- Accessibility – Doctors are looking for greater access to major road arteries and highways so that their patients can locate them easily. If a doctor’s office is off the beaten path, the patient may become lost and have to cut through side streets or worse, make unnecessary phone calls to your office. From a patient’s perspective, after exiting the highway, a physician’s practice should be no greater than two turns. As a patient, they may not be in the best physical or mental health whereby adding additional stress may complicate the already difficult situation. While most doctors that we speak with have a strong regard for their patient population, more and more are heeding this wisdom.
- Mixed-Use Development/Modern Architecture – More often, physicians are looking for mixed-use developments featuring more modern architecture. They are attracted to buildings that are appealing and inviting. Unless you are a small practice with a doctor or two, the old one story stucco flat roof office building is quickly becoming history. A few recent medical office building projects in the Woodlands, Sugar Land and Cinco Ranch are examples of prime upscale designs with the more modern office park environments to which many physicians gravitate.
- Parking Ratio and Parking – Most professional office buildings have a parking ratio of three to four parking spaces per thousand square feet. With patients coming and going throughout the day, doctors need to have at least five to six parking spaces per thousand square feet to avoid overcrowding. Since parking can be tight in areas such as Downtown, Midtown and the Inner West Loop, doctors often shy away from the area for medical. Driving the suburban markets you will notice medical in every direction, but driving Travis Street, Main Street, or Westheimer the medical is very sparse, if not nil in some stretches. Physicians are requesting reserved parking, which is also a nice bonus for key employees and staff as well. Also, covered handicapped pick-up and drop-off areas are a real asset, especially if there are associated outpatient treatment facilities.
- Shell Space vs. Used Space – Although shell space, not built-out, may cost more in the initial term, it will end up saving the practice or organization a tremendous amount of money in the long run. With new shell office space the practice can implement space planning/design to fit their needs as well as increasing patient flow. Used office space with existing layouts, but such space often cannot be adapted without expensive demolitions and remodeling. While this can be accomplished, there still remains the potential for poorly laid out space that doesn’t fit the requirement.
- Proximity to Other Physicians – In a medical office building, doctors are often looking for proximity to other physicians who may refer business to one other. For example, a family medicine physician will frequently refer patients to other medical specialties such as cardiology or orthopedics. With the right synergy, all of the doctors are inter-referring and enhancing their practices.
- Ancillary Services – Working with the physician community is no different than working for a Fortune 500 in that, especially in this environment, people are trying to maximize profits to stay ahead of the curve. The buzz word within the physician community over the past five year is “Ancillary Services.” Traditionally, hospitals were the main benefactor of such services. Ancillary services include MRI’s, sleep labs, physical therapists, outpatient surgery centers, and imaging centers. Doctors are more recently looking for extra medical office space where they can install ancillary services and other diagnostic treatment areas.
- Geographic Location – Until the last decade, doctors needed to be close to the hospital to round on large numbers of inpatients and perform mostly inpatient surgeries. Now procedures have been more frequently performed on an outpatient basis, and physicians can relocate their offices farther away from the hospital at usually lower lease rates. Many practices now have incorporated outpatient surgery facilities located at or nearby their office location.
- Exclusivity – Willingness of the landlord to restrict leasing to other physicians of similar specialty in the same building is common. While many physicians view this as an important concession, it probably is not that important in the long run. After all, there is really nothing a physician group can do if a competitor wants to relocate across the street. This idea is typically of greater importance in rural or less populated areas where a new hospital is being established.
- Signage - Building monument or signage to distinguish a medical organization or practice is an important feature. Local restrictions often restrict the size and location of business signage in a given area, but often the developer can offer “top of building” signs for major anchor tenants.
- Price – Everyone is looking for price in today’s market, especially physician groups that are in their office more than in the hospital. For a doctor to move off-campus, the offer must be aggressive. For an example, Memorial Hermann is offering a few of our clients below market rental rates with above market build-out allowances. In other locations, they are offering full-service gross rental rates, which is coming back into vogue as hospitals rely heavily on cost control their costs to improve their bottom-line.
The most streamlined and effective approach is summarized here:
- Establish a relocation team to coordinate the move. This may also include an advisory team consisting of real estate and relocation professionals and real estate attorney.
- Determine your needs. How much space do you require? What type of building fits your business? What is your preferred geographic location? Do you need to be located near restaurants, hotels and/or public transportation? Lastly, you’ll need to prepare a budget.
