Tag Archives: broker

Is It Time To Purchase Your Medical Office Space?

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We believe that the unique timing of this commercial real estate down market cycle coupled with historically low interest rates has created an investment opportunity for physicians. There are several advantages of investing in medical office space for your organization and only a few disadvantages.  And, considering inflation is upon us, rents appear to go in only one direction – up, up, up!

As for the negative factors of investing in medical or commercial real estate, as always it remains the large cash outlays and potential tenant vacancy. When you are purchasing for your organization, these disadvantages are essentially erased.

When purchasing a building for use, initial down payments begin as low as 10-15% of the purchase price. The most coveted loan made by commercial lenders is via medical and corporate users, purchasing space for their own use.  Similar to residential lenders, the most attractive interest rates and down payments are given to owner occupants for their primary residence, and similarly, commercial lenders favor user loans over non-user or investment loans.

When we are assisting physicians with the purchase of office space, one of the major advantages that sells the deal is that of principal reduction.  When you own space, each month a portion of your occupancy cost has reduced the principal balance of your mortgage. Often times, when our group is commissioned to dispose a property, the seller will admit to purchasing the building to control costs or to keep the organization in one place.  But, often times, the profit from a disposition turns into a windfall that was not expected.  Because physicians are paying their mortgage in as few as 5, 10 or 15 years, the building purchase has the potential of providing a supplemental retirement package upon resale.

Returning to the inflation topic: Historically, purchasing medical office space has increased rents over a period of time.  When purchasing space, you control the increases and not the other way around. This is a simple point, but one that needs to be made.

Another inflation benefit is the positive leverage of financing your space. For example, if you get a 7% return on $100,000 that is $7,000. If you choose to place $100,000 down to purchase a $1,000,000 medical office building, at only 2.5% inflation, that equates to $25,000 per year annually.

Keep in mind, it is the power of positive leverage and inflation that creates wealth. Contact Robert S. “Bob” Lowery for your commercial and medical real estate needs.

It is time.

Is Your Building a Class A, B or C?

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The most misunderstood description of commercial buildings also happens to also be the most overused description of commercial buildings, which is especially true for office and medical.  If you are not familiar with the building designations (Class A, B or C), than pay attention to the next time the owner, broker or developer speak about the property.  Most often you will hear the building oversold as a Class A, the highest classification of the grouping.  But, the truth is that the majority of the buildings built over the last 5-10 years could easily be classified as a B building and possibly a C.

There are no true definitive, distinctive ground rules set a regulatory commission regarding classifications, thus the oversell of the building and property’s amenities to the public.  But to make an simple correlation, think of a building like you would a car.

  • Is there enough demand to keep the price of the vehicle higher than the market average?
  • Is the vehicle engineering above par, on par, or below market?
  • Does the manufacturer have a good track record, or do they spit out product cheaper and cheaper each and every year?
  • What does the user say of the car?
  • If the car is under warranty, how is the customer service when brought to the shop?
  • Can anybody, everybody, use this type of car or do they establish a lengthy track record, celebrity or rapport in their respective business to obtain?
  • Is the interior built-out using the lastest and most recent technology, as well as design strategy?
  • Is the car using the most efficient and safety measures?
  • Are the majority of the amenities built-in or tacked on…

…and so on.

The Square Feet blog, to which I am a subscriber, posts…

  • Class A. These buildings represent the highest quality buildings in their market. They are generally the best looking buildings with the best construction, and possess high quality building infrastructure. Class A buildings also are well-located, have good access, and are professionally managed. As a result of this, they attract the highest quality tenants and also command the highest rents.
  • Class B. This is the next notch down. Class B buildings are generally a little older, but still have good quality management and tenants. Often times, value-added investors target these buildings as investments since well-located Class B buildings can be returned to their Class A glory through renovation such as facade and common area improvements. Class B buildings should generally not be functionally obsolete and should be well maintained.
  • Class C. The lowest classification of office building and space is Class C. These are older buildings (usually more than 20), and are located in less desirable areas and are in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is out-dated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities.

And additional consideration for…

  • HVAC Capacity
  • Elevator quantity and speed
  • Backup Power
  • Security and life safety infrastructure
  • Ceiling heights
  • Floor load capacity
  • Location
  • Access (freeway, public transportation)
  • Parking
  • Construction, Common Area Improvements
  • Nearby and/or on-site amenities (dry cleaning, restaurants, ATM, etc.)

…in which I could supplement with…

  • LEED designation
  • Insurance requirements
  • Interior build
  • Maintenance

So, next time you hear a real estate representative tell you that a building is Class A, you now have the armament to dispute or corroborate.

Lousy Leasing Advice from the Landlord’s Listing Broker

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Landlord brokers generally are great stewards of landlords.  This is what they’re paid to do, and it is not an easy task.  In my prior experience, working with landlords provided for annuitized income streams that were reliable during the up parts of the cycle, such as the current commercial real estate environment in 2011.  Also, the valuable transactional experience that any broker receives in managing the entire lease process is critical to the landlord and tenant, as well as associated parties to the lease transaction.  It prepares you for any challenge and most brokers (and their spouses) find comfort in the certainty of repetitive transactions, rather than representing the interests of buyers or tenants.  As the old saying goes, you list you last.

But working as a landlord rep, you shouldn’t be surprised to find that the advice landlord brokers are accustomed to offering doesn’t serve your interests.  Working on behalf of landlords on hundreds of transactions, we are privy to such broker persuasion.

