Tag Archives: Warren Brown

Commercial Lease Renegotiation During Covid-19

30 Mar
March 30, 2020

A frequent question consistently raised during these tumultuous times is how to handle a tenant seeking to renegotiate its rent payments or cease paying rent altogether. As this post explains, it’s best for both tenant and landlord to work together to reach an amicable solution. Let’s take a look at the issue from both perspectives.

Tenant Side:  

Tenants should carefully review their lease agreements to understand their rights during current circumstances, as non-essential businesses have been ordered to shut down. In particular, many leases contain a force majeure clause, which may have been perceived to be an insignificant issue at time of lease negotiation, but suddenly is gaining lots of attention. This clause is a legal term pertaining to unforeseeable circumstances that prevent someone fulfilling a contract. The advent of COVID-19 can certainly be considered an unforeseeable circumstance, but all force majeure clauses are not uniformly negotiated. These clauses may not explicitly permit a tenant to cease rent obligations, and may require tenants to continue paying rent. Sometimes this clause may not be included in a lease altogether. Further, pursuing a force majeure case can be time consuming, lead to costly legal bills, and may be difficult to wind through the legal systems. A better solution is for a tenant to approach its landlord up front to work out an amicable solution. In many cases, tenants will find a sympathetic landlord especially if the relationship has been positive leading up to the current crisis. Hopefully, the landlord that has existing debt, and in turn has a sympathetic lender that is also flexible on loan payment terms. Unlike the Great Recession, most banks have strong balance sheets heading into the current crisis, and are on more solid footing to offer flexibility. However, tenants should understand that in addition to debt obligations, landlord’s also have bills to pay such as real estate taxes and operating expenses. Further, not all lenders will be amicable to allow restructuring of landlord’s debt service, and loans may contain specific covenants requiring the landlord to maintain specific cash flow levels and other ratios.

Alternative methods to structure rent include a straight rent abatement for a period of time, partial rent abatement, rent abatement with tack on of equivalent rent on back end of the lease and a more aggressive restructuring of business terms. The latter approach, popularly described as “blend and extend” during the previous downturn, is to reduce the rentable square footage, and gradually increase this over the term and extend the lease term altogether. This allows the tenant to obtain up front relief while stabilizing the tenancy for the landlord especially if the lease is close to end of the term.

Tenants should also take a hard look at the recently signed Cares Act for beneficial provisions such as the Paycheck Protection Program which, for eligible employers, provides for a refundable credit against qualifying wages, as long as the employer continues payroll for its employees. More details on this program can be found here: https://drive.google.com/file/d/1NhxAbs6Wj4Oifp9opZoORWxfbUGf49qz/view 

Landlord Side:

Setting the scene for landlords to treat tenants amicably, the second largest apartment owner in the country, Equity Residential, recently announced that it will pause evictions for tenants that have been impacted by COVID-19, as well as hold off on rent increases for 90 days. However, commercial leases are more complex than residential leases, and most landlords are not as well capitalized as Equity Residential, and thus need to take more proactive action.

One of the first actions a Landlord should take to get out in front of this issue is to immediately reach out to its lender to find out flexibility of the terms of its loan. As mentioned previously, the current crisis is not rooted in the financial services industry. Some lenders have been considering interest only payments for a period of time. Perhaps relaxing cash flow, cash on hand and other loan covenants can be arranged.

Landlords should also carefully review their lease agreements and understand tenant’s rights under force majeure, as well as its own rights in the event of tenant default. As mentioned earlier, taking legal action can be costly, and it is highly unlikely to find a landlord-sympathetic court to hear an eviction proceeding for quite some time. Further, eviction is not prudent with the prospect of having an extended vacancy, and best to be cautious with pushing default given social pressure and potential tenant legal argument of force majeure.

Landlords do not need to be in a position to be taken advantage of and tenants should be prepared to fully explain its financial position and provide financial statements for the Landlord and Landlord’s lender to review. If a tenant’s claim is legitimate then there should be no issue with providing financials. 