- Identify potential properties. Obtain a list of available properties from your tenant representation broker. Narrow the list by excluding properties that are unsuitable. Schedule a tour of the remaining facilities. Determine which locations could be appropriate for your business.
- Prepare a preliminary space plan. With the help of a space planner or architect, determine the most efficient use of space at your two or three top building choices. For construction cost estimates, establish a general type and amount of changes required.
- Develop a Request for Proposal (RFP). Your tenant broker will prepare and distribute an RFP to the landlords of your top building choices. Based upon response, determine which space would be the best alternative for your business. Once determined, your tenant broker will submit a letter of intent to the landlord outlining the terms you intend the lease to be based upon.
- Finalize space plan. Get input from departmental representatives and have a formal blueprint created to represent your new space should remodeling/construction be necessary.
- Negotiate the terms of your lease. Once a lease is obtained and reviewed by decision-maker(s) from your company, get input from your tenant representative and attorney. Renegotiate and/or accept lease terms.
Now, having conceptualized the process, you’ll need to dive a bit deeper into the details required for planning your move.
- Identify dedicated resources. This should include a relocation coordinator and departmental representation. Each participant should understand occasional evening and weekend work may be necessary. The team should also plan to attend weekly progress meetings, once details begin to materialize.
- Develop an advisory team:
A Tenant Real Estate Representative:
Choose someone experienced in lease negotations and specialized in similar types of space (e.g. office, industrial, retail, etc.). Understand how he/she finds available space. Ask how this person will get paid for providing services. Also ask for 2 or 3 references of similar clients.
A Real Estate Attorney:
He/she should help in determining rights of both parties and understanding the significance of all lease terms. Should also recognize and leverage the goals of the business with those of the landlord.
An Architect/Space Planner:
Relocation is an excellent opportunity to design a more efficient working environment. This person can help in determining the correct amount of space required, taking into consideration current/future employees and growth expectations.
A Furniture Consultant:
If buying new furniture, bring a furniture vendor into the process to help with the type of configuration of workstations and individual office furniture. Design services are typically offered at no charge to you, depending on the type of and quantity of furniture ordered.
An IT Consultant:
This is crucial in helping to design and setup telephone/data services, esp. if you are planning to move significant existing equipment. Key considerations include building ample capacity for phone/data networks with appropriate access points throughout the new office. This resource may also be helpful in coordinating external vendors, such as utility providers, ISPs, phone companies, etc. and renegotiate contracts.
- Determine the budget. Consider the costs of professional advisory fees, hiring a moving company, relocating your equipment and computer network, replacing office furniture and printing costs for new business cards, stationary and other printed material, including relocation announcements for customers.
- Establish a Time Line. A typical move can take anywhere from 6 to 12 months of planning. In general, your facility selection and lease review process will take the longest amount of time. It’s important to continue working through other facets of the move, choosing a moving company, researching furniture options and office equipment during the facility selection process.
Evaluate the feasibility of renewing your current lease before making decisions to relocate. If you choose to move, interview tenant representation brokers. Be sure to check references as well as companies/properties they represent. Establish a moving date well in advance, ideally in less busy period of the business to ensure ample time for the relocation process.
Depending on size of the organization, anywhere from 6-12 months prior to the move you should: Appoint a relocation coordinator, interview and select a tenant representative, engage services of a real estate attorney, select the rest of your advisory team including an architect or space planner as well as furniture and IT consultants. Next develop your relocation budget, including estimates for professional services, moving expenses and the cost of new furnishings and equipment. Lastly, schedule the prospective moving day, knowing that this may be a moving target until the office space selection and other factors are determined.
Contact us today to assist in the implementation of a relocation plan.
- Tenant Performs Build-out – It may be better to have the Landlord perform actual build-out work, so that unexpected problems or delays will be the Landlord’s cost. When it is appropriate for the Tenant to perform the build-out, have the lease provide for an extension if delays are encountered which are not the fault of the Tenant, and extra Landlord monetary contribution if unexpected repairs are required (termites, code violations, etc.).
- No Limit on the Personal Guaranty – Many times it is possible for the Personal Guaranty to expire “x” months after lease commencement, or provide a specific dollar amount of guaranty. Sometimes it is possible to have the guaranty amount diminish in equal annual installments over the lease term or a portion of the lease term.
