardless of when the lease expires, contact Fountainhead Commercial brokers to discuss the best way to proceed to better position your business for long-term success. - Property Purchase Opportunity: In some foreclosure cases, you might have the option to purchase the property at a reduced price. This could be an excellent opportunity to gain control of your business premises, securing your location long-term and possibly reducing future occupancy costs.
Taking Advantage of Denver’s Soft Office Market
The ongoing softness (post-2020) of the office commercial real estate market in Denver presents an advantageous landscape for business owners looking to optimize their CRE strategy:
- Negotiating Better Lease Terms: Increased vacancies mean landlords are more likely to offer competitive lease terms. This could include lower rental rates, extended rent-free periods, or significant tenant improvement allowances, moving allowances, etc. allowing you to invest more in your business rather than increasing your landlord’s wealth.
- Enhanced Space Selection: With more lease options available, now is the time to consider upgrading your office space or moving to a more strategic location within the Denver metro area. The availability of quality spaces at favorable terms can position your business for long-term success.
Conclusion: Protecting and Enhancing Your Business Amid Foreclosure
Navigating the complexities of a foreclosure can be daunting, but with the right approach, you can not only protect your business but also turn the situation to your advantage. Whether it’s renegotiating your lease, considering property ownership, or leveraging the current market conditions, there are opportunities to be seized.
For a look at office buildings in Denver-metro that are currently in foreclosure or at risk, check out this summary of current & past distressed properties: Denver Buildings in Foreclosure or Default | BusinessDen
To best understand the risks and opportunities presented by a foreclosure, contact a Fountainhead Commercial broker to discuss your specific situation.
