100% Leased - But At What Cost?

By Venture Mortgage Corporation

We all realize-  at least on a basic level- that a commercial building is only as good as the rents it can produce. One of the main components of obtaining financing for commercial space involves the analysis of the current rent roll (a rent roll is a list of tenants with the rent amounts and expiration date for each tenant).  Questions about the current vacancy, historic vacancy, current rent per square foot, average lease length, and lease rolling periods are a few of the basic concerns lenders have that will need to be addressed during the underwriting of a loan.

So, is it in your best interest to get open spaces leased, even if you have to discount the new tenant to fill it?

In many cases, probably not. Here's why: if a property currently has a vacancy of 20%, and the owner would like to get that rate down to 10%, it may seem prudent to lease at a discount to lower the vacancy rate. However, if you are currently leasing at $10/Square Foot, lowering your rate to, say, $6/SF in order to attract new tenants could cause your entire property to be viewed by lenders as having a market value of $6/SF, since many lenders will take the newest price per square foot as the "market" rent for the area and use that figure when underwriting the loan.

If you find yourself in a situation where you are considering lowering rents to fill space and are looking to refinance in the next 18 months or so, it is important to contact a seasoned mortgage banker as your partner to assist you with a personalized situation analysis. Venture Mortgage has over 25 years of experience in commercial real estate, and we are experts in helping you to leverage your property and increase wealth without causing harm to your property value. Additionally, we have close relationships with a wide network of lenders willing to lend in a variety of situations.
Here's the takeaway: make sure you keep in mind the overall impact of how you lease up that last bit of space, especially if you are looking to place financing in the near future.