- Limit on Company Flexibility – How fast is the company going to grow? Will it be necessary to downsize or expand? How likely is a new partner or merger? These situations, and more, indicate the Tenant’s need for as much flexibility as possible. Tenants should work with experienced professionals to insert language into the lease which will allow a cancellation or modification of the lease under certain circumstances.
- Limit on Product Flexibility – Will the company want to carry a new product line or install a new technology? Will a neighboring Tenant vacate (or move-in) which impacts the business? Tenants should be cautious with their “Use Clause” since these clauses can be very specific as to what goods and services the Tenant will provide, and may prevent a Tenant from offering a very lucrative product or service in the future which has not yet been invented!
- Declining Market Area – Tenants who do not know the local market may locate into a declining area, making it impossible to hire and retain the highest quality employees.
- Choosing a Building because of Low Rental Rates – Retail Tenants who choose the wrong location to obtain lower rental rates. Traffic and subsequent sales volumes are terrible, and tenants fight a losing battle.
- Hamstrung by Outdated Technology Systems – The office building is not set up with the newest in telecommunications and data cabling, such that Tenant cannot benefit from today’s technology. Business is lost to competitors which can offer better service to clients.
- Taking Too Much Space – Tenant did not use their own space planner and leased offices which were too large or had an inefficient floor plan.
- Space was Measured Incorrectly – Tenant did not verify the Landlord’s dimensions and figures and paid rent on “phantom” space.
- Unnecessary Security Deposit - Landlord asks for Security Deposit as standard procedure, but should not require one depending upon Tenant creditworthiness and/or build-out requirements.
- Too Narrow of Search – Tenant limits its geographic area of interest too severely, and does not complete adequate market education resulting in lost opportunities.
- Holdover Penalty Too High – Standard hold-over penalties in first draft lease agreements are typically far higher than necessary.
- Not Reviewing the Lease Often Enough – Tenants miss notification dates, resulting in automatic renewals, loss of option period, or other penalties.
- Poor Design - Tenant made poor choices during interior design stage because of focus on “least initial cost” instead of “lifetime operating costs”. Many times upgraded lighting, windows, insulation, etc. can make very dramatic improvements in employee productivity, operating costs, and business security. Your professional should be able to discuss the latest in facility design, materials and technology.
- Poor Planning – Natural catastrophe occurs and electric power is lost for an extended period of time. Tenant is out of business, and loosing clients at a rapid rate. Proper planning and/or design can eliminate potential business disasters.
In general, in the commercial real estate environment, the majority of buyers are picking off distressed property at much lower purchase prices than in 2008, as others wait for these same deals to be delivered on and off-market. While some debate has occurred over whether a bottom if forming, we believe at any point in any real estate cycle, timing the market perfectly is almost impossible. The real opportunities lie in establishing and executing a plan to capture unrealized, additional value. One way, and perhaps the best way, to accomplish this goal is to initiate a strategy based on an investment plan that provides a working solution with your lender and the distressed real estate owner.
A lender’s fear is having to put up reserves to protect failed or under-performing loans. A commercial property owner’s fear is that upon refinancing they will be forced to foreclose in the face of capital injection requirements or other lender requirements that they cannot meet. At this intersection, is a set of requirements that offer considerable negotiation latitude to achieve superior investment upside upside for the new investor.
Those commercial real estate owners with loans in the last 5 years are doing whatever they can to protect their equity first. For lenders, the game plan is a bit more difficult to discern due to a wide range of issues including regulatory compliance, shareholder protection, cash flow needs, asset preservation, and reserve position.
With this in mind, the best opportunities to look at as an investor are:
- Properties that are in technical or actual default with the lender.
- Properties that are approaching their loan term and cannot appraise at or near the original purchase price.
- Properties that are lender owned.
- Properties that will be coming to term in the next 12 months.
As an investor targeting distressed, some ideas are:
- An offer of equity injection along with a loan workout proposition.
- Offering lenders workout solutions for projects that meet all the regulatory needs for a performing loan and require no cash outlay on the banks behalf.
- Negotiating with property owners of well priced and positioned property to protect some of their equity to prevent a future default event, while taking a stake in the property.
For investors with strong enough cash reserves and a broker that is willing to put forth the effort, these opportunities could offer discounts for equity of 30% to 50%, may minimize cash outlays, and in the long term could lock in tremendous equity gains for investors as the rental and commercial markets eventually stabilize.
