Tenant quality and building features are top of mind.
What is your lender looking for? What are the office real estate lending rules? Your lender will focus on tenant quality and building features. Quality of tenancy speaks directly to certainty of cash flow. Building features will directly impact your ability to retain existing, and attract new tenancies. Let’s take a closer look at lender concerns, or their “rules” for granting credit secured by office real estate.
Generally speaking, lender’s have a bias towards multi-tenanted buildings. Exposure to cash flow disruptions due to vacancies (also known as “roll-over” risk) is less in a multi-tenanted facility, with staggered lease maturities. Lenders will also be looking for tenants with covenant strength. The financial strength, and hence “staying power” that will ensure their continued tenure during their lease term. Single tenant buildings are more attractive to your lender if the tenant is considered strong and undoubted. Governmental authorities and large financial institutions would fall into this category. Do you know how strong your tenants are? For those occupying 25% of more of your building, request and obtain financial statements if possible. You will be comforted, and your lender will be thankful you’ve obtained this supporting information.
know your A B C’s
Office buildings are typically classified as “A”, “B”, or “C”. This refers to the degree of modern attributes and features available to tenants. There are established markets for each building class, with better buildings having features more attractive to tenants willing to pay higher rents. Lenders will be looking for high-speed elevators, high efficiency HVAC systems, automated fire alarm and suppression systems, underground parking, secure access, and energy saving features. All features typically found in “A” class buildings.
Class “B” buildings may have many of these attributes as well, but are possibly 10+ years old, or more, and in suburban locations. While still competitive, they may lack certain state-of-the-art features.
Class “C” buildings typically lack features found in more modern structures. They can remain competitive however, with regular attention to maintenance, and building upgrades and retro-fits, as appropriate. Not all tenants require, or are willing to pay the higher costs of modern building design or operating features.
The important item to remember, is that in a period of office market weakness, “C” and “B” class office tenants are a flight risk, at lease maturity, to better class buildings. Know this, and be prepared to discuss with your lender, your strategy to maintain your building’s competitiveness, and hence, your ability to retain tenancies.
Sufficient parking is also key for your lender. Though site specific, a good rule of thumb is that lenders will be looking for at least 3 spaces per 1000 sf of gross leaseable area, for mid-town and suburban locations, with perhaps a lower threshold for downtown locations well served by public transit.
The property should be in a location considered competitive for office property, ideally on a major thoroughfare , or in an established business park, close to public transit.
Knowing what your lender’s “rules” are helps you have an informed and beneficial discussion around how your building’s features addresses your lender’s concerns.