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How the Capital Markets and Current Drop in Property Values Can Work to a Tenant's Advantage

By John Kevill and Elizabeth Cooper

It is definitely a tenant's market, but the tenant needs to be aware of the “point of no return” for the landlord.

It is well documented that the current economic malaise has its roots in real estate. The residential real estate crash gets a tremendous amount of airtime from the mainstream media, but the commercial sector has been decimated as well. Because of the fact that in many cases office properties are under lease to viable tenants that are paying higher “old economy” rents and owners have capital structures in place that reflect the heady times as well, in most cases the decrease in values has done nothing more than affect the book value of properties. Absent a major capital event at the asset level in the form of a new lease being signed at today's rents, required major capital improvement, or a loan maturity, the decrease in value only shows up on paper. That will change with time, however, and tenants need to be acutely aware of how their tenancy will affect the value of a property and how to properly leverage their existing or contemplated occupancy.

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