Smart Tenants, Wise Choices: A Four-Point Guide to Choosing a Commercial Landlord

Imagine signing a 10-year commercial lease for the perfect space, customizing it to your needs, and moving your employees and equipment in, only to see the building's quality, services, security, and amenities deteriorate by year three.

This scenario is increasingly common as commercial property mortgages adjust to higher-than-expected interest rates, making it difficult for some landlords to keep up with costs. As commercial tenants are increasingly drawn to top-tier buildings, owners of lower-performing properties will struggle. Many will manage, but others may default—MSCI estimates that $38 billion in U.S. office buildings are threatened by default, foreclosure, or other forms of distress.

This shift has flipped the script: increasingly nervous tenants now need to scrutinize their landlords just as much as landlords scrutinize their tenants. There's a lot at stake: commercial tenants are often locked in for years, making it crucial to choose the right landlord to avoid getting stuck in a poorly managed or "zombie building," which can jeopardize their business growth and operations. With few legal protections for commercial leases, it is up to tenants to do the work and thoroughly evaluate potential landlords before signing.

A FOUR-POINT GUIDE

Based on over 40 years of experience working closely with commercial landlords, tenants, investors, and financial institutions through multiple market cycles, we have outlined four essentials for commercial tenants to consider when choosing a landlord.

1. THE LANDLORD'S TRACK RECORD

A history of financial distress and poor management can lead to neglected maintenance, inadequate security, unresolved legal issues, and worse.

Look for:

• Stability: Inquire about the landlord's financial, management, and maintenance history; consult public records. Confirm that the landlord is free of management issues and foreclosures. Evaluate trends and identify changes over time – is performance stable, improving, or going downhill?
• Compliance: Ensure the building meets all safety regulations and building codes. Search relevant records for compliance history; compliance signals a landlord’s commitment to maintaining a property with cash equity.
• Legal Issues: Verify the absence of recurring legal problems that could impair management. Conduct a thorough legal search focusing on lawsuits and complaints, particularly between partners or related to the landlord’s other properties; these could hint at future problems.

2. THE LANDLORD'S FINANCIAL COMMITMENT TO THE PROPERTY

A financially committed landlord is good for a property’s long-term quality and stability and offers protection against future problems resulting from sudden management changes.

Look for:

• Equity: Landlords with at least 20-30% equity tend to be invested in a property’s long-term success and have a strong financial incentive not to walk away or neglect the property. Request documentation of financial investment and look for evidence of reinvestment, including recent renovations and plans for future improvements.

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3. THE LANDLORD'S COMMITMENT TO TENANTS, AND THE TENANT EXPERIENCE

A landlord who prioritizes tenant needs and maintains and enhances the building is more likely to deliver a positive tenant experience.

Look for:

• Maintenance and Upgrades: Verify the landlord’s commitment to building quality. Request schedules of past and planned upgrades. Look for HVAC, security, and common area upgrades and proactive landscaping, plumbing, electrical, and infrastructure schedules.
• Responsiveness: Gauge how promptly and completely the landlord addresses issues. Ask current tenants about their experiences and recent changes; response slowdowns can signal management problems or financial distress.
• Proof of Funds: Confirm the landlord has funds allocated for tenant improvements and other recurring expenses, like broker fees. Request written proof of financial stability.
• Leasing Transparency: Ensure lease terms are clear, understood, and well documented. Non-standard terms should be proactively identified and discussed. Include flexibility to accommodate your business’s evolving needs to enable growth and prevent future disputes.

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4. THE LANDLORD'S RESILIENCE AGAINST ECONOMIC CHALLENGES

A financially stable landlord can continue to invest in property improvements even while managing unexpected expenses, ensuring a safe, pleasant environment for your business.

Look for:

• Vacancy Rates: Low vacancy rates promote stability. Request vacancy data and tenant lists, including the proportion of space each tenant accounts for and anticipated lease termination dates.
• Debt-to-Value Ratio: An LTV ratio of 75% or lower indicates manageable debt levels and an ability to access additional funds. Request LTV information, particularly if you are a large tenant occupying a sizable portion of the building; a landlord with a low LTV or no debt at all will be a lot more willing to share (beware the broker who claims this information is unavailable).
• Mortgage Timeline: Inquire about the timeline and details of mortgage obligations to assess financial strain; ask if the lender has already granted accommodations regarding the loan.

Good due diligence is key to helping tenants secure commercial spaces that support their business growth and safeguard their future.

Ask the hard questions. Request the documentation you need to see.

Choose your landlord just as carefully as they choose you.