So, below, Robert S. “Bob” Lowery and his representation group have outlined some typical commentary that we deem as poor advice from landlord representation.  We apologize to our broker brethren in advance for letting this cat out of the bag, but as the last decade came and went, so did poor business decision-making.

1.  “We can get you the best deal because we know the market.” Bad leases are signed NOT because a tenant somehow misses a great space, but because the leases are poorly negotiated.

All commercial real estate brokers have access to Class A and B space.  Landlords must pay their mortgage, and they never know which broker might provide a tenant for their building, so they let everybody know about availabilities directly, through frequent mailings, as well as through real estate databases, to which we subscribe to.

Leases go wrong because costs soar higher than bargained for, because the leases didn’t stipulate adequate performance standards for a landlord’s performance in such areas as heating, ventilating, air conditioning, electricity and other services, because leases restricted a company’s flexibility, imposed costs beyond those bargained for, and many other reasons – every one of which arise from the way the lease was negotiated.  A badly negotiated lease often turns a “great space” into a bad deal.

2.  “We can get you a great deal because we have a relationship with the landlord.” If your organization, business or practice have the creditworthiness, which suggests you can meet your lease obligations, then any landlord would love to have you as a tenant.  The suggestion that you need some kind of “in” to do a deal is ridiculous.  Landlords need the business of renting tenants.

What your organization really needs is a broker who will represent your interests – not the interests of some landlord with whom they have a relationship or hope to build one.  This is because many landlord draft leases offer blatantly anti-tenant terms, some buildings have a high level of tenant dissatisfaction, some landlords routinely violate lease terms, and there are landlords whose financial troubles could impair their ability to perform as provided in a lease.

When a broker entices you with claims of a special relationship with the landlord, you must ask whether such a relationship is consistent with an obligation to represent you.  Will such a broker be free to offer full disclosure of all costs in a proposed lease?  How about management practices that will affect you?  Will a landlord broker be able to negotiate forcefully on your behalf if this means opposing a landlord from whom they hope to gain lucrative agency business?  Of course, you want lease negotiations that are conducted amicably.  This means insisting upon a professional approach, not trying to buy goodwill.

3.  “We can provide great service because we have a lot of branch offices.” One doesn’t need branch offices to identify spaces in another city, because landlords list their availabilities through brokerage networks and databases.  Landlords want everybody know about what they have, so they can start getting revenue as quickly as possible.

If branch offices are serving landlords, then they face a serious conflict of interest in their ability to protect you.  After all, every landlord is a current client or a prospective client, and aggressively protecting tenants jeopardizes lucrative landlord business.

The key to signing a good lease is having good site analysis, good lease analysis and good lease negotiation and good follow-up.  These depend on the caliber of the tenant representative, not the location of their offices.

4.  “We don’t rock the boat and discourage the landlord.” Landlord brokers often advise tenants not to negotiate aggressively, not to demand that landlords comply with lease terms and, once a lease is signed, not to insist on the rights provided in the tenant’s lease.  In a recent situation, a tenant has been paying $4 million in annual escalations, and the landlord is preventing the tenant’s representative from auditing the billings as provided in the lease, yet the tenant’s current broker – a landlord broker – has repeatedly advised the tenant that continuing to demand a proper audit would alienate the landlord.  Tenants seem to be afraid a hostile landlord might become more difficult to deal with.

Yet in our experience, landlords respect tenants who know their rights, as well as pursue their interests in a profession manner.

While it’s true a tenant often needs a landlord’s cooperation, it’s also true a landlord needs a tenant to help pay the mortgage, and it’s generally cheaper to keep a current tenant satisfied than to incur the cost and possibly lost income resulting from a dissatisfied tenant moving out.

5.  “Hurry up to get the deal done.” More than anything else, landlord brokers push tenants to get a deal done.  These brokers will tell tenants that if they don’t quickly commit to a space, somebody else will take it. Such pressure is especially intense in a “hot” market favoring landlords.  One tenant, a major accounting firm, told us of being shown space by a nationally-known landlord broker.  At virtually every location shown, the broker was mum on details but advised, “you’d better hurry up and make a decision, this space is going to be gone soon.”  The tenant soon decided that the landlord broker was not providing the service they sought, despite its branch offices, large staff and national reputation.  The tenant moved on and selected a tenant representative to help them find a space that will serve their needs.

Hurrying into a deal risks neglecting comprehensive due diligence, overlooking costly drawbacks in a building, failing to properly analyze the risks and total costs of a landlord’s draft lease – and signing up for a transaction which can become a serious liability to your company.

6.  “Since you’re such a big tenant, you have very few alternatives.” Some of the worst leases have been signed by big companies probably because top executives felt they had to be in a particular building.

While it’s true the number of large spaces in a particular area are limited at any point in time, this definitely doesn’t mean big tenants must accept whatever terms landlords care to offer.

Getting a good deal, however, means big tenants must gain every possible bargaining advantage.  Tenants must have a representative serving tenants exclusively – and not the interests of landlords.

It’s critically important for a large space user to start the site search early.  A million square foot tenant should start at least five years before lease expiration.  Starting early means you’ll be able to see more spaces and include options that require building from scratch as well as different options for leasing vs. owning.  There are almost always more alternatives for large space users than you might imagine, including existing buildings in the same area that can be repositioned, buildings in a different area once considered off limits, and build-to-suits.

By developing viable alternatives, objectively analyzed in detail, you will understand your true costs and trade-offs.  Only with this background can you know if a premium is being demanded for the solution you prefer, and whether it is a premium you think is worth paying.

