The drumbeat of the challenges facing almost every corner of the office building market should be loud and clear to owners and lenders. For some, the current situation is dire, while for others it will likely worsen in the coming months or years as leases roll-over and loans mature.
Properties and businesses that relied on vibrant office buildings and their many workers who could be counted on to support surrounding retail businesses, as well as single-family and multifamily housing projects, may also face similar distress. Ultimate outcomes will vary and, although many deals will follow the playbooks developed during prior market downturns, there will continue to be a range of bespoke responses and solutions that owners and lenders will likely want to consider.
Here are five initial steps owners and lenders should take in order to begin to assess their particular situation and to prepare for the process ahead.
1) Understand Your Situation Fully
It is critical to accurately assess and understand your situation in order to effectively formulate and present possible solutions. To do so, you will need to know and understand, as the case may be: your property, your market, and your competition; your leases and your tenants and their challenges and options; your loan and entity documents; your lender (or borrower) and their considerations and limitations; and your partners and investors and their motivations. Tax considerations will play into almost every solution you may consider, so it is critical to discuss any potential transaction with qualified tax counsel.
Ultimately, you will want to comply with all of your obligations to the extent you can (and most certainly you need to know the implication for not strictly complying with any obligations, especially with respect to potential recourse under a guaranty). You will also want to understand all of the obligations and rights of all of the parties you are dealing with and what each of their motivations and constraints are so that you can develop viable strategies and can plan for and proactively anticipate challenges or impediments to reaching an agreement.
2) Assess and Plan Accurately and Reasonably
There are the facts, and then there is the interpretation of the facts. It is critical to be self-aware of your situation and agreed to obligations as well as the reasonable expectations and needs of the other parties involved in a given situation. The basis for productive discussions in order to resolve a problem is credibility and trust which are based on a reasonable assessment of the situation, its causes, and possible solutions combined with good-faith compliance with one’s contractual obligations and transparency as to one’s actions and communications. It is much more difficult to arrive at a consensual solution if there is mistrust or uncertainty as to a party’s ability or willingness to effectively help resolve a given situation.
3) Seek Out the Perspective and Advice of Others
Whether it is the advice of counsel, an accounting firm, or a trusted business advisor, competitor, or capital source, one should seek out a range of perspectives and potential options for consideration. As unique as your situation may be, there have been many similar challenges and solutions over the years that can provide a frame of reference for your assessment and analysis. There is usually no one solution for most situations, and parties will often pursue the solution with which they are most familiar or comfortable. There may be other solutions that could work as well, if not better, although they may take some time and effort to build a consensus around. Understanding as many options as possible, and keeping an open mind, usually helps at arriving at the best solution.
4) Take Small Actions That Can Help
Cutting operating expenses; considering a real estate tax appeal; conserving cash; negotiating reasonable compromises with tenants, lenders, or borrowers; subleasing or otherwise relocating tenants; or legally separating space (using a condominium structure or subdivision) may be able to help improve the situation and set-up future strategies for the property.
5) Remain Proactive and Flexible
Most troubled situations are, by their nature, changing situations. Sometimes you may be the party needing to make a change. Often, it will be other parties or the market. Regardless, being able to identify changing facts or circumstances, ideally in advance, and adapting as needed will be critical to arriving at an ultimate solution. That solution may not be what one had originally hoped for, and it may not even be ideal in terms of the original investment or loan, but it may be the best option under the circumstances.
For further guidance, reach out to the experienced members of Ballard Spahr’s Distressed Real Estate Group including its Distressed Office Buildings Team. Our interdisciplinary approach sets us apart as a leading force in helping clients navigate the challenges and opportunities in distressed transactions, deal restructurings, and enforcement matters across a wide range of markets, project types, and deal structures.
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