What other major items should I be concerned?
A: Several. Most commercial leases are lengthy because they try to cover what each party’s rights and obligations are with respect to the property. In our experience, most commercial leases that we have witnessed will also include the following negotiable items:
- The amount of the security deposit that a tenant has to pay before moving in, as well how the deposit will be refunded and the circumstances in which the landlord can keep portions of it, such as damage to the property caused by the tenant.
- How the utilities will be apportioned among multiple tenants and whether the tenant has to pay them directly to the utility or service provider, or if they are included in rent
- Who’s responsible for designing, building and paying for any improvements the tenant wants or needs in order to conduct his or her business
- How much the tenant will have to pay for maintaining common areas, such as parking areas and elevators
- Who’s responsible for insuring the property against loss from theft, fire and natural disasters, like flooding or hurricanes
- The fact that the premises are “suitable” for the tenant, that is, the premises are structurally safe and sound and there are no defects that would prevent the tenant from using the premises for his or her business
- If, how and when either party can end the lease early, say, for example, if the tenant’s business out-grows the leased premises
- If the tenant can “sublet” the premises, that is, rent it to someone else
- When the landlord can enter the leased premises, either with or without the tenant’s permission
- If and where the tenant can erect a business sign
- Who’s responsible for paying property taxes
- If the lease automatically renews after the initial term expires
- The tenant’s duty to “restore” the premises to its original condition when the lease expires, by doing things like removing his or her personal property, furniture, equipment and trade fixtures, like signs, etc
- The requirement that the tenant can use the premises only for the commercial use specified in the lease, so if the tenant rents space to operate a delicatessen, the landlord could prevent him or her from later using the premises as a dry cleaners
Others? Please contact us for a review of your lease document.
Nothing contained herein is to be considered legal advice. Always seek legal advice when evaluating any legal document.
The biggest mistake many tenants make is not developing legitimate alternatives to their first choice, whether a new space or a lease renewal. If a landlord believes you’re not willing to relocate to a comparable property, you lose your negotiating leverage.
Begin the Process Early
Time should be your ally, not your enemy during negotiations. Landlords know that the managers of other buildings can take six to nine months to create a space plan, obtain construction pricing, agree on a rental rate, prepare a lease document and ready the space for occupancy. If you wait too long before asking for a renewal proposal, you’re telling the landlord that you’re not considering any other options.
Capture the Big Picture Before You Start Negotiating
Is the building being sold? Is the largest tenant moving out? How much free rent did the last tenant get? Does the building have HVAC or parking problems? What is the landlord’s financial situation? Candid, complete answers may not be forthcoming from the landlord or landlord’s broker. A large commercial brokerage that has access to such items is mandatory, as they will impact your lease decision and negotiation.
Make Sure Landlords Are Competing For Your Business
The key to a successful negotiation is creating competition between your current landlord and other landlords in the area. You should have an experienced adviser providing the comparable market research, lease comparables and the negotiating expertise to create a competitive advantage.
It’s In Your Best Interest To Have A Professional Negotiate On Your Behalf
Unless you’re a commercial real estate professional, it’s not a good idea to negotiate a lease deal directly with the landlord’s broker. An experienced tenant representative will help ensure that you receive the best possible rates, terms, incentives and lease clause protections. Remember, the landlord’s representative negotiates leases every day; you may do it once every 5-7 years!
Hire A Tenant Representative
Occasionally a landlord will “try to save you some money” by discouraging you from engaging a tenant representative. Don’t be fooled. He’s not doing this out of the goodness of his heart. He knows that without a tenant representative you’re more likely to be in the dark about market rates and complicated attorney drafted lease items. Also, you are far less likely to shop the market or consider other lease or purchase alternatives. This equates to more money in the landlords pocket.
Make Sure You Are Comparing Apples To Apples
Business owners who are not experienced with commercial real estate often find it difficult to perform a true “apples to apples” comparison of different facility choices. Lease terms such as full service gross, modified gross, triple net, tenant improvement allowances, rental abatement, escalations, base years, operating expense stops and loss and load factors can obscure the true amount you’re paying and make legitimate comparisons difficult. A good tenant representative will sort through all this for you.