An experienced commercial real estate broker can be the trusted advisor for either party to find the best market based solution during these challenging times. Please contact me to review your specific lease issues and assist with navigating this complicated landscape to find the ideal solution in order for you to be successful.

Warren Brown, Boston Commercial Properties, Inc.



All information provided is from sources deemed to be reliable, however no warranty or representation is made as to the accuracy thereof.

2019 Forecast: Dark Clouds Forming

09 Jan

original photo by fiona graeme cook, boston commercial properties, dark clouds1/8/19

The risks to the downside for the commercial real estate market are currently outweighing the upside as negative indicators have increased. The first obvious concern is the return of high volatility with selling pressure in the equity markets. For 2018, the Dow was at -5.97%, S&P -6.24% and NASDAQ -4.38%. The S&P closed the year near bear market territory from recent highs. Now stock market sell offs are not necessarily an indicator of future economic slowdown, but the shock may lead to one in the near future as other economic factors mount. Current volatility may be similar to that of 2016, and we are just not used to the current roller coaster ride as the market in 2017 was so benign. We may be experiencing asset repricing as markets may have gotten ahead of accurate valuations. If assets do reprice to depressed levels, the impact on the psychology of investors will weigh on the overall economy.

Further, as Neil Irwin mentioned in his Boston Globe column on 12/25/18: “The sense of doom & gloom and pessimism has gotten ahead of the facts on the ground….[the economy may be] returning to old new normal of moderate economic growth that was completely normal from 2010 to 2017. ” However, there seems to be a “crisis in confidence.” On that latter note, there is a palpable sense of declining confidence in the political realm. Investment bank RBC Capital markets surveyed big investors in December about what kept them up at night,and Trump topped the list. Interest rates and trade war ranked second & third (Reference: 1/2/19 Boston Globe). Indeed, the irrational tweeting by the President along with misguided statements made by Treasury Secretary Mnuchin rocked equity markets at year end and left investors with a sense of a vacuum of leadership in the Executive branch which is not a good thing for financial markets. Equity markets do not like uncertainty and the uncertain political climate along with economic conditions will continue to weigh investors minds.

Other concerns include an inverted yield curve which has frequently in the past preceded recessions, future rate hikes by the Federal Reserve, Fed unwinding of its bond purchase program which tightens money supply, corporate earnings (e.g. Apple), slowing Chinese economy, trade war concerns, continuing U.S. government shutdown, weak ISM Manufacturing Index report, slowing service sector, unstable Brexit process, slowing European economies and record high corporate debt as companies feasted on historically low interest rates to finance expansion. Corporations may now look to correct their balance sheets, seek to trim expenses and cut back on hiring. On the trade war front, mark your calendar for March 1st which is the deadline for the U.S. and China to resolve trade differences.

In spite of concern of political leadership and the aforementioned indicators, other economic fundamentals appear to be very strong. Mainly employment is very a strong – a major factor of the economy. The December unemployment report indicated 312,000 jobs created which is a very strong number and far exceeded expectations but wages increased a strong 3.2%. While inflation is still under control, with rising wages, expect the Federal reserve to continue tightening short term interest rates which will have a negative effect on the mood on Wall Street and create a drag on the economy.

Let’s take a look at the current state of the residential market which is a main driver of the domestic economy. Locally, the Warren Group just reported pretty strong conditions. November showed both sale prices and sales volume at all time highs for the month of November. The median sale price for a single family home in Massachusetts is $385,000. But sale price increases are rising at a slower rate than earlier in 2018. With continued low levels of inventory, prices are reaching a point where many buyers cannot afford to buy. The condo market is experiencing increase in supply. In Boston, luxury home sales actually fell 4.7% in Q3 to an average of sale price of $3.6m (Source: The Warren Group). Anecdotally, my colleagues in the residential real estate industry report that homes are sitting on the market longer with fewer offers received.

In New York City, a correction has been underway for a while as in some cases, sellers have taken a haircut of 30%. The median price for a Manhattan apartment fell below $1m. This is the first time below this level since 2015 (Source: The Warren Group).

