Posts Tagged ‘landlord’
| Newer Entries »A Glimmer of Hope?: Q&A with Houston Tenant Advisors
Wednesday, March 9th, 2011
Participants:
Sue Rogers, Principal
Steven Heal, Vice President
John Mason, Project Manager
Perry Reese, Senior Associate
Brett Ganz, Senior Associate
Erik Prejean, Senior Associate
What differences are you seeing from the landlords in the deals you are currently working compared to those of the past year?
E.P. - A year ago, I was seeing more free rent offered; now not as much. Fortunately, I am seeing quicker turnaround on commission payments lately.
S.H. – I am actually seeing more free rent being offered and better Tenant Improvement Allowances now as well. However, there isn’t much change in the rental rates.
P.R. – In the industrial industry, I am still seeing free rent being offered. The only difference is that now I am encountering landlords who are “sprinkling” free rent throughout the term rather than all at once at the beginning of the term.
B.G. – Well, it seems to really depend on who you ask and what landlords they are dealing with. Right now, I am not seeing a lot of free rent offered, but I am getting some through negotiations. A year ago, landlords used concessions to entice prospective tenants, but now there is more movement, and landlords are significantly cutting back on what they offer.
S.R. – Landlords, buoyed by the recent activity, will be more aggressive in their efforts to protect face rates, and they will, most likely, decrease free rent and other incentives toward the fourth quarter.
What are your clients expecting right now from you and/or their leases?
E.P. – In particular, I am representing a residential real estate company and an energy company that are pursuing options to provide more flexibility.
S.H. – Tenants that did five-year terms back in 2005 and 2006 are under the misconception that they should be able to find outstanding deals due to the down market and recession, but due to the large rate increases that happened in 2007 and 2008, their renewal rates are typically much higher than their expiring deal.
P.R. – I am actually finding some great deals in the market – however, for the most part, they are all in functionally obsolete buildings. The rate will