Equally important, this means you’ll be able to pursue preliminary negotiations, and if they don’t lead to satisfactory terms, you’ll have time to walk away and begin negotiations elsewhere.

7.  “The landlord’s draft lease is boilerplate, standard terms.” So-called “Standard terms” invariably mean pro-landlord terms because leases are drafted by landlords which are naturally protecting their interests.  You wouldn’t expect them to do otherwise.

“Standard terms” often includes tenant budget-busters like operating expense loopholes, mark-ups on mark-ups, vague landlord performance standards and no audit rights.

Don’t be pressured into accepting “standard terms.” A lease negotiation should be driven by your business objectives, not by a landlord’s desire to avoid risk (and pass it on to tenants like you).    Your business needs must be translated into lease terms to be secured during negotiations.

8.  “Just focus on rent and workletter – let lawyers take care of the fine print.” Many corporate executives imagine they’ve locked in their biggest costs by shaking hands on these two terms.

However, the rest of the lease is loaded with costs.  There easily are 25 significant non-rent costs in a typical lease, many hidden, and it’s contrary to the interests of landlord brokers to identify these costs – or do anything else that might jeopardize a deal.

Lawyers don’t provide complete protection for tenants because they aren’t trained to analyze, nor have hands-on experience with, business issues which are responsible for so many excessive lease costs.  Lawyers don’t claim to know how desirable or undesirable a landlord draft lease is from the standpoint of the current real estate market.  Lawyers aren’t experts on the economics of building operating systems.  Lawyers aren’t expected to know how various ways of charging for electricity will affect costs.  Lawyers don’t audit landlord billings, so they don’t see whether particular landlords honor or evade lease terms – and what must be done about it.  Lawyers typically review a lease without ever visiting the building, and many problems are missed because a lease didn’t address certain things which must be seen to be appreciated – or avoided, as the case may be.

Best advice

Overall, the most common reason tenants seem to take bad advice from landlord brokers is that they’re impressed by the big deals such brokers have done.  But as talking points, big deals are meaningless unless they’re good deals for tenants.  The fact is that a substantial number of leases over 100,000 square feet have serious problems, even though these leases were reviewed by competent lawyers.

It’s shocking to see how many large leases have inadequate operating expense controls, high-cost electricity formulas, mark-ups on mark-ups, vague landlord performance standards, weak sublease rights, limited audit rights and so on.  In some cases, lease problems became so serious that heads rolled.

Best advice: when you’re interviewing a broker, ask not about what deals a firm has done but about how a firm has protected tenants.  You’ll probably find out all you need to know about the deals while discussing how a broker analyzes sites, evaluates landlords, negotiates leases, negotiates other kinds of real estate transactions, monitors build-outs, audits billings and in other ways protects tenants.  How else can you be sure that a broker and the resulting lease will protect your vital interests?

Investing in Medical Real Estate

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Most serious commercial property investors are well aware that multifamily apartment buildings are leading the commercial sector recovery.

Right now, multifamily transactions are well on pace to eclipse the 2009 and 2010 by the first half of 2011.  Remember though, medical offices are the best commercial investment for the future.  Hedge funds, insurance companies, pension funds, and other highly capitalized investment groups have been moving into large medical centers for several years.  Smaller investors, have made similar moves into single office practices and small medical complexes.

There are several reasons that medical real estate is on the short list of commercial investments to be closely analyzed. It’s difficult to single out an individual reason, as there are many.  However, the fact that a growing number of baby boomers will be entering their 60′s cannot be denied.  The medical needs of baby boomers are about to explode.

On average, 7,000 new beneficiaries will be added to Medicare every day during 2011. That adds up to 2.5 million in a single year.  Over the next 20 years, the Medicare program will expand to cover approximately 70 million people, compared to 42.5 million in 2008 (source: AARP).  As baby boomers continue to age, the senior care market will also expand into assisted living and nursing home care until 2030 and beyond.

Another reason that medical facilities would make a solid addition to your commercial property portfolio is the Obama administration’s Health Care Reform package.  Whether you agree with it or not, when fully implemented, the program is expected to provide medical coverage to an additional 32 million people as well as improve coverage for those with limited coverage or those that have reached their life term limit, which has been abolished.  The 32 million becoming eligible for health insurance will no longer have to be treated at hospital emergency rooms for non-emergency conditions.  They will receive preventive medical services and other treatments from private practitioners operating out of private medical offices.

Finally, I would like to the caliber of tenants that lease medical facilities.  These are not a couple of high school hot rod enthusiasts partnering up to start an automotive performance parts store without any business background. The kind of tenants that go out of business as soon as their SBA loans run dry.  Instead, doctors are highly trained and educated individuals.  These motivated tenants attend university and intern programs for between 11 and 16 years before beginning their medical practice.  That shows serious tenacity and dedication towards their profession.  Once they start their medical practice, they lease or buy hundreds of thousands of dollars of expensive and specialized equipment.  These are not people that are going to give up their practice on a whim and leave you with a difficult to fill vacancy.

The bottom line is that if you don’t want to be a landlord of a multifamily apartment building and you don’t want to deal with overflowing toilets or a noisy neighbors in the middle of the night, there are quite attractive investment opportunities in medical real estate.  I would encourage you to understand how health care functions and make medical facilities part of your ongoing investment interest.

The Necessary Components To An Investment Property Purchase

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As our group continues to provide ongoing data to our clients, we are noticing a greater number of decision-makers seeking information for a  purchase of a building to consolidate their operations, absorb vacant space in financially distressed buildings, and lease the remaining space to like-minded businesses.

