Medical Office Buildings: A Class Of Its Own

Ninety-nine percent of real estate service platforms consider office and medical office one in the same. They are not. There are numerous differences between medical office space and standard office space. The most obvious are rental rates, expenses, tenant mix, construction costs, tenant improvement allowance, and building features such as elevators and parking. In addition, the proximity and the financial condition of an adjoining hospital should be examined. These examples do not even begin to touch upon the intricacies within the healthcare system itself, which is of unique consideration when purchasing a medical office building.

Medical office buildings (MOBs) are deemed “specialty use” real estate. From our perspective, many lenders will consider financing MOBs, but most lack the experience in transactions or simple dealings. Thus, identifying capable players within this asset class is critical. Whether traditional debt, fully amortized structures or even shorter term, higher leverage deals, the MOB is becoming a greater diversification tool for lenders and investors alike.

While government involvement has had a tremendous impact on the past, present and future of the healthcare industry, demographic changes that include an aging population and a increasingly informed and health conscious society is guaranteed to increase demand for years to come. Consolidation will remain a continuing trend for practice groups that lack association with stronger, more diverse physician networks and/or hospital systems. This will have a negative impact on buildings with small, not very well connected and/or aging physician groups.

As for funding, financial sponsorship remains essential to MOB transactions, especially off-campus assets. Here, owner-occupied doctor groups or hospitals themselves receive favorable underwriting treatment. The commitment to their investments and their businesses will be of tremendous importance. Of greater impact is sponsorship that features a commercial real estate firm or private equity company who joint ventures with tenants. Some of the most aggressive lending structures are dedicated to this type of partnership.

Lenders prefer on-campus MOBs, however locating and underwriting these investments can become complicated due to bond financing or land lease issues. Thus, finding the medical office property within the tight radius of the hospital might just be as easy to work, if not easier.

In terms of the lender’s perception of the development and ownership of real estate, a lot has changed after a strong run in the middle of the last decade. Healthcare is no longer deemed recession-proof and, without government support (loose term), it instead operates like the majority of for-profit businesses which became severely impacted by the credit crisis of 2008/09.

While this distinct type of investment is certainly not immune to the juggling act that is supply and demand in a highly levered world, as the economy rehabilitates, the medical office building is becoming one of the most aggressively sought after asset types within the healthcare real estate sector. Call 713-701-7900 to request assistance with one of our several MOB opportunities.

Office Building Design: From the Inside Out

After walking through thousands of corporate and medical office spaces, based upon the building’s construction, we certainly believe that the efficiency of architect’s plan is of greater importance than the developer’s goal for a tract of land.

We continue to work with developers, most of which are beginning to see signs of life for their projects, whereby we provide formal studies for any specific submarket, comparable market analysis, tenant expansion or relocation, demographic studies and leading economic indicators.  But, to be quite honest, the developer is often in too strong of a position and can influence how, what and who will build on the tract.  This is why we feel securing a developer or architect who uses multiple, not individual, armies (w/ proven strategies) to construct a building will provide the best opportunities in this new commercial real estate marketplace.

When planning to construct an office building, it is important to ensure that the architect that is chosen has performed a tremendous amount of office interior space planning work as there are many variables that can affect the amount of space that a prospective tenant will require in a given building.

We have added some special guidance below to assist in the consideration of an office development.  An inside out approach to office design and construction; a few items to analyze in greater detail when assembling your team for an office project:

1. Window mullion spacing: Most office buildings that we usually comb maintain a 5′-0″ o.c. mullion spacing.  Every now and again we come across a project where the mullion spacing is as little as 4′-0″ o.c. or as large as 6′-0″ o.c. The problem is that, with companies now having fewer tiers of management structures, most of the staff will either be assigned an open office work station of some size (either 6’x6′, 6’x8′ or 8’x8′ in size) or a private office (roughly 10′ w. x 12′-15′ d.). When one has to plan office space in a building with larger mullion spacing, such as 6′-0″ o.c., the company has to provide 20% more window perimeter for each (10′ w.) office thus getting fewer people on the outside window wall.

2. Column size & spacing: Office buildings are typically framed in one of two ways: either steel frame and steel columns (which are relatively small – generally 1 to 2.5 square feet in area) or concrete frame and concrete columns. Poured concrete buildings are great for fireproofing and soundproofing. They also provide for superb impact sound resistance characteristics, but in concrete buildings that have a minimum floor plate size of 25,000 – 30,000 square feet, these columns will generally be12-15 square feet in size, thus effectively blowing out a full work station.

3. Column spacing: It is fair to assume that a building with a larger column spacing makes it easier to plan reliable office space. An example of this is the former World Trade Center Towers in New York City. While their floor plate size was exactly 40,000 square feet (quite large for any office building), the entire floor plate was column free, from the central core to the outer wall.

4. Building shape: Quite simply, if a tenant wants to get a maximum number of employees in the least amount of space, then a building planned on an orthogonal grid, or composed of right angles, is the most efficient one.

5. Floor plate size and shape: It is generally more appealing for a tenant to be in a space that has greater window perimeter and shallow floor depth to get more of their employees to enjoy daylight and view. For example, if a tenant is looking to rent only10,000 square feet, he will generally end up in a better space if he moved into a building having a floor plate size of 20,000 square feet than into a building having a floor plate size of 40,000 square feet.

6. Core factor: What a tenant can actually only use is the net (usable) area of his space. So if he needs 10,000 usable square feet, he will pay less rent overall, if he can get that amount of space in a building only having a 15% core factor than one maintaining a 25% core factor.

7. Another issue that impacts the utility of a given floor plate is the location of the building core (where are the elevators, stairwells and bathrooms located). If it is unique (off-center) or if the fire stairs aren’t placed far enough apart, it will have a serious impact on the size of the tenant that can fit on a given floor.  This typically means that only larger sized tenants can fit (fire code regulations) because of the issue of providing two means of egress.

Efficiency in today’s building environment is absolutely essential and we certainly feel our partnership with multiple developers, architects and construction companies will protect your project from wasted space — and money.

Boxer Property Continues Its 2010 Buying Streak

So far this year, Boxer Property has acquired 10 office buildings totaling more than 2.3 million square feet. The local company has four more buildings totaling 550,000 square feet under contract and plans to search out at least a couple more acquisitions by year end.
 
“This is our most active year for acquisitions by far,” says David Kayle, a member of the firm’s acquisitions team. “This is the most square feet we’ve ever acquired in one year. We’re buying bigger buildings and taking advantage of distress in the market. It’s a great opportunity.”
 

For complete article, go to Globest.com.


Your link to this week’s Greater Houston real estate and business stories from local, regional and national publications.  For a complimentary assessment of your commercial real estate interests, please contact Robert S. “Bob” Lowery.

PIMCO Project: Commercial Real Estate

PIMCO on the Commercial Real Estate Market:

  • Capital has returned and high levels of bidding activity in certain sectors (but) transactions have been limited in trophy properties and properties where below-market agency financing is available
  • On the debt side, insurance companies are actively looking to finance quality properties, for Wall Street conduit groups are re-forming and several private debt vehicles are raising capital
  • Manhattan and Washington D.C., where demand from foreign capital has led to recent office trades at capitalization rates and per-square-foot values close to peak prices in 2006 and 2007
  • (Multifamily) transactions pricing in the 5% to 6% cap rate range
  • Local investors perplexed by the extent of non-U.S. capital funneling into their market
  • Prolonged deleveraging process is expected to result in a sustained period of limited price transparency and risk aversion

But, PIMCO suggests…

  • Many CRE assets likely will not return to 2007 prices until the end of this decade
  • Macroeconomic factors will force the market to re-evaluate assumptions it has used to price CRE
  • Prolonged deleveraging process is expected to result in a sustained period of limited price transparency and risk aversion

And, a ton more…

Weekly Rewind: December 21-25

Top 10 Houston Blogs – As I See It

Off the Kuff

A Progressive political blog.

Latest Posts:

  • Judicial Q&A: Cheryl Harris Diggs
  • Precinct Analysis, District Council
  • Here Come the Gay Tourists
  • Bellaire Bans Texting While Driving
  • RIP, Laff Stop

Hair Balls

Houston Press Spin-Off.  Hilarious.

Latest Posts:

  • All of Sharpstown Mall’s Problems to be Solved with Name Change
  • More Allegations of Sexual Harrassment and Abuse at the Houston Humane Society
  • Business is Booming in the DWI-Arrest Industry
  • Game Time: My Plea to In-And-Out Burger…Let Me Speak for You
  • Survey of Top Pop Culture Dogs Proves Aggies may have Skewed Priorities

Houston Strategies

An open dialogue on serious strategies for making Houston a better city, as well a coalition-builder to make it happen.

Latest Posts:

  • An Agenda for Mayor Parker
  • World’s Smartest Cities
  • Comparing Texas’ Big 4 Metro Economies
  • Houston VS. Chicago, Seattle, Portland
  • Houston One of Five Cities that will Rise in the New Economy

BlogHouston

Focuses on Houston politics, media, and life.

Latest Posts:

  • What’s the Status of the City’s Sorely Needed New Emergency Radio Network?
  • Big Sports News in Recent Days
  • City of Houston to Harris County:
  • Metro Chairman David Wolff’s Admonition
  • Good News for Ice Cream Lovers

Houston Clear Thinkers

Observations on developments in law, business, medicine, culture, sports and other matters.

Latest Posts:

  • That Wild Landry’s Ride Continues
  • They Got How Much?  For Doing What?
  • Mr. Ruehle, You are a Free Man
  • Criminalizing the Neighborhood Pharmacist
  • How Many Felonies did you Commit Today?

Houston Tomorrow

Collection of writings from Houston’s Visionaries.

Latest Posts:

  • Houstonians Want Safer Streets
  • The Case for an Energy Tax
  • Perception vs. Reality
  • Block by Block Sustainability
  • Sprawl has passed into History

Bay Area Houston

Dedicated towards Clear Lake, Houston, and Political Junkies.

Latest Posts:

  • A Republican in Democratic Judicial Clothing
  • Harris County GOP Insanity
  • Kay Bailey’s Whataburger Commercial
  • Surprise! Texas Tort Reform Didn’t Work!
  • What a Kinky Idiot

Houstonist

Collection of Houston Pictures, Food, Music and Beverage.

Latest Posts:

  • St. Arnold Brew News
  • H-Town Rock
  • Eat This: French Onion Soup
  • Houstonist Photo of the Day: Antique Running
  • You Wanted the Best! You Got the Best!

Swamplot

Covers real estate, home design and renovation, architecture, and the landscape of Houston.

Latest Posts:

  • Saved by a Ham: The Museum Plan for Immanuel Lutheran Church
  • Daily Demolition Report: Demo Defender
  • Greatest Moment in Real Estate 2009
  • Rail Removal Program Complete for the Year: Heights Hike and Bike Trail Opens
  • Haven is Open:  Modern Texas Cuisine – Algerian Way

Culture Map

Everything Houston.  Great site that toes the line of news and blog.

Latest Posts:

  • No Joke: Houston’s Legendary Laff Stop Closes
  • Is Houston Shrinking?
  • Where to Eat on Christmas
  • Plan proposed to save Historic Heights Church
  • D-Box Motion Movie Seats come to Tomball

Honorable Mention:

SpaceRef

Startup Houston

NeoHouston

Voted by Robert S. “Bob” Lowery

Weekly Rewind / December 7-11

100+ Commercial Real Estate Terms that your *representation* should be comfortable…

Senior Leasing Consultant-Tenant Representation

The “ideal”commercial real estate tenant representative is able to:

Dissect an office lease like an attorney,

Audit expenses like an accountant,

Cad an office building like an architect,

Implement a construction plan like a developer,

Immerse in a community like a residential agent,

Put out fires when “people issues” arise like management,

Analyze income property or comparable space like appraisers,

Master the ground level and subsurface like a surveyor,

And is tech savvy like a telco business.

This said, I understand that more than one-half of my readership support comes from those who are unfamiliar with, gaining entry to, or educating others in the field of commercial real estate – primarily leasing and tenant representation.

Thus, I have compiled a list of terms that are relevant to representatives of businesses, whether it be for the purposes of leasing or purchasing commercial real estate.

“and we thank you for your support”

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Abatement

Free or reduced rent for a fixed period of time.

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Above Building Standard

Upgraded finishes and specialized designs necessary to accommodate a tenant’s proposed leasehold improvements.

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Allowance or Construction Allowance

The contribution by the landlord for the cost of tenant improvement in excess of the base building shell, often expressed as a cost per square foot with a maximum.

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Anchor Tenant or Major

The major or prime tenant in a shopping center, building, etc.

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As-Is Condition

The acceptance by the tenant of the existing condition of the premises at the time the lease is consummated, including any defects.

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Assignment

A transfer by lessee of lessee’s entire estate in the property. Distinguishable from a sublease where the sublessee acquires something less than the lessee’s entire interest.

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Attorn

A tenant’s agreement to recognize a new owner (including a foreclosing lender) as the new landlord and pay rent and otherwise perform under the existing lease.

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Base Rent

A set amount used as a minimum rent in a lease with provisions for increasing the rent over the term of the lease.

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Base Year

Actual taxes and operating expenses for a specified base year, most often the year in which the lease commences. Once the base year expenses are known, the lease essentially becomes a dollar s lease.

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Building Classifications

Building classifications usually refer to Class A, B, C (sometimes D) properties. Classifications are subjective, Class A buildings generally feature superior construction and finish and are well located. They frequently offer covered parking. These buildings, of course, command the highest rental rates in their sub-market. The lower Classes of buildings are progressively less desirable due to age, location or construction. Rents decline as the class of the property declines.

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Building Code

The various laws set forth by the ruling municipality as to the end use of a certain piece of property and that dictate the criteria for design, materials and type of improvements allowed.

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Building or “Core” Factor

Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Loss Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage.

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Building Standard

A list of construction materials and finishes that represent what the Tenant Improvement (Finish) Allowance/Work Letter is designed to cover while also serving to establish the landlord’s minimum quality standards with respect to tenant finish improvements within the building. Examples of standard building items are type and style of doors, lineal feet of partitions, quantity of lights, quality of floor covering, etc.

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Building Standard Plus Allowance

The landlord lists, in detail, the building standard materials and costs necessary to make the premises suitable for occupancy. A negotiated allowance is then provided for the tenant to customize or upgrade materials.

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Build-out

The space improvements put in place per the tenant’s specifications. Takes into consideration the amount of Tenant Finish Allowance provided for in the lease agreement.

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Build-To-Suit

An approach taken to lease space by a property owner where a new building is designed and constructed per the tenant’s specifications.

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Capital Expenses

A capital expense is generally defined by reference to generally accepted accounting principles (GAAP), but GAAP is often unclear on whether a particular item is a capital expense

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Certificate of Occupancy

A document presented by a local government agency or building department certifying that a building and/or the leased premises (tenant’s space), has been satisfactorily inspected and is/are in a condition suitable for occupancy.

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Clear-Span Facility

A building, most often a warehouse or parking garage, with vertical columns on the outside edges of the structure and a clear span between columns.

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Common Area

There are two components of the term “common area”. If referred to in association with the Rentable/Usable or Load Factor calculation, the common areas are those areas within a building that are available for common use by all tenants or groups of tenants and their invitees (i.e. lobbies, corridors, restrooms, etc.). On the other hand, the cost of maintaining parking facilities, malls, sidewalks, landscaped areas, public toilets, truck and service facilities, and the like are included in the term “common area” when calculating the tenant’s pro-rata share of building operating expenses.

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Common Area Maintenance (CAM)

This is the amount of Additional Rent charged to the tenant, in addition to the Base Rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include snow removal, outdoor lighting, parking lot sweeping, insurance, property taxes, etc. Most often, this does not include any capital improvements (see “Capital Expenses”) that are made to the property.

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Comparables or Fair Market Comparables

Lease rates and terms of properties similar in size, construction quality, age, use, and typically located within the same sub-market and used as comparison properties to determine the fair market lease rate for another property with similar characteristics.

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Concessions

Cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, moving expenses, cabling expenses or other monies expended to influence or persuade the tenant to sign a lease.

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Condemnation

The process of taking private property, without the consent of the owner, by a governmental agency for public use through the power of eminent domain.

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Construction Management

The actual construction process is overseen by a qualified construction manager who ensures that the various stages of the construction process are completed in a timely and seamless fashion, from getting the construction permit to completion of the construction to the final walk-through of the completed leased premises with the tenant.

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Consumer Price Index (“CPI”)

Measures inflation in relation to the change in the price of a fixed market basket of goods and services purchased by a specified population during a “base” period of time. It is not a true “cost of living” factor and bears little direct relation to actual costs of building operation or the value of real estate. The CPI is commonly used to increase the base rental periodically as a means of protecting the landlord’s rental stream against inflation or to provide a cushion for operating expense increases for a landlord unwilling to undertake the record keeping necessary for operating expense escalations.

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Contiguous Space

(1) Multiple suites/spaces within the same building and on the same floor which can be combined and rented to a single tenant. (2) A block of space located on multiple adjoining floors in a building (i.e., a tenant leases floors 6 through 12 in a building).

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Contract Documents

The complete set of design plans and specifications for the construction of a building or of a building’s interior improvements. Working Drawings specify for the contractor the precise manner in which a project is to be constructed.

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Core Factor

Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Loss Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage.”

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Covenant

A written agreement inserted into deeds or other legal instruments stipulating performance or non-performance of certain acts or, uses or non-use of a property and/or land.

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Covenant of Quiet Enjoyment

The old “quiet enjoyment” paragraph, now more commonly referred to as “Warranty of Possession”, had nothing to do with noise in and around the leased premises. It provides a warranty by Landlord that it has the legal ability to convey the possession of the premises to Tenant; the Landlord does not warrant that he owns the land. This is the essence of the landlord’s agreement and the tenant’s obligation to pay rent. This means that if the landlord breaches this warranty, it constitutes an actual or constructive eviction.

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Default

The general failure to perform a legal or contractual duty under a commercial lease, such as not paying rent when due, or the breach of other nonmonetary lease covenants.

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Demising Walls

The partition wall that separates one tenant’s space from another or from the building’s common area such as a public corridor.

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Design/Build

A system in which a single entity is responsible for both the design and construction. The term can apply to an entire facility or to individual components of the construction to be performed by a subcontractor; also referred to as “design/construct”.

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Depreciation

Spreading out the cost of a capital asset over its estimated useful life or a decrease in the usefulness, and therefore value, of real property improvements or other assets caused by deterioration or obsolescence.

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Distraint

The act of seizing (legally or illegally) personal property based on the right and interest which a landlord has in the property of a tenant in default.

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Dollar or Expense Stop

An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance).

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Effective Rent

The actual rental rate to be achieved by the landlord after deducting the value of concessions from the base rental rate paid by a tenant, usually expressed as an average rate over the term of the lease.

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Efficiency Factor

Represents the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.). This factor can be computed for an entire building or a single floor of a building. Also known as a Core Factor or Rentable/Usable (R/U) Factor, it is calculated by dividing the rentable square footage by the usable square footage.

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Eminent Domain

A power of the state, municipalities, and private persons or corporations authorized to exercise functions of public character to acquire private property for public use by condemnation, in return for just compensation.

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Encroachment

The intrusion of a structure which extends, without permission, over a property line, easement boundary or building setback line.

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Encumbrance

Any right to, or interest in, real property held by someone other than the owner, but which will not prevent the transfer of fee title (i.e. a claim, lien, charge or liability attached to and binding real property).

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Equity

The fair market value of an asset less any outstanding indebtedness or other encumbrances.

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Escalation Clause

A clause in a lease which provides for the rent to be increased to reflect changes in expenses paid by the landlord such as real estate taxes, operating costs, etc. This may be accomplished by several means such as fixed periodic increases, increases tied to the Consumer Price Index or adjustments based on changes in expenses paid by the landlord in relation to a dollar s or base year reference.

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Estoppel Certificate

A signed statement certifying that certain statements of fact are correct as of the date of the statement and can be relied upon by a third party, including a prospective lender or purchaser. In the context of a lease, a statement by a tenant identifying that the lease is in effect and certifying that no rent has been prepaid and that there are no known outstanding defaults by the landlord (except those specified).

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Exclusive Agency Listing

A written agreement between a real estate broker and a property owner in which the owner promises to pay a fee or commission to the broker if specified real property is leased during the listing period. The broker need not be the procuring cause of the lease.

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Expansion Option

A right for the tenant to increase the size of its premises under specified terms and conditions.

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Expense Stop

An agreed dollar amount of taxes and operating expense (expressed for the building as a whole or on a square foot basis) over which the tenant will pay its prorated share of increases. May be applied to specific expenses (e.g., property taxes or insurance).

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Fair Market Value

The sale price at which a property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Also known as FMV.

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First Generation Space

Generally refers to new space that is currently available for lease and has never before been occupied by a tenant.

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First Mortgage

The senior mortgage which, by reason of its position, has priority over all junior encumbrances. The holder of the first or senior mortgage has a priority right to payment in the event of default.

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First Refusal Right or Right Of First Refusal

A lease clause giving a tenant the first opportunity to buy or lease a property at the same price and on the same terms and conditions as those contained in a third party offer that the owner has expressed a willingness to accept. Such rights often pertain to adjacent space.

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Flex Space

A building providing its occupants the flexibility of utilizing the space. Usually provides a configuration allowing a flexible amount of office or showroom space in combination with manufacturing, laboratory, warehouse distribution, etc. Typically also provides the flexibility to relocate overhead doors. Generally constructed with little or no common areas, load-bearing floors, loading dock facilities and high ceilings.

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Floor Area Ratio (FAR)

The ratio of the gross square footage of a building to the land on which it is situated. Calculated by dividing the total square footage in the building by the square footage of land area.

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Force Majeure

A force that cannot be controlled by the parties to a contract and prevents said parties from complying with the provisions of the contract. This includes acts of God such as a flood or a hurricane or, acts of man such as a strike, fire or war.

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Foreclosure

A procedure by which the mortgagee (“lender”) either takes title to or forces the sale of the mortgagor’s (“borrower”) property in satisfaction of a debt.

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Full Service Rent

An all-inclusive rental rate that includes operating expenses and real estate taxes for the first year. The tenant is generally still responsible for any increase in operating expenses over the base year amount.

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Future Proposed Space

Space in a proposed commercial development which is not yet under construction or where no construction start date has been set. Future Proposed projects include all those projects waiting for a lead tenant, financing, zoning, approvals or any other event necessary to begin construction. Also may refer to the future phases of a multi-phase project not yet built.

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Graduated Lease

A lease, generally long term in nature, which provides that the rent will vary depending upon future contingencies, such as a periodic appraisal, the tenant’s gross income or simply the passage of time.

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Gross Building Area

The total floor area of the building measuring from the outer surface of exterior walls and windows and including all vertical penetrations (e.g. elevator shafts, etc.) and basement space.

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Gross Lease

A lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.

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Ground Rent

Rent paid to the owner for use of land, normally on which to build a building. Generally, the arrangement is that of a long-term lease (e.g., 99 years) with the lessor retaining title to the land.

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Guarantor

One who makes a guaranty or promises to pay a third party’s obligations.

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Guaranty

Agreement whereby the guarantor undertakes collaterally to assure satisfaction of the debt of another or perform the obligation of another if and when the debtor fails to do so. Differs from a surety agreement in that there is a separate and distinct contract rather than a joint undertaking with the principal.

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Hold Over Tenant

A tenant retaining possession of the leased premises after the expiration of a lease.

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HVAC

The acronym for “Heating, Ventilating and Air-Conditioning”.

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Improvements

Generally refers to the improvements made to or inside a building but may include any permanent structure or other development, such as a street, sidewalks, utilities, etc.

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Lease

An agreement whereby the owner of real property (i.e., landlord/lessor) gives the right of possession to another (i.e., tenant/lessee) for a specified period of time (i.e., term) and for a specified consideration (i.e., rent).

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Lease Agreement

The formal legal document entered into between a Landlord and a Tenant to reflect the terms of the negotiations between them; that is, the lease terms have been negotiated and agreed upon, and the agreement has been reduced to writing. It constitutes the entire agreement between the parties and sets forth their basic legal rights.

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Lease Commencement Date

The date usually constitutes the commencement of the term of the Lease for all purposes, whether or not the tenant has actually taken possession so long as beneficial occupancy is possible. In reality, there could be other agreements, such as an Early Occupancy Agreement, which have an impact on this strict definition.

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Leasehold Improvements

Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by Landlord.

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Legal Description

A geographical description identifying a parcel of land by government survey, metes and bounds, or lot numbers of a recorded plat including a description of any portion thereof that is subject to an easement or reservation.

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Letter Of Credit

A commitment by a bank or other person, made at the request of a customer, that the issuer will honor drafts or other demands for payment upon full compliance with the conditions specified in the letter of credit. Letters of credit are often used in place of cash deposited with the landlord to satisfy security deposit requirements.

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Letter Of Intent

A preliminary agreement stating the proposed terms for a final contract. They can be “binding” or “non-binding”. This is the threshold issue in most litigation concerning letters of intent. The parties should always consult their respective legal counsel before signing any Letter of Intent.

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Lien

A claim or encumbrance against property used to secure a debt, charge or the performance of some act. Includes liens acquired by contract or by operation of law. Note that all liens are encumbrances but all encumbrances are not liens.

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Lien Waiver (Waiver of Liens)

A waiver of mechanic’s lien rights, signed by a general contractor and his subcontractors, that is often required before the general contractor can receive a draw under the payment provisions of a construction contract. May also be required before the owner can receive a draw on a construction loan.

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Listing Agreement

An agreement between the owner of a property and a real estate broker giving the broker the authorization to attempt to sell or lease the property at a certain price and terms in return for a commission, set fee or other form of compensation.

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Long Term Lease

In most markets, this refers to a lease whose term is at least three years from initial signing until the date of expiration or renewal option.

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Lot

Generally, one of several contiguous parcels of land making up a fractional part or subdivision of a block, the boundaries of which are shown on recorded maps and “plats”.

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Lump-Sum Contract

A type of construction contract requiring the general contractor to complete a building or project for a fixed cost normally established by competitive bidding. The contractor absorbs any loss or retains any profit.

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Market Rent

The rental income that a property would command on the open market with a landlord and a tenant ready and willing to consummate a lease in the ordinary course of business; indicated by the rents that landlords were willing to accept and tenants were willing to pay in recent lease transactions for comparable space.

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Master Lease

A primary lease that controls subsequent leases and which may cover more property than subsequent leases. An Executive Suite operation is a good example in that a primary lease is signed with the landlord and then individual offices within the leased premises are leased to other individuals or companies.

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Mechanic’s Lien

A claim created by state statutes for the purpose of securing priority of payment of the price and value of work performed and materials furnished in constructing, repairing or improving a building or other structure, and which attaches to the land as well as to the buildings and improvements thereon.

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Metes and Bounds

The boundary lines of land, with their terminal points and angles, described by listing the compass directions and distances of the boundaries. Originally, metes referred to distance and bounds referred to direction.

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Mixed-Use

Space within a building or project providing for more than one use (i.e., a loft or apartment project with retail, an apartment building with office space, an office building with retail space).

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Net Lease

A lease in which there is a provision for the tenant to pay, in addition to rent, certain costs associated with the operation of the property. These costs may include property taxes, insurance, repairs, utilities, and maintenance. There are also “NN” (double net) and “NNN” (triple net) leases. The difference between the three is the degree to which the tenant is responsible for operating costs.

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Net Rentable Area

The floor area of a building that remains after the square footage represented by vertical penetrations, such as elevator shafts, etc., has been deducted. Common areas and mechanical rooms are included and there are no deductions made for necessary columns and projections of the building.

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Non-Compete Clause

A clause that can be inserted into a lease specifying that the business of the tenant is exclusive in the property and that no other tenant operating the same or similar type of business can occupy space in the building. This clause benefits service-oriented businesses desiring exclusive access to the building’s population (i.e. travel agent, deli, etc.).

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Normal Wear and Tear

The deterioration or loss in value caused by the tenant’s normal and reasonable use. In many leases the tenant is not responsible for “normal wear and tear”.

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Operating Cost Escalation

Clauses that adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings. The landlord’s definition of Operating Expenses is generally very broad, covering most costs of operation of the building. Most landlords pass through proper and customary charges, but in the hands of an overly aggressive landlord, these clauses can operate to impose obligations which the tenant would not willingly or knowingly accept.

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Operating Expenses

The actual costs associated with operating a property including maintenance, repairs, management, utilities, taxes and insurance. A landlord’s definition of operating expenses is likely to be quite broad, covering most aspects of operating the building.

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Operating Expense Escalation

Although there are many variations of operating expense escalation clauses, all are intended to adjust rents by reference to external standards such as published indexes, negotiated wage levels, or expenses related to the ownership and operation of buildings.

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Parking Ratio or Index

The intent of this ratio is to provide a uniform method of expressing the amount of parking that is available at a given building. Dividing the total rentable square footage of a building by the building’s total number of parking spaces provides the amount of rentable square feet per each individual parking space (expressed as 1/xxx or 1 per xxx). Dividing 1000 by the previous result provides the ratio of parking spaces available per each 1000 rentable square feet (expressed as x per 1000).

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Partial Taking

The taking of part (a portion) of an owner’s property under the laws of eminent domain.

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Pass Throughs

Refers to the tenant’s pro rata share of operating expenses (i.e. taxes, utilities, repairs) paid in addition to the base rent.

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Percentage Lease

Refers to a provision of the lease calling for the landlord to be paid a percentage of the tenant’s gross sales as a component of rent. There is usually a base rent amount to which “percentage” rent is then added. This type of clause is most often found in retail leases.

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Performance Bond

A surety bond posted by a contractor guaranteeing full performance of a contract with the proceeds to be used to complete the contract or compensate for the owner’s loss in the event of nonperformance.

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Preleased

Refers to space in a proposed building that has been leased before the start of construction or in advance of the issuance of a Certificate of Occupancy.

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Prime Tenant

The major tenant in a building or, the major or anchor tenant in a shopping center serving to attract other, smaller tenants into adjacent space because of the customer traffic generated.

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Pro rata

Proportionately; according to measure, interest, or liability. In the case of a tenant, the proportionate share of expenses for the maintainenance and operation of the property.

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Punch List

An itemized list, typically prepared by the architect or construction manager, documenting incomplete or unsatisfactory items after the contractor has notified the owner that the tenant space is substantially complete.

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Real Property

Land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing and heating fixtures, or other items which would be personal property if not attached.

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Recapture

A clause giving the lessor a percentage of profits above a fixed amount of rent; or in a percentage lease, a clause granting the landlord a right to terminate the lease if the tenant fails to realize minimum sales.

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Renewal Option

A clause giving a tenant the right to extend the term of a lease, usually for a stated period of time and at a rent amount as provided for in the option language.

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Rent

Compensation or fee paid, usually periodically (i.e. monthly rent payments, for the occupancy and use of any rental property, land, buildings, equipment, etc.

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Rent Commencement Date

The date on which a tenant begins paying rent. The dynamics of a marketplace will dictate whether this date coincides with the lease commencement date or if it commences months later (i.e., in a weak market, the tenant may be granted several months free rent). It will never begin before the lease commencement date.

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Rentable Square Footage

Rentable Square Footage equals the Usable Square Footage plus the tenant’s pro rata share of the Building Common Areas, such as lobbies, public corridors and restrooms. The pro-rata share, often referred to as the Rentable/Usable (R/U) Factor, will typically be at least 1.10 and may be higher for more inefficient buildings (such as historic rehabilitations) or for partial floors.

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Rentable/Usable Ratio

That number obtained when the Total Rentable Area in a building is divided by the Usable Area in the building. The inverse of this ratio describes the proportion of space that an occupant can expect to actually utilize/physically occupy.

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Rental Concession

Concessions a landlord may offer a tenant in order to secure their tenancy. While rental abatement is one form of a concession, there are many others such as increased tenant improvement allowance, signage, lower than market rental rates and moving allowances are only a few of the many.

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Rent-Up Period

That period of time, following construction of a new building, when tenants are actively being sought and the project is approaching its stabilized occupancy.

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Representation Agreement

An agreement between the owner of a property and a real estate broker giving the broker the authorization to attempt to sell or lease the property at a certain price and terms in return for a commission, set fee or other form of compensation.

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Right Of First Refusal

See “First Refusal Right”.

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Sale-Leaseback

Essentially a financing transaction where the owner occupant of a property agrees to sell all or part of the property to an investor and then lease it back and continue to occupy space as a tenant. Although the lease technically follows the sale, both will have been agreed to as part of the same transaction.

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Security Deposit

A deposit of money by a tenant to a landlord to secure performance of a lease. This deposit can also take the form of a Letter of Credit or other financial instrument.

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Slab

The exposed wearing surface laid over the structural support beams of a building to form the floor(s) of the building or laid slab-on-grade in the case of a non-structural, ground level concrete slab.

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Space Plan

A graphic representation of a tenant’s space requirements, showing wall and door locations, room sizes, and sometimes includes furniture layouts. A preliminary space plan will be prepared for a prospective tenant at any number of different properties and this serves as a “test-fit” to help the tenant determine which property will best meet its requirements. When the tenant has selected a building of choice, a final space plan is prepared which speaks to all of the landlord and tenant objectives and then approved by both parties. It must be sufficiently detailed to allow an accurate estimate of the construction costs. This final space plan will often become an exhibit to any lease negotiated between the parties.

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Special Assessment

Any special charge levied against real property for public improvements (e.g., sidewalks, streets, water and sewer, etc.) that benefit the assessed property.

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Speculative Space

Any tenant space that has not been leased before the start of construction on a new building.

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Step-Up Lease (Graded Lease)

A lease specifying set increases in rent at set intervals during the term of the lease.

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Straight Lease (Flat Lease)

A lease specifying the same, a fixed amount, of rent that is to be paid periodically during the entire term of the lease. This is typically paid out in monthly installments.

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Strip Center

Any shopping area, generally with common parking, comprised of a row of stores but smaller than the neighborhood center anchored by a grocery store.

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Subordination Agreement

As used in a lease, the tenant generally accepts the leased premises subject to any recorded mortgage or deed of trust lien and all existing recorded restrictions, and the landlord is often given the power to subordinate the tenant’s interest to any first mortgage or deed of trust lien subsequently placed upon the leased premises.

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Taking

A common synonym for condemnation or any actual or material interference with private property rights but it is not essential that there be physical seizure or appropriation.

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Tenant (Lessee)

One who rents real estate from another and holds an estate by virtue of a lease.

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Tenant At Will

One who holds possession of premises by permission of the owner or landlord, the characteristics of which are an uncertain duration (i.e. without a fixed term) and the right of either party to terminate on proper notice.

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Tenant Improvements

Improvements made to the leased premises by or for a tenant. Generally, especially in new space, part of the negotiations will include in some detail the improvements to be made in the leased premises by the landlord.

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Tenant Improvement (“TI”) Allowance or Work Letter

Defines the fixed amount of money contributed by the landlord toward tenant improvements. The tenant pays any of the costs that exceed this amount. Also commonly referred to as “Tenant Finish Allowance.

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Time Is Of The Essence

Means that performance by one party within the period specified in the contract is essential to require performance by the other party.

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Trade Fixtures

Personal property that is attached to a structure (i.e. the walls of the leased premises) that are used in the business. Since this property is part of the business and not deemed to be part of the real estate, it is typically removable upon lease termination.

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Triple Net (NNN) Rent

A lease in which the tenant pays, in addition to rent, certain costs associated with a leased property, which may include property taxes, insurance premiums, repairs, utilities, and maintenances. There are also “Net Leases” and “NN” (double net) leases, depending upon the degree to which the tenant is responsible for operating costs.

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Turn Key Project or Premises

The construction of a project in which a third party, usually a developer or general contractor, is responsible for the total completion of a building (including construction and interior design) or, the construction of tenant improvements to the customized requirements and specifications of a future owner or tenant. This term refers to the fact that the space is completely constructed and ready for occupancy, and the tenant need only “turn the key” to occupy the space (i.e., no further work is necessary).

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Use

The specific purpose for which a parcel of land or a building is intended to be used as specified in the lease’s use clause.

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Usable Square Footage

Usable Square Footage is the area contained within the demising walls of the tenant space. Total Usable Square Footage equals the Net Square Footage x the Circulation Factor. Also see Circulation Factor and Net Square Footage.

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Vacancy Factor

The amount of gross revenue that pro forma income statements anticipate will be lost because of vacancies, often expressed as a percentage of the total rentable square footage available in a building or project.

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Vacancy Rate

The total amount of available space compared to the total inventory of space and expressed as a percentage. This is calculated by multiplying the vacant space times 100 and then dividing it by the total inventory.

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Workletter or Work Letter

A list of the building standard items that the landlord will contribute as part of the tenant improvements. Examples of the building standard items typically identified include style and type of doors, lineal feet of partitions, type and quantity of lights, quality of floor coverings, number of telephone and electrical outlets, etc. The Workletter often carries a dollar value but is contrasted with a fixed dollar tenant improvement allowance that can be used at the tenant’s discretion.

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Working Drawings

The set of plans for a building or project that comprise the contract documents that indicate the precise manner in which a project is to be built. This set of plans includes a set of specifications for the building or project.

5 Negotiable Items in an Office Lease

1. Commencement Date

If a space has been vacant for a long time, the owner is usually more willing to deal. If you can’t meet the landlord’s rent needs, but are willing to take the space right away, the landlord might be more willing to bend on the rent.  Also, if demo is to be performed, make sure not to be too specific on this date.  You don’t want to pay for space that is not ready for move-in,especially when your business is renting elsewhere.

2. Rent

In the not so distant past landlords in the Houston market were negotiating their asking rent down 5-10% from advertised price. The leasing market gathers its pricing data from market comparables which are other companies signing leases. Data is currently traded among brokers so they can make sure their clients are receiving the most appropriate rental rate and terms. If you don’t have a broker or if your broker isn’t aware of the most recent deals completed, then a barometer of a 5-10% discount is a fair goal.  Given today’s volatile market, our tenant representation group strives for greater rental reductions and/or terms.

3. TI – Tenant Improvements

If the space is not ideal, try to negotiate so the landlord is responsible for all reasonable changes to the space. The longer term lease you are signing, the more willing the landlord should be to perform significant improvements.  But, as landlords struggle to fill space, these improvements will be diminished due to negative cash flow to the landlord/lender.  So realize your window of opportunity for a significant build-out allowance is closing.

If your business is need of short-term space, gear your search to spaces that need almost no improvements. If the term is below two years, even asking more new paint and carpet might be a too much.  But, as tenant representatives, we are aware of  multiple options if the landlord is not flexible on improvements to your short-term lease space.

4. Free Rent

The amount of free rent depends on the current market conditions, your financial statements, and the term of the lease. With shorter leases (less than 2 years) it is tough to negotiate free rent because you are only there for a short period and the landlord wants you to paying the whole time. If it’s a five year lease, 3-5 months of free rent would not be unusual. Most justifications for free rent is covering the expensive moving costs and other expenses associated with the move (e.g. stationary, wiring the space etc). If you are a start-up without revenue, the landlord will be hesitant to provide rent abatement because of their concern that you may default after 6 months and they will have provided free rent for 3 months. You may be able to negotiate the free rent after fulfilling an agreed upon minimal paid rent period. As tenant representatives, we know that it does not hurt to try.

5. Term

Landlords prefer a longer term lease because a space, on average, sits vacant for 5 months between leases. The less downtime, the better it is for the landlord’s bank account, and so he will want a longer term agreement. What does this mean to you?

If you are comfortable signing a 3-5 year lease, you can get more aggressive on the economics (rent below asking, free rent, more improvements etc). One way to avoid a longer term commitment is to get termination rights written into your lease. This typically includes a rent penalty, and possibly the payment of unamortized commissions and tenant improvements.  Your tenant representative’s knowledge of the market should be able assist in these negotiations.

Next 5…next week.

Weekly Rewind / November 30 – December 4

~ Llenrock & Lowery Blogs