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Tenant Impact When a Building is For Sale and After it Sells

9/30/2019
Tenant Impact from Building Sales Video Tenant Impact from Building Sales Video
Office building sales in Charlotte in 2019 are projected to surpass last year’s total of $1.6 billion.

At mid-year, 3.8 million square feet of office assets totaling $892.6 million had already traded. The average office cap rate of 6.3% continues to compress in Uptown and the more urban submarkets as investors strive to acquire properties in Charlotte’s stable, high-growth market.

As space is leased and rental rates continue to rise, owners are expected to sell properties for record amounts as Charlotte demonstrates it is a viable and highly sought-after investment market. If you’re a tenant in a building that’s on the market, it’s important to be aware of the sale process and what’s next. The new owner can impact enhancements/upgrades to the property, rental rates and lease terms.

Building For Sale – Now What?

  • Estoppel Certificate: A legal document required by the Landlord’s lender to verify lease conditions are accurate. This is an opportunity if the Landlord has not fulfilled all their obligations under the lease. Ask your commercial real estate brokers to review the lease to ensure the Landlord is fulfilling their obligations.
  • Subordination, Non-Disturbance, and Attornment (SNDA) Agreement: Do you have rights to an SNDA in your lease? This document is important if the Landlord has debt and could be in trouble on the loan. Ensure your SNDA is still valid or request a form, if applicable. Your broker can also help navigate this process.
  • Tenant Interviews: This is an opportunity to voice your opinion on building related issues such as property management, amenities, parking, etc.

After the Sale – Who is the Buyer and What’s Their Strategy?

  • Private Equity: Value-add, accelerated rent growth This owner will push the rental rates but will be more flexible with free rent and tenant improvement allowance. Usually a relatively short-term hold to reposition the asset and sell it.
  • Pension Fund/Institutional: Long-term holder who wants to keep the building stable. This owner may perform some capital improvements and steadily increase rental rates, but typically their motivation is to keep tenants in the building to maintain steady income stream.
  • Real Estate Investment Trust (REIT): Long-term holder, usually their primary concern is to maximize their FFO (Funds From Operations), and their motivation is to maintain cash flow and occupancy. A REIT is more likely to agree to a lower rental rate than offer a large tenant improvement allowance or free rent.

A building sale can have significant impact on the future of the tenant in the building. By knowing what to expect during and after the sales process, tenants can proactively plan their future real estate strategy.

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