When An Office Building Is Even Suspected of Being In Trouble, Other Negative Events Happen

We are hearing about more office buildings rumored to be having financial issues. In some cases, there is a mortgage loan coming due and the owner is having trouble refinancing as recently many insurance lenders and banks have made office loans ‘off limits’. It may be that the vacancy of the building has increased to a level where the owner is having negative cash flow and having trouble making his monthly mortgage payment, or slow or not paying vendors. Some may quit. There might also be new tenant prospects who will require extensive tenant improvements before they can occupy the building, and the cash-strapped landlord is unable to secure financing for these tenant improvements. My estimate of the percentage of office tenants represented by an office leasing specialist is in the 90% range, which means almost all tenants have a broker representing them. When brokers hear of an office building in trouble, they have several concerns. Their client might not be able to get their tenant improvements built or get occupancy in a timely manner, which could cause financial hardship if they have to holdover at a 150-200% rent penalty. The building could be foreclosed, and the lender may have the right to cancel the lease. The lease might be signed, and then if the building goes into foreclosure there might be a never-never period when the landlord, lender, and everyone else simply does nothing, leaving the tenant in limbo. There is also the concern for the broker that he or she might not get paid a commission even if they get the lease executed, the tenant gets their Ti’s and moves in, and then the building gets foreclosed, and the lender decides not to pay. We call these ‘Zombie office buildings.’