After the Hurricanes: What Can Owners and Tenants Expect?

by admin on September 18, 2017

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By Carrie Rossenfeld Published:

Wilson: “Make sure to the best of your ability you understand the terms of your lease and know what that means if your building is impacted.”

Lease preservation is the ideal situation for owners and tenants after a natural disaster, but understanding what your lease says and provides for is key, Douglas Wilson, CEO of Douglas Wilson Cos., tells Hurricanes Harvey and Irma have brought certain questions to the fore: When thingsreturn to some sense of “normal,” will residents of Texas and Florida have workplaces to which to return? What happens if their building is damaged and cannot be occupied?

Acting as a fiduciary, Wilson has expertise in remediating, fixing and repositioning damaged/broken assets. His company has handled $18 billion in distressed assets nationwide, including Florida. We spoke with him about the pressures on commercial property owners, landlords and lenders after a natural disaster, the legalities of lease preservation and the covenants in a loan, as well as what happens when property owners just “hand back the keys” on a damaged building to their lender? What can residents of Texas and Florida look forward to regarding their workplaces when things return to some sense of normal after the hurricanes?

Wilson: At this point, it’s still early—especially with Irma. We’ve been in business a long time—30 years. San Diego is our base, but we’re a national firm, and we’ve done a lot of development, mainly the Southwest. We also step into problem situations where the lender needs to put in a court-appointed receiver after a property has been damaged and is unoccupiable. The borrower/owner may not have the capital to fix the property, so the court appoints a receiver, an agent that will focus on preserving the value of the real estate. We’ll look at environmental and lease-preservation issues, among others.
What can these tenants expect? It depends on the nature of the damage. Often, these buildings are not occupiable because the systems have gone down. In those cases, it’s really a crisis-management situation. Our intent is to go in as quickly and efficiently as we can to identify the scope of the problem. We’ll then craft a business plan to fix the situation.

For example, after the earthquake in Northridge, CA, we were brought in in such a fashion to help with a single-net-tenant asset where Mass Mutual was the lender, and the tenant had 10 years remaining on the lease. The building was damaged to the extent that it was unoccupiable. There was a clause in the lease that if that happens, the tenant has to be notified within 30 days of the owner’s ability to fix building within 180 days—if not, the tenant can get out of the lease. The tenant had a lease that was worth millions of dollars, and they didn’t want to occupy the damaged space, but the owner wanted to preserve the lease. We brought in experts to evaluate the viability of fixing the building within 180 days, and we discovered that if we worked round the clock we could do so. In accordance with the terms of the lease we were able to bring in very sophisticated contractors and consultants, to remediate the building to the point of being occupiable again. The lease was preserved, which saved the owner and lender millions of dollars.

It’s a remarkable story, and we’re finding that there will be other examples of this in Houston and Florida. We have been a court-appointed receiver in 35 states, and we are well known in that space for stepping up quickly. As a receiver, we have the judicial authority to go in and solve these problems. What happens if you determine that a workspace cannot be occupied even if remediation were attempted?

Wilson: If there is extensive flood damage, regrettably the lease could be null and void. But each situation is different. The fact pattern is different for each. We talk to the special servicers and lenders directly, and over the last 10 days, we’ve already been in discussions with several of these parties over certain projects that are going to happen. The reality of it is you have to do something. It’s a big problem if property within a building is damaged and the tenants don’t have insurance. The collateral damage can be extensive to items like furniture and computers, so you have to make sure that you are adequately insured. What happens when owners hand back the keys on a damaged building to their lender?

Wilson: Let’s say you own a 150,000-square-foot office building in Houston, and it was seriously damaged from the storm. You may have some insurance, but not enough to fix the building. Often, owners don’t have that much equity in the building to begin with, especially in Houston, which has been a softer office market lately with the oil situation. So, you have no equity, and you don’t want to be involved in it anymore, so you will contact your lender and say, “You can take it—it’s yours.” At that point, the loan is in default, and the lender has the option under the loan documents to go to court and ask the judge to appoint a receiver to the property, which gives companies like ours the authority to be an asset and construction manager—to provide all of the real estate services we provide, only under a judicial context. What else should our readers know about this topic?

Wilson: The biggest message here is, wherever you are, make sure to the best of your ability you understand the terms of your lease and know what that means if your building is impacted. Protect yourself with insurance for the building and personal property.

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