Browse Tag: London Interbank Offered Rate

The Stalled Escalator: Rigged LIBOR And Rent Increases

Under Repair

Brokers and landlord reps use of the escalation clause in a commercial space lease is a common one. These clauses provide for increases in rent over a specified period of time. Often, these increases are determined not by actual increases in the landlord’s operating costs, but are instead keyed to an index, such as the consumer price index (CPI) or the London Interbank Offered Rate (LIBOR).

Longer-term office leases so often involve the landlord’s lender that negotiations over lease provisions can seem to be between a tenant and lender rather than tenant and landlord. When a lender is in a position of underwriting the cash flow of a building, it’s that lender’s job to scrutinize closely the creditworthiness of a prospective tenant.

And therein lies the rub these days. The capacity of lenders to scrutinize creditworthiness has been called into very stark question thanks to a continuing series of scandals and financial meltdowns, the latest of which probably directly affects the lease on your table today. The LIBOR number — an interest rate that drives the rent escalation clause math in untold numbers of commercial space leases — looks like it is, was, and continues to be, in a word, rigged by banks. Banks, under investigation for engaging in book-cooking to cover their derivatives traders and to pretend to the wider market that the cost of money is lower than they actually pay, have distorted the LIBOR number to the point that holders of financial transactions that are keyed to it are hurriedly reviewing their portfolios in a hunt for lost money. And there’s plenty to find — LIBOR lives in the beating hearts of $350 trillion worth of contracts according to the Financial Times.

Going Up? No, actually

One argument about LIBOR in commercial space leases is that the bank scandals benefited tenants at the direct expense of landlords using escalation clauses tied to LIBOR. If, as allegations claim, starting in 2007, large banks began underreporting their costs of borrowing in order to stave off a rising sense of panic in the credit markets, that means that during those quarters, commercial landlords using LIBOR indexing in their escalation clauses were left holding the bag on rent — charging tenants less than they would have been due under the lease terms had LIBOR not been corrupted for the purposes of the banks’ charade.

One of the truisms in this business for both prospective tenants and landlords is to protect yourself — to secure your own representation at the deal table or otherwise run the risk of having your interests overlooked. But when our pinstriped friends the bankers are at the same table, offering both sides index numbers that amount to broken instruments designed to cover some derivative trader’s rear end instead of either the tenant or the landlord’s — how do you protect from that?

(Photo credit: Jeremy Brooks)

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US, EU Sue Over Bank Corruption, LIBOR Interest Rate Fixing

Interest Rates
Interest Rates (Photo credit:

When financing commercial real estate deals, interest rates are key points of negotiation.   Veteran brokers know that few basis points in one direction or the other on a sale negotiation over an office building or shopping center can make the difference between iced champagne buckets and cold feet.

Where do these rates come from?  Interest rates are the price of money.  So who determines how much money costs?  To some degree, the holder of that money does.  But in a wider sense, the job falls to a global market set up by the planet’s top exchangers of money. Of course, these entities are called banks.

Determining the price of money in a free market for money is the least banks can do for our commercial real estate industry.  It’s literally the least they can do, because the historic purpose of banks — providing financing for our CRE deals  — should be, by most research, much easier than it has been lately.

But are we getting even that much from our pinstriped friends?  Unfortunately, like so many “free markets” we hear about but never quite get to participate in, the market for interest rates is effectively a private, nontransparent arrangement between banks.  As such, sometimes even the small favor of honest price determination proves too much for the largest banks to grant our industry.

This is the core of a criminal case filed three days ago by US and EU governments against the giant Deutsche Bank.  The claim is that Deutsche Bank violated commodities trading and SEC laws to fix a very widely-used interest rate named LIBOR – short for London Interbank Offered Rate.

(Reuters) – Deutsche Bank (DBKGn.DE) said it received subpoenas and requests for information from U.S. and European Union agencies as part of a global probe into interbank offered rates and that it was also being sued over alleged dollar interbank rate manipulation.

The requests came from entities including the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and the European Commission, Deutsche Bank said on Tuesday.

The inquiries relate to periods between 2005 and 2011, the bank said, adding it was cooperating with the investigations.

What could this mean for you as a broker, an investor, a manager?  If this probe, (as well as similar probes against Citi, HSBC, UBS and others) find that banks have been colluding to fix the LIBOR rate, it means, in short, that they have been ripping you off.  How much of the $360 Trillion worth of financial contracts tied to LIBOR contain your deals?  Your REIT plays?  Your lease calculations?

More than that, what deals might you have ultimately lost because of a fixed LIBOR?

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