So as to prepare those with an eye on the commercial real estate market for user/investment purposes, we have provided some helpful insight into the necessary components of a commercial property purchase.

We have detailed 10 (of 20) of the needs analysis for a commercial property purchase or sale scenario. While these are not the only items that should be scrutinized, they are the most important in the majority of circumstances. We will update the second half via your inquiry (email or call).

If you are not utilizing our service, we recommend that you create a checklist using these items for your next property review.

The Asset Schedules: The property will contain many fixed, as well as movable assets. These will normally be detailed on the asset register. A well maintained commercial property will have an up-to-date asset register for your review. Obtaining the asset register as early as possible is very productive as it will tell you, in detail, what you are being sold. 

Bank and Personal Guarantees: An investment property comprises of leases and other documents which support tenant occupancy. A normal leasing process would involve and create some form of guarantee to be provided by the tenant to the landlord for the duration of the lease. It is important that this guarantee has both strength and substance to reimburse the landlord in situations where the tenant defaults under the terms of the lease. At the time of property sale, these guarantee documents should have the ability to be transferred or re-issued to the incoming purchaser. This process is called an assignment of the guarantees. You should consult with the landlord’s management to identify the types of guarantees involved, as well as the ease to which it is provided.

Capital Expenditures: Major items, such as the building’s air conditioning system, which are replaced in a commercial property are usually regarded as capital expenditures and are separately itemized for the purposes of taxation and depreciation over a period of time. Taxation laws will stipulate the depreciation terms as they apply to different types of capital expenditure. For example, a computer that is purchased for the building control system will depreciate far quicker than the air handling unit which was purchased for the air conditioning system. Well maintained property records will include a detailed capital expenditure register and the date at which the capital item was purchased. Purchasers to the property will be interested in the depreciation that this register provides against the cash flow in coming years.

Taxation: Every property has its own unique tax issues relating to property, particularly in an investment property. In the purchase process, it is important that these matters have been handled property and are up-to-date. Sometimes, it is necessary to view the returns for the property over the last few years.  You can also seek written confirmation from the owner of the property that all taxation matters are current.

Income and Rent Analysis: The income for the property is a reflection of the leases and occupancy within. It is essential to understand that the rent has been collected in accordance with the leases and that all rental matters are up to date. Part of this process will also involve checking the rent review profile and the expirations of all leases. A property with weak leases that are soon set to expire will impact the price or purchaser’s interest. When reviewing tenant occupancy, you should review the original documents and cross reference this to the tenancy schedule as well as information provided by the landlord.

Independent Valuation: Many property owners will obtain a valuation regularly in support of their property financing package. It is not unusual for such valuations to occur annually. It is important they are done by a qualified and registered commercial appraiser. If you utilize an appraiser during the pricing process for the property, the landlord should consider the true independence of the valuation, when it was performed and its relevance to the current market. Some valuations for financing purposes may not be in line with the existing market conditions. It pays to sometimes seek a true independent valuation at the time of sale or in preparation for sale.

Lease disputes: Rarely is there a property that does not have an existing lease dispute or has been impacted by a previous lease dispute. For this reason it pays to question the matters of lease dispute and resolution. If in doubt, seek a copy of correspondence and any subsequent agreement between the appropriate parties. Unresolved lease disputes can jeopardize, or at the very least, slow the process of property sale.

Mortgaged interests: Most commercial real estate properties will have a mortgage with a lender. When a mortgage exists, it is necessary to understand how it will be handled or removed in the process of sale. The broker should consult with the mortgagee to clarify these matters for you. In a situation of distressed properties, the sale of the property may need to realize a particular price before clear title can be achieved.

Operational expenditures: The management of a commercial property will involve the operational expenditures attributed to its working costs. Most of properties of particular types in the same location will have similar operational expenditures.  If a property has excessive operational expenditures, above average for the area, then the property will likely to be difficult to sell due to its high maintenance. Most brokers understand the averages of property expenditures realistic for each property type and location.

Rent reviews: A significant concern in the sale of a property is the size and stability of future rent reviews. It is the rent reviews which examine the cash flow and attractiveness of the property to purchasers. It is essential that the landlord’s real estate broker read all of the leases, before any assessment of price or method of sale is given. It is quite possible that the rent reviews projected for leases will either negate or attract interest in the property.

Contact us for the second half!

Costly Mistakes When Leasing Space

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1. Starting the Process Too Late

Most organizations fail to realize how long it takes to perform a well-executed commercial real estate transaction. The search for a typical commercial or medical lease space cannot be compared to a search for an apartment. By starting the process early, tenants gain control of the process, increase their number of options, and enhance their leverage. Identifying a firm’s real estate needs, looking at properties, and conducting a comparison analysis can take as little as a week for motivated companies already familiar with the local market. Unfortunately, this is just the beginning of a process that can take several months. Negotiations with several landlords to obtain the best transaction can take weeks, even months. Once the parties have agreed to lease terms, lease preparation, negotiations, and execution can easily take weeks or months. Once the lease is signed, some degree of tenant finish work is usually required. Unless it just cosmetic changes (carpet, paint, etc.), expect several weeks to prepare construction documents, a week or so to competitively bid the work, a few weeks or a few months to obtain permitting, and one to two months for actual construction. Therefore, savvy tenants generally start their search for space at least six months prior to the time they expect to move and more if a large/complex transaction or build-to-suit is a possibility.