The residential market will likely begin to feel softer as more homes are put on the market. This will lessen the rise in sale prices and stabilize the market. The reality is the residential real estate market has been extremely tight for an extended period of time, is not sustainable and is cyclical. Expect supply to increase and softening in the residential real estate market with gradual decrease in median sale prices. As the residential market softens, expect the economy to slow given the huge impact the residential market has on the overall U.S. economy.

As with the economy and residential real estate market, the commercial real estate sector is cyclical, an eventual downturn is inevitable and expect commercial real estate to begin to soften this year. As interest rates rise, capitalization rates will rise thus lowering overall valuations. As companies seek to clean up their balance sheets, expect belt tightening, restraint on expansions and reduction of head counts. This will curtail demand for new space overall. Vacancy rates will begin to rise and the recent trend of lease rate increases will flatten out. The greater Boston economy has proven to be resilient with diverse industries including defense, biotech, enterprise, cyber security, fintech, education and healthcare. This resiliency will soften the blow of any downturn locally but weakening conditions will develop nevertheless.

Contact me to further discuss any questions and to review your specific space requirements to find the best solution to your needs and to provide a steady hand during turbulent times.

Warren Brown, President, Boston Commercial Properties, Inc.

All information provided is from sources deemed to be reliable, however no warranty or representation is made as to the accuracy thereof.

Will WeWork Conquer The Real Estate Market?

28 Feb

Actually, WeWork wants to do more than just conquer the real estate market. The ambitious plans for this rapidly growing company includes expanding into residential real estate, high end fitness, and even education. A recent NY Times article describes the enthusiastic goals of  WeWork’s founder. One has to wonder if  WeWork will become the Amazon of the real estate market and change the paradigm of how companies of all sizes use space. This company is a real global landlord to contend with – 2017 revenues were $900m and it will continue to grow in 2018 as they plan on expanding from over 200 locations to 400.

By capturing the imagination of entrepreneurial as well as Fortune 500 companies, and fulfilling the desires of how millennials view the work environment, WeWork appears to have revolutionized how we work. Rather than occupying staid, plain, vanilla office buildings, at WeWork, employers now have the option to lease flexible, fun and creative work environments with chic decor, with many amenities, where their employees enjoy working, never have to leave the office, and are inspired as a result.

The WeWork concept includes flexible lease terms, comfortable, and creative spaces where the theme of the decor and amenities may change depending upon the location. WeWork offers facilities in hip downtown locations around the world including 303 locations in 62 cities. Amenities include free flowing beer, piped in music, fitness facilities, social networking venues and more. An elementary school and wave pool for inland surfing are other concepts currently being developed.

But will WeWork succeed in becoming a game-changer in how we lease space? While WeWork definitely serves a niche – and a growing one at that – there will always be a place for more traditional space alternatives. As an example, for now it appears that WeWork does not aspire to penetrate suburban areas. Leave other experienced real estate developers that are increasingly adding their own amenities to office parks for that. There will also continue to be a role for traditional landlords in downtown markets. For example, law firms, insurance companies and financial service companies that occupy large blocks of space for a lengthy period of time will need their own corporate identity, perhaps their own office tower, and with their own unique corporate image. As companies see the expanding trend of younger talent seeking employment in urban environments, this fast growing company is quickly becoming an 800 pound gorilla to contend with in downtown markets.

Not to be outdone, many upstart co-work facilities have also been expanding in downtown areas. Knotel in New York, the Cambridge Innovation Center, WorkBar and others in Boston are seeking to disrupt how we use space. Given this trend, we should be cognizant of the possibility of over saturation of the co-work concept.

Is the co-work concept right for your business? Contact me to further discuss this and to review your specific space requirements to find the best solution to your commercial real estate requirements.

Warren Brown, President, Boston Commercial Properties, Inc.

All information provided is from sources deemed to be reliable, however no warranty or representation is made as to the accuracy thereof.