Taking a Hard Look at Lease Terms

In a recent newsletter, Abe Schear, real estate partner at Arnall Golden Gregory, raises many excellent points about the necessary complexity of today’s LOIs and leases, and I agree with all of them.

Certainly, the accelerated pace of changes in the use of space initiated by rapidly changing technology, not to mention Black Swan events like we just experienced, forces landlords to take a hard look at their standard lease terms, including covenants and use provisions. At the same time, tenants are likely seeking more flexibility in lease terms, expansion or downsizes, and the ability to modify space.

This also creates challenges on the investment side. Shorter term leases, more termination rights, and other similar requests diminish the stability of income and negatively impact value, creating serious problems for institutional investors who prefer stable assets with long-term leases and credit tenants.

We’ve seen a preview of this with WeWork and other shared space concepts. Tenant balance sheets will likely become more important as market changes can force a credit company into bankruptcy in a short period of time (á la Regal and AMC). Another result could be more conservative lending as financial institutions will want owners to make higher-percentage equity contributions.

Overall, I think this is more than just a financial crisis impacting supply and demand, that will eventually recover. The confluence of technological changes and the pandemic will result in fundamental changes to all property types and how spaces are leased as well as accelerate obsolescence of many properties.

I expect there will be many seminars (I mean webinars) on this topic. Good of Abe to raise these issues.