By Ken Ashley
ATLANTA (December 13th, 2010)
In a recent visit to a friends office space I took a second look at the common areas for the so called class “A” office building. The poor quality of the maintenance was simply stunning. The “deferred maintenance” included loose floor tiles, dirty wall covering, squeaking doors and many burned out light bulbs. Heaven only knows about the condition of the building systems such as heating and air conditioning.
Times are still hard in the commercial real estate business and many owners who are hanging on for dear life have really no option but to put off maintenance. A great article in the October edition of Commercial Investment Real Estate Magazine entitled The Big Fix addresses the topic of delayed maintenance from the investment point of view.
The article explains that:
“When property values decline to the point where negative equity exists, the owner’s perspective and incentives change dramatically. First, the owner no longer has the option to sell or refinance without making an additional investment in the property. More importantly, on nonrecourse loans, if the borrower were to default, the amount of negative equity makes no difference with respect to the owner’s cash flow. Whether there is $1 million or $2 million of negative equity, the borrower gets and pays $0 when the lender forecloses on the property.”
In other words, the ownership isn’t worried about the squeaky door, or the indoor air quality, or for that matter key safety issues like operating life safety systems and elevators. They are all focused on keeping control of the asset while you as the tenant (the customer!) are required to pay rent no matter how poorly the building is maintained.
Make’s you wish the industry had a “Carfax” for buildings. Instead as a tenant you should use common sense when evaluating building options. That unbelievable amount of free rent in a proposal to lease can really be unbelievable and unsustainable as the landlord tries to maintain the asset you are leasing for years in the future.
Entering into a lease with a landlord is really like a marriage. You will be living with each other for 5, 7 or even 10 years. Make sure your potential spouse isn’t a slob; especially when you are dating!
Look at a property from an owners perspective and be wary of superficial maintenance issues like caulk and paint that aren’t taken care of. Below the surface there may be other major issues that will make you miserable. Also, ask to walk the physical plant of a building you are seriously considering leasing. Talk to the engineers and property managers and ask the hard questions. You might be surprised at what you hear.
Finally, ask your broker and attorney to review the lease for the landlord’s obligations. It is a huge beef of ours that landlords have page after page of tenant obligations but sometimes literally two sentences of landlord obligations. Your advisors should help you spell out industry and market standard requirements by landlords.
At the end of the day, if you aren’t comfortable with the landlord, no amount of free rent is worth miserable employees and lost productivity. Plow around the
stump and keep moving to better pastures.