Poorly designed office layouts are an unfriendly reminder of how tenants, as well as landlords, paid little attention to the detail when arranging space for their daily operations. Now, as our economy forces many of these organizations to downsize, landlords and tenants are liable for these past mistakes. The office configuration that suited the way business was conducted just ten ago is likely irrelevant today.
So what can tenants do now?
The best way for a tenant to find out if their office is dysfunctional is to conduct a study of the space. We advise firms to create a drawing of traffic patterns around the office, by shadowing employees for several days in a row. Whether conducting an in-house study or hiring a design consultant, the three key methods for gathering information is shadowing employees on their paths through the office; visiting conference rooms and desk areas every half hour to determine how they are being used; and asking employees to track their own movements and report back on how they spend their time.
Here’s what to look for:
Study whether the layout of the building is helping or hurting employees in their quest to get work done. Shadowing workers for a few days will reveal wasted motion and inefficient organization of space.
Problem Areas are:
Collaborative spaces that are bunched at the far end of the space
People whose jobs are highly collaborative not naturally coming into contact with colleagues during the workday
Employees spending a majority of their time in transit to meeting rooms, printers, copiers, and fax machines
Find out how often people are using existing spaces. Check in on what is occurring by stopping by the cubicles and conference rooms every half hour.
Problem Areas are:
An workspace that is always empty
An workspace that is always overcrowded
Workers competing for certain furnishings or equipment and not using others
Look closely at whether workers are using their space, furnishings, and equipment as intended. Does the environment support their process, or have they been forced to circumvent it?
Problem Areas are:
Employees meeting at a coffee shop because they can’t find common space
Workers use drop-in space on another location of the office, or different floor, because the area around their desks is too noisy
Remember: If your study reveals a number of these so-called problem areas, it’s time to hire an experienced broker, efficient space planner or architect to find out how a redesign can improve the efficiency of your space.
To view our complete list of “top ten” areas of concern regarding office space design, please contact Robert S. “Bob” Lowery at 832-275-6514.
During the commercial lease process, it is common to run across the word ‘amortization’. By general definition, amortization is the recovery of landlord incentive costs over the duration of the lease.
In this property market, landlords are anxiously attempting to attract tenants to the property, so as to encourage the decision of signing a lease within the building. In the case of new tenant occupancy, the landlord may choose to provide incentives – some by way of free rent, a fresh build-out or reduced rate. This is common when the market is in a downturn and an oversupply of vacant space exists.
But, landlords who choose to provide incentives upfront, provide such discounts with the understanding that these incentives will be returned in some form or fashion within the lease. And, the game of whack-a-mole begins.
Cost of Incentives
When incentives such as build-out and free rent are provided by the landlord, it is common practice to attempt to recover the costs of those incentives, plus interest on any funds provided, structured over the duration of the lease. Amortization is the process that achieves this.
This then suggests that incentives are not actually free. While most of the time, this is the case, it really depends on the property’s overall position in the marketplace (too many factors to list here-contact us). Most tenants and their representatives become disappointed when they find that their client’s lease is structured in such a way that the incentives turn to balloon payments towards the end of the commitment. Due to their lack of familiarity, they are unaware of how to structure leases to protect their themselves. In turn, the deal that the tenant strikes typically forfeits any leverage that they initially had as time becomes an enemy.
This is why experienced aid and client support are very important throughout the leasing process. It is wise to implement financial analysis spreadsheets (economics of the lease) to ensure that the funded incentives do not become bloated to overly favor the landlord 3-5 years from now.
Face and Effective Rent
The rent and incentive commerce typically is offered in two ways:
If the rent for the premises, without incentives, is $24 per square-foot (sf) and the incentive that is to be provided to attract the tenant to sign the lease is equivalent to an amount of 10% of the rent recovered from the tenant during the term of the lease, then the starting rent should be $26.40 p/sf. This is called a ‘face rent’. The rent without incentives paid in the lease ($24 per sf) is called an ‘effective rent’.
Whatever the beginning rent (face or effective), it will need to be compared to the overall marketplace by a rent review structure via your representation. Because most brokers do not have access to this information, it is mandatory to begin the lease process with a commercial tenant representation broker that not only deals in the market, but has adequate resources (Costar Tenant and Property Databases) supplied by their company. Also, absolute market knowledge is a tremendous advantage to a functioning lease rent assessment. The tenant and representation need to be aware of the most recent market information to uncover and negotiate the most attractive lease deal.