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Office Tenants: Do Due Diligence on Your Landlord

Office markets from coast-to-coast are struggling mightily, especially in major urban downtowns. Chicago’s downtown business district (i.e. the Loop) is no exception. Right now, Chicago’s Loop office vacancy rates are the highest since such rates have been recorded.

In April of this year, Crain’s Chicago Business reported that downtown office vacancy broke 25% for the first time on record, landing at 25.1%. This number reflects seven consecutive quarters of increasing vacancy.

What does this mean for tenants? Well…a lot.

It means opportunity as landlords feel pressure to fill vacant office space. Lease concessions that never would have been considered three years ago, might be available now. These days, on most office deals, tenants enjoy considerable leverage. While this market brings tenant’s many benefits, it also brings significant risks. Here are a few risks for tenants to consider before signing a lease:

1. Is your landlord in financial distress? Landlords will always vet an incoming tenant’s financial condition. The same often does not happen in reverse. Many office landlords face financial pressure now. If the landlord is at risk of foreclosure, or otherwise in financial peril, the tenant should have a number of concerns ranging from how well the building will be maintained to whether or not they will be staying in a bank-owned building soon. Tenants should fully inquire into landlord’s financial condition, especially if meaningful tenant allowances have been agreed to.

2. Subordination and Non-Disturbance Agreements are more important now than ever. “SNDAs” can go a long way towards protecting tenant’s lease rights in the event of a foreclosure.

3. Will “creative” uses come to the building? Never underestimate the ingenuity of the commercial real estate industry. All kinds of ideas have sprouted up as to what could be done to fill empty downtown office space. Indoor dog parks, pickle ball courts and the often tossed about notion of converting vacant office space into residential apartments are good examples. Tenants should find out before signing if the landlord has any designs on filling vacant space with uses that the tenant might find objectionable.

4. Co-tenancy provisions and the careful review of how operating costs will be allocated are critical. Who bears the risk of vacancy as to operating expenses? Tenants needs to know if fewer tenants means they will have a higher share of operating costs. Tenants also need to know if they have any way out of the lease if the building really struggles. No one wants to be alone in an empty tower.

© 2024 Chuhak & Tecson P.C.
by: Kevin M. Coyne of Chuhak & Tecson, P.C.
For more on Office Tenants, visit the NLR Real Estate section.

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