This is a vicious market for lessees. Owners are increasingly finding their spaces going dark as the market takes a toll on Tenants and the economic performance of their businesses.
Many businesses predicate and sustain their business model on the economic relationship they have with their lease. When the line of profitability intersects the economic demands of the lease, business owners are faced with tough decisions…so, too are Owners.
Truly, a lease is a function of sound business planning and, in these days, may prove pivotal with respect to sustaining profitability. Revenue for some businesses has decline by almost 30 percent, a huge and life-threatening decline for just about any endeavor.
My Property Performance Analysis (PPA) was orignally designed to assist owners with assessing their property performance and financing options in this “vicious market” but I am extending it to a new approach that assists tenants with evaluating their lease, lease options and streamlining their lease.
The Tenant PPA looks at a number of factors from the Tenant’s side of the relationship, then seeks to formulate a strategy of lease modification that will prove accepatable to the Lessee and Lessor. Some of the components of the Tenant PPA are:
- Financial review of business performance
- Creation of ecomomic model for lease performance
- Streamlining the lease to cycle through the downturn
Bottom Line. As a result of the Tenant PPA, rental rate modification may result if supported by the financial analysis. The Owner maintains leased space with creative offsets to the streamlined lease that serve as incentives against a space “going dark.” These incentives may include early renewals, extensions and rent adjustments associated with positive market and business performance improvements.
The Cost of Going Dark. Going dark is expensive. Re-letting space in a highly competitive market is costly, time consuming and almost always results in revenue decline when measured against a well drafted lease modification.
When an Owner/Tenant relationship is economically strained beyond the breaking point, our position at Arizona Commercial is a simple one, keep the lights on! In a rapidly appreciating market with vacancies below seven percent, this would not be the normal case. However, these are not normal economic times and the decision to execute a Tenant PPA may be in the best interest of the Parties.
Donald Teel is Senior Associate with Arizona Commercial a central and northern Arizona commercial brokerage firm. Need more information call 1-877-777-9100 or, if you prefer, you may email Donald Teel
The Northern Arizona commercial real estate market is tracking with the national markets. Leases were up by about 50 percent in 2008 over 2007 while the sales transactions over the same time period decline by about 45 percent.