Short-Term Loan Extensions Don't Equal Stability
We’ve often emphasized the importance of understanding the capital stack—equity and debt—when leasing office space. Today, one of the most critical considerations is: Who is really in control when the capital stack breaks down? The answer is often more complex than it appears.
Frequently, the party identified as the “landlord” or borrower continues to manage and lease the property, even after losing its equity stake. In these situations, true decision-making authority may rest with the lender. This makes it essential for tenants to understand who the lender is and what drives their decisions.
The Illusion of Stability
Short-term loan extensions can obscure the reality of a distressed capital stack. While these extensions may appear to signal stability, they often do not. In most cases, they represent a lender’s effort to buy time—not a reflection of financial health. Even if the borrower makes a payment as part of the extension, it doesn't necessarily mean the underlying issues have been resolved.
To understand why, it helps to consider how office loans are structured. Typically:
The loan is secured solely by the asset, with no recourse to the borrower beyond their equity.
Loans are often interest-only with a balloon payment at maturity.
Terms range from 5 to 10 years, with a 30-year amortization schedule.
Repayment strategies rely on either selling the asset or refinancing at the end of the term.
In today’s post-pandemic market, many office assets have lost value, wiping out borrower equity. If a property is underwater, refinancing requires fresh capital—something not easily secured for distressed assets. In many cases, the borrower’s only viable option is to return the property to the lender.
Why Tenants Should Be Wary
Tenants considering leases in buildings operating under short-term loan extensions should proceed with caution. These properties often remain burdened by unsustainable capital structures. Financial partners may look to cut costs wherever possible, potentially impacting building operations and tenant experience.
Moreover, any lease signed before a building is recapitalized at current market value is likely to come at a premium. In other words, tenants may end up paying materially more than market rates—only to see rents reset downward once a new owner acquires and recapitalizes the asset.
Bottom Line: Short-term loan extensions are not a sign of long-term stability. For tenants, understanding the full financial picture behind a property is essential to avoid risk and ensure long-term value.