2. Not Using a Qualified Real Estate Broker

The vast majority of companies and doctor practices choose commercial real estate brokers to assist them in developing of their real estate needs, finding the best properties that fit those needs, and negotiating the transaction. Those organizations that attempt to solve their real estate problems by controlling their interests are committing a costly mistake. Driving around looking for signs on buildings to call is a significant waste of your time primarily because you do not know what to expect.  Quality real estate brokers complete dozens of transactions every year. To illustrate, ask yourself this question: would you try to take out your own appendix or represent yourself in a court of law for a crime? Probably not.  This is why it pays to have experience on your side.

3. Selecting a Tenant Representative Broker Based on the Reputation of the Firm

The firm may be a national entity that collectively has an impressive resume. But, beware, not all brokers in that firm may be the best broker for your needs. The broker could be too new to the business, might not understand the market you want to be in, might not be a specialist in the type of real estate your firm needs (office, medical, retail, etc.), or might take the approach that a broker’s job is limited to helping his clients find suitable space. The right broker knows that finding the space is only the beginning and is the easiest and least time consuming part of the process. The right broker has the qualifications and the drive to do so much more. Hire the broker, not the firm.

4. Inadequately Forecasting Future Needs

Companies that focus solely on their immediate real estate needs may be faced with the costly and time consuming act of re-addressing their real estate needs sooner than anticipated. In addition to defining current needs relative to square footage requirements (number and size of rooms), type of floor plan (open, hard walled offices, or a mixture), parking needs, communications needs, access, etc., tenants should also consider their long-term needs. By obtaining facilities and lease terms that allow a company to expand, downsize, or relocate as circumstances dictate, companies can avoid the brain damage, expense, and loss of productivity associated with relocating too soon after their lease has commenced.

5. Misunderstanding the True Cost of Space

Most business and medical users, who are inexperienced in commercial real estate, are often unable to adequately perform an “apples to apples” comparison of several real estate choices. This can be a complex drill even for a real estate professional. Leases and the underlying economics can come in many varieties such as: full service gross, expense stop versus base year, modified gross, triple net, etc. Additionally, each landlord’s existing interior finish levels, tenant finish contributions, lease incentives (free rent, moving costs, etc.) must be factored in to determine the optimum financial package.

6. Not Leveraging Properties Against Each Other

Often times tenants zero in on their favorite building and attempt to negotiate a suitable transaction with just that building. By becoming privy to all buildings that fit their needs and negotiating simultaneously with the top choices, tenants achieve more leverage and force building owners to compete for their business. The result is a more favorable transaction for the tenant, even if it is still their “favorite building.”

7. Over-Estimating the Condition of the Premises

Tenants that take a property on an “as-is” basis are taking a great risk. Even if the space looks good, building codes may have changed or the property’s infrastructure may be inadequate. It is best to have the landlord warrant that the property meets current building, zoning, fire, life safety and ADA codes. It also makes sense for the landlord to warranty that all electrical, plumbing, and HVAC are in good working order and anything that malfunctions during the first three to six months shall be repaired/replaced by the landlord at landlord’s cost.

8. Tying Completion of Construction to Lease Commencement

This has been a disaster for tenants who did not properly estimate the time needed to complete construction documents, competitively bid work, pull the necessary permits, and complete construction. This can eat up any free rent periods tenants have and cause budgetary nightmares. When possible tenants should allow the landlord and their experts to complete the tenant finish work as that is their core business. Further, the lease commencement must be tied to completion of tenant finish work unless the delay was the direct result of the actions of the tenant.

9. Providing Too Much Security

Your organization does not have a strong balance sheet so the landlord wants a personal guaranty and a bigger security deposit. You hear that all the time, right? There are many alternatives to solve this problem that an experienced real estate broker can lead you through. For example, why not negotiate that the guaranty be limited in some fashion and that a portion of the security deposit be refunded over time if your firm lives up to its leasehold obligations?

10. Not Reviewing the Lease

Tenants often miss opportunities by not being familiar enough with their lease and the rights and obligations it provides. These rights and obligations could include the right to expand, contract, terminate, renew, obtain a refund on a portion of the security deposit, etc. Therefore, your real estate broker should provide you a concise but detailed lease summary that outlines these issues and he should periodically provide reminders of these critical dates/events.

Republished from Robert S. “Bob” Lowery’s original article, “10 Massive Leasing Mistakes”.

Seeking the Lowest Rental Rate

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Tenants often determine the success of a lease transaction by the price difference between the initial landlord’s advertised rental rate and the executed, contractually negotiated, rental rate. However, by focusing exclusively on the rental rate, a tenant actually stands to lose much more than this negotiated difference.

Among the 40-50 pages that make up a typical lease document, there are at least 100 negotiable items that can lead to significant monies for, or extracted from, a leasing tenant. These range from modest ones such as monthly parking fees and rooftop-access rights to more material matters such as sublease rights and termination options. To maximize savings, tenants must negotiate all facets related to their specific circumstances. Below we have provided just a few items, other than rent, that will affect your bottom line:

  1. Accuracy of space needs assessment. Is the assessment of your space needs accurate? For instance, are you sure that you need 5,000 square feet over the five-year term, or could your space be restacked more efficiently to utilize only 4,500 or even 4,000 feet? What about the potential for expansion or contraction over the lease term?
  2. Base-building conditions. Have you identified the deficiencies of base-building conditions when comparing alternatives? If the owner is not held responsible, what is the tenant’s cost to upgrade mechanical, electrical, or fire/life safety systems? A seemingly fair comparison of two buildings with the same quoted rent is not truly comparable if one requires additional expense for base-building upgrades.
  3. Tenant improvements. How much of a tenant improvement allowance will you need to build out the space to fit your needs, accounting for all non-construction related costs? Knowing this is essential to accurately negotiating tenant improvement dollars. Is the tenant improvement allowance offered on usable or rentable square feet? If based on rentable square feet, you will have approximately 12-18% more funds at your disposal. If you are using project management services, you can also negotiate the building owner’s project administration fees.
  4. Realistic occupancy date. When can you take occupancy? This estimate must account for all factors, including scheduling of design, permitting, construction, furniture delivery, technology installation and all other relevant vendors’ work.

Time Is Money When Leasing Commercial Real Estate

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In my twelve years in commercial real estate, I have never seen a better opportunity for tenants to reduce costs and secure better space – at the same time!  With a few exceptions in and around the Houston area, today’s commercial leasing market is a tenant’s market.  Tenants should not shy away from renegotiating their leases early to take advantage of the favorable market conditions.

It’s All About Leverage

I have been saying the same thing to my clients for many years; lease negotiations are largely about leverage.  In a landlord’s market, the only leverage a tenant has is to begin negotiations early and keep all options open, including moving to new space.  For example, if a tenant has been leasing 20,000 square feet of office space for the past fifteen years it is unlikely that the tenant wants to move.  Landlords know this.  Therefore, the landlord will wait until as late as possible to approach the tenant about renewing its lease.  Waiting serves the landlord’s interests, because at some point there is not enough time for a tenant to find new space, negotiate business terms, engage legal counsel to document the deal, complete improvements to the new space, pack up their existing space, retain a moving company, and move into the new space.  Depending upon the size, type, and complexity of the space, negotiations should begin anywhere from two years to a few months in advance of commencement.  Many small commercial tenants believe that they can pack and move into a new space that does not require improvements quite quickly, however, they frequently forget that at least a few months must be allotted to finding the new space, negotiating the business terms, completing legal documentation, and moving.

Leverage shifts to the landlord in negotiations when the landlord knows the tenant does not have sufficient time to move before the expiration date of the tenant’s current lease.  Unless there is a provision in the tenant’s current lease to the contrary, the tenant will likely become a holdover tenant on the first day after the expiration of the term.  In the best case scenario, the landlord will have to provide a thirty day notice to quit which would not be effective until the last day of the calendar month following the thirty day notice.  Accordingly, in the best case scenario, a tenant would have sixty days to vacate if landlord delivered such a notice on the first day after the expiration of the term.

Early planning and action shift negotiating leverage to the tenant and save tenant money in the long run.  For example, if tenant’s lease is set to expire on December 31, 2010 then the tenant should begin (or already be in) the process of renewal or new lease negotiation now.  The tenant or representation should begin by sending out a request for proposal to its current landlord and to at least three other landlord’s with suitable space available.  The proposals received will form the basis of tenant’s decision to move or stay and will help shift leverage to tenant in its negotiations.  Making it known to the current landlord and others receiving the request for proposal that all options are being considered.  To keep confidential the fact that tenant is exploring all options is to negate the leverage obtained by starting early and exploring options.

How to examine a proposal and what information to request be included in a proposal is the topic of another article, but suffice it to say for purposes of this article that the tenant should negotiate each possibility seriously to obtain the best possible business terms.  Such terms are not simply about rent, although that is the single largest business term, but also about obtaining other tenant friendly provisions or rights.  A tenant’s current lease may not permit assignment or subletting without landlord’s consent, which consent may be withheld by landlord for any reason or no reason at all.  Such a provision is not tenant friendly or reasonable, in my opinion.  The tenant should state in its request for proposal that the right to assign and sublease with landlord’s consent, which shall not be unreasonably withheld, delayed, or conditioned, is an important business term to tenant (there are many variations of this provision that may be important for one reason or another to the tenant, but for example purposes, I have kept this simple).  Any proposals received that include this provision can then be used to negotiate such a change in the tenant’s current lease if the current landlord submits a competitive proposal.

Multi-Track

In my experience, the average new lease acquisition unfolds something like this:  A prospective commercial tenant will look at various spaces and make a decision about which space best suits their needs and desires.  Based upon that determination, the tenant makes the decision to lease that space and requests landlord’s form lease.   The tenant then goes back to the office and waits for the landlord’s draft lease.  Several weeks may go by before the initial draft is received.  During the wait period, the tenant is comfortable that she has found the space she wants and all other leasing activities have ceased.  Either through communications between tenant and prospective landlord directly or through brokers, the message is communicated that the tenant is excited about the new space and ready to move.

The landlord’s draft lease arrives and it is a typical landlord oriented lease.  During legal review, many issues arise that tenant’s counsel advises against, but tenant reminds its counsel that this is the space tenant wants and there are no other options being considered.  In addition, it is most likely too late to consider other space because now there are only two or four months left until expiration of the current lease as opposed to the six, nine, or twelve months that were left when tenant first began to search for new space.  Tenant’s counsel negotiates the best deal possible considering that landlord is not willing to negotiate too much because landlord knows the tenant really loves the space and does not have time to find and negotiate new space before its current lease expires.

The point is that the tenant should always be multi-tracking its negotiation process.  The tenant should begin early and always continue negotiations with current landlord and prospective landlords until the tenant’s attorney is comfortable that the form of lease is negotiated to a point where the remaining issues are not significant.  This way the tenant can say to the landlord “the first one to give me a lease that my attorney says I can sign wins”.  With that pressure and leverage, the deal will move faster and most landlord’s will be more willing to negotiate.

Yes, this multi-track approach may result in a longer period of time spent up front, however, it should result in a better rental rate and better lease terms for the tenant, which will more than pay for itself in the long run.

Example

An office tenant’s lease was set to expire December 31, 2010.  The tenant has a small space of approximately 2,500 square feet, but it is in a Class A Building in the Energy Corridor, so even that small space equates to significant dollars.  In December 2009, the landlord approached the tenant about renewing for ten years.  The tenant was receptive and asked the landlord for a proposal.  The proposal was promptly faxed over to tenant and stated that renewal would be for ten years at $25 per square foot with a formula for escalations.  The tenant was inclined to agree and execute a renewal amendment because, as the tenant put it to me, “the landlord is a good guy and I trust him.  He said this is the going rate now”.  The tenant’s wife convinced him to call me just to be sure everything was okay.

The tenant reluctantly called me and faxed me the landlord’s proposal and their current lease.  I quickly determined that the landlord had other vacant space in the building that was advertised at $22 per square foot.  I brought this to the landlord’s attention and he dropped the proposal to $22.  That saved the tenant approximately $75,000 over the term.

I then suggested to the tenant that they look at other spaces on the market.  They did and found two spaces that they loved.  They received proposals from both of those landlords one of which was at $22 per square foot and one of which was at $21 per square foot.  I then reviewed their current lease and made a list of provisions that were deficient or unfair to the tenant.  We redacted the proposals from the two vacant spaces so that the landlord and address were not visible and sent them to the current landlord.  The tenant told the current landlord that while they would like to renew in place, they were willing to move if they did not get terms they considered favorable.  The landlord did not cave right away, but the tenant’s determination to move if the current landlord did not improve its proposal led to a ten year renewal at $20 per square foot, an increased base year for taxes and expenses (left out of landlord’s original proposal), release of tenant’s personal guaranty, and other changes favorable to tenant.  I have no doubt that without the credible threat of moving, the tenant would not have been able to negotiate such a good deal.  In the end, the tenant will save around $125,000 over the ten year renewal term and have no personal liability.

Cautions

Shifting leverage by shopping around and knowing the market conditions is one thing, but taking the opportunity to renegotiate other terms of the lease is another.  Tenant’s must bear in mind that a landlord may perceive renegotiation of lease terms other than base rent and length of renewal term to be a renegotiation of the entire lease.  Accordingly, the landlord will feel free to review the lease for provisions that the landlord would like to see amended to suit the landlord.  There is not much that can be done about this except to plan carefully with your legal counsel and utilize whatever leverage can be mustered.

To a large extent this is a game of chicken.  Most tenants do not want to move and most landlords do not want to lose a tenant.  However, there is no greater leverage for a tenant than a credible threat of moving.  In some cases, tenants really do find better space and end up moving and that’s okay.  However, without the credible threat the landlord has no fear of losing the tenant and little or no motivation to negotiate a good deal for the tenant.

There are many good brokers serving the commercial leasing community, however, it has been my experience that tenants should not share their strategy with their real estate broker or anyone outside the immediate circle of decision makers.  In far too many instances, brokers and others, whether accidental or otherwise, have told landlords or landlord’s broker that the tenant is looking at other space, but they are not serious.  Clearly, this negates the entire strategy.

Conclusion

While the principles espoused above work in all market conditions, the current conditions are exceptionally favorable to tenants.  Landlords in most markets today are desperate to keep tenants and sign up new tenants.  What I suggest in this article is not intuitive to most tenants, but if kept in mind I am reasonably certain that tenants will get a much better lease deal than waiting for the landlord to approach the tenant a couple of months prior to expiration.  Knowledge of the market place and time to pursue all options equals leverage for the tenant.

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”- Archimedes

This article was republished from Robert S. “Bob” Lowery’s original post, “Tenants: Leverage is Key”, published on May 14, 2010.

A Well-Crafted Letter of Intent

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Plain and simple: We, as partners in a real estate transaction, need to resolve as many issues as possible for your business, before the lease is drafted.

While we have encountered several competing brokerage firms using letters of intent / tenant proposals based on basic business terms such as rent, area, and escalations, we understand that dozens of other issues typically surface with the presentation of the landlord’s draft lease. From our point of view, this is the worst time for disagreements or misunderstandings to emerge. Your urgency to close the deal and get the relocation program underway can now pressure you to concede to unfavorable lease provisions.

A well-crafted letter of intent / tenant proposal can prevent this situation from occurring.

This type of proposal covers, in detail, the terms and conditions of the deal. It is delivered to the landlord, or landord’s leasing broker, to demonstrate intent to lease or purchase as well as for qualification and negotiation purposes, prior to the drafting of a lease.

What does this accomplish?  Your legal fees are reduced, and your leverage is conserved.

Comprehensiveness is crucial and when we draft a proposal with the highest attention to detail, nothing is taken for granted.  While listing broker’s tend to cast as little light on detail or imperfection, it is assumed that any issues omitted or inadequately addressed will ultimately be resolved in the landlord’s favor.

Among other questions that our tenant representation team has catered for industry specific needs, we find these proposal inquiries commonly omitted from letter of intent / tenant proposals, which should be clearly addressed in ours . . .

  • What restrictions will be put on the use of the premises?
  • Which of the landlord’s expenses will be included in calculating operating escalation, and which will be excluded?
  • How will you be charged for electricity usage? If sub-metered, what is the landlord’s profit margin?
  • What rights will you have to sublease the space? If there is a profit, which party will get the benefit?
  • What rights will you have to renew the lease? How will the renewal rent be determined?
  • What rights will you have if the landlord defaults on a mortgage or a ground lease?
  • What rights will you have to make alterations to the space?
  • What will your obligations be at the expiration of the lease?
  • Which party will pay for working drawings?
  • Which party will bear the cost of bringing the space into compliance regarding any Disabilities regulations?
  • During what hours will the space be heated and air-conditioned?
  • What penalties will accrue if the landlord does not deliver the space on time?

These are only some of the potentially deal-breaking or otherwise costly issues that the proposal should address. If they are resolved, final lease negotiations will be relatively swift and painless. If not, you preserve your options while looking elsewhere.

This post was republished from Robert S. “Bob” Lowery’s original post, “Resolving Issues Prior To A Landlord’s Lease”

The 10 Golden Rules of Office Moving

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On average companies only move office every 7 years and the vast majority of people assigned to manage the move are doing so for the first time. There are so many things to consider when you move office. At the same time you have to continue to run your business and focus on your existing workload and commitments. No wonder moving is ranked as one of life’s most stressful events. So, for most companies, the prospect of moving office is a daunting process. But like any process it can be broken down into a series of simple tasks and checks. By following these Golden Rules you can ensure your office move is on time, to budget and hassle free.

1. Assess your needs and current situation

You need to be clear about the purpose of your office relocation, (e.g. lease break, lease expiry, planned growth or contraction), in order to define your needs and map out the appropriate office move plan. There are some big decisions that must be agreed as the starting point and which will form the basis of the subsequent planning process including the details of the existing lease and notice period and your current obligations and liabilities.

2. Be clear about your requirements

A clear understanding at the outset of your basic strategic and operational requirements will make the whole moving office process go more smoothly – and save time. Don’t worry too much about the technical specifics (as that is part of the advice given by the external property move professionals), however, you must have an overall idea and consensus from the decision makers about the key drivers of the office move including:

* Where you want to move to * How much space you need * When you need to be in by * What key features you need your new office to have * What your planned business objectives (including growth plan) the move needs to satisfy * Type and length of lease you want

3. Build the right office move project team

An office move is a major undertaking and a collaborative effort is needed for a successful outcome. Putting together the right project team is critical and should include people who will help facilitate all aspects of the move. It will need to comprise both internal and external members. A Project Leader must be put in charge of the move process as soon as the decision to move office has been made. This person must have enough time to devote to the office move project and should: have the trust of senior management; the authority to act on behalf of the company; be senior enough to be able to make decisions; be a good organiser of people and processes; have experience of setting and working within budgets; and be a good communicator.

4. Start early

There’s a lot to do, so the earlier you start the greater the chance of achieving the smooth move your company expects. It is impossible to plan too far ahead. Once the Office Move Project Leader has been appointed work should start. You should start reviewing your options 9 – 18 months prior to your lease expiration regardless of whether you are considering renewing, renegotiation or relocation. It is vital that you allow enough lead-time to increase the amount of leverage and competition between the various options, which can result in substantial savings for you.

5. Create a realistic budget

Creating a realistic office move budget is a critical planning tool that will help you assess your costs and manage them throughout the process.

6. Engage the right office move professionals

The whole moving office process can be complex, stressful and time-consuming. After people costs property costs are most company’s next biggest expenditure. The decisions you make will have an impact on your company’s profitability. Working with the right professional team is the single biggest must-do for any company thinking of moving office. They will guide you through the process, save you money in the long run and also make sure you don’t make any critical mistakes.

7. Don’t sign any lease documents without getting legal advice

Your property solicitor will negotiate the detail of the lease documentation to minimise your exposure to potential liabilities, and subsequently, to advise you on the implications of the detailed terms in the final documents to ensure you are aware of your ongoing responsibilities.

8. Communication

Internally, change can be unsettling for staff and this can certainly be the case with an office move. At the same time as the office move process is going on, your company has to continue to run its business and focus on its existing workload and commitments. However, moving office is a great opportunity to affect positive change management, improvement in business performance, increased morale and momentum. Externally, there are many moving parts to an office move and you need to ensure that everyone involved in the project is regularly updated, especially if there are any changes. If you keep the lines of communication open to all interested parties, internal and external, your office move will have a much greater chance of success.

9. It’s a process

The prospect of moving office may seem a daunting process but like any process it can be broken down into a series of simple tasks and checks. The intelligent use of your project planning documents, spreadsheets and checklists will not only help you plan the office move, but also act as your road map to carry out the many tasks involved with the project. Don’t try and reinvent the wheel when you can use tried and tested moving office tools and guides.

10. Take advantage of the opportunity

Clear out old files and purge all storage areas of unneeded items prior to moving. Also consider scanning any documents no longer needed in hard copy (remember to dispose of unwanted files securely). Secure storage and/or archiving of documentation is a flexible, safe and cost-effective solution to free up valuable and more costly office space. It can be accessed at any time by arrangement and provides excellent off-site backup for damage limitation in case of fire or other disaster.

* Upgrading – Moving office is an opportunity to update to modern, efficient and space-saving equipment. * Review existing suppliers – Moving office can provide a trigger for renewing/switching supplier contracts on favourable terms. * Don’t forget your customers – Moving office is a great opportunity to communicate positive messages to your customers and maximise the brand and image of your business.

This was a prior post by Robert S. “Bob” Lowery on http://leasinghouston.org.