Post-Recession Landscape of Small Business-Landlord Relations

Howard Ecker is a pioneer in the realm of representing small-business tenants in their negotiations with landlords.

As CEO of namesake firm Howard Ecker + Company, he pioneered the tenant representation market in 1975. The firm has offices in Chicago, Denver, New York, Charleston, Miami and Detroit, working solely on behalf of tenants to help them hedge their real-estate market risk.

He recently sized up current trends in small business-landlord relations for Here’s what he had to say:

Smaller tenants usually have a disadvantage compared to larger tenants when it comes to renegotiating their leases since they take up less space. But given the economic downfall, even small businesses have unprecedented leverage in negotiating lease terms as building owners and managers contend with high vacancy rates, the looming risk of insolvency among existing tenants and the slow thaw occurring in the credit markets making deals increasingly difficult to fund and close. This trend not only strongly favors tenants looking for new space, but also tenants who are close to renegotiations on current lease terms.

Small business tenants with strong credit are an increasingly rare but valuable commodity for building owners navigating current economic conditions. As a result, tenants with strong credit ratings are rewarded for their performance as building owners/managers obtain a tenant with a low likelihood of default, a pressing concern in today’s business environment.

While small businesses’ credit is important, small businesses are finding additional leverage due to the concerns over landlord’s credit. Credit has historically been thought of a tenant’s issue.  But what’s overlooked in the economic landscape is whether the landlords have good credit themselves. Tenants have another piece of leverage in asking landlords and owners if they will still be around when tenants seek office space.

Another interesting shift is occurring in security deposits within lease terms today. Landlords are no longer accepting cash deposits upfront. The reason being is that if a tenant declares bankruptcy, that cash is claimed by the bankruptcy courts and the building owner/management loses out. Increasingly, building owners/managers are demanding letters of credit as the preferred form of security deposit. They’re also demanding that those letters of credit come from Triple A-rated banks. This trend places an additional burden on tenants looking for space in today’s market and gives companies with good banking relationships a tremendous advantage.

Tenants must now concern themselves with bank ratings that they otherwise may have ignored. What’s more, they find themselves in the hard-to-fathom position of being denied cash on hand in favor of letters of credit.

While tenants have started to become watchful of their landlord’s credit, it was usually understood that even if the landlord defaults it wasn’t likely that they would be evicted from their building -- until now. A small tenant in Dallas looking to renegotiate a lease received a letter from their building manager that they were going to be evicted because the building owner's lender was not going to extend their loan. The building manager/landlord had to default on their loans and foreclose the building. This is a new trend that small tenants are starting to see when their lender decides to walk.