Communication can be the key to keeping rents paid instead of losing them to bankruptcy
Austin Business Journal - by Matt Hudgins Austin Business Journal Staff
The decline of Internet companies and other high tech businesses in Austin hit the real estate industry hard.
For tenants with the wherewithal to spend on space, Austin's office market now offers some welcome variety of selection, mostly in the form of subleases from other tenants. That greater availability, however, is a slim silver lining on an otherwise dark cloud over real estate.
Subleases are a symptom of a contracting economy. The same forces that drive one tenant to offer its excess offices for sublease may lead another firm to give up altogether on its obligations. That company may then file for bankruptcy, or at least file for bankruptcy protection while it reorganizes.
A tenant's bankruptcy can be costly for landlords. The loss of a large tenant during a period of stagnant leasing activity can even spell death for some projects. A landlord unable to find a replacement tenant may wind up in default on the building's mortgage.
All but a handful of the Class A office buildings constructed in Austin during the boom of the 1980s suffered the default fate and were returned to the lenders.
Doug Dwyer, a senior vice president of Transwestern Commercial Services in Austin who represents a number of area landlords, says most office buildings operate on a fairly thin profit margin.
"You lose a major tenant and it can be financially devastating," he says. "Those buildings eat a lot. The taxes don't go away, the utilities don't go away, and certainly the mortgage doesn't go away."
Dwyer says a tenant's bankruptcy may not hurt the landlord, depending on the type of filing and the specific case.
If tenants simply file to reorganize, then they may specify in the filing their intent to keep their leases.
For the landlord, the good or bad nature of the deal boils down to paying rent.
"The best thing that happens for a landlord is the rent is paid," Dwyer says. "The worst thing that happens is the tenant walks away and pays no rent, and [the landlord] has to go in and re-tenant the building."
Jerry Heare, a corporate services real estate broker with Austin's NAI/Commercial Indus-trial Properties Co., agrees the type of bankruptcy makes a big difference for the landlord.
He advises landlords to talk with tenants about the filing quickly to learn whether the company is liquidating or reorganizing.
"You don't solve anything by not communicating with one another," Heare says. "A landlord needs to find out what's going on, what kind of bankruptcy, what's the time frame on it."
The landlord probably needs an attorney to clarify and assert the landlord's rights, Heare says. The tenant has rights as well, even when filing for bankruptcy, and all parties will have to abide by directives from the bankruptcy court.
If the tenant reorganizes, the landlord may be able to renegotiate the lease and retain the firm in its space. If the company liquidates, the landlord needs to know what assets may be available for seizure and who else may have a claim to them.
"Communication is the key," Heare says.
Letters of credit
When Austin's high tech firms were in lightning acceleration mode and demanding big blocks of offices to handle anticipated growth, many property owners requested letters of credit to back up leases.
Brokers commonly refer to the instruments as LCs.
An LC is a line of credit from a lender, prepared as a sort of guarantee the tenant will pay the rent for the agreed-upon term. A company with a strong business history, such as General Motors Corp. as an extreme example, probably doesn't pose much risk it will default on a lease. But for a promising but brand new firm, even one with millions of dollars in the bank, landlords take a greater risk the company may not survive, or at least may not be able to live up to its obligations through the course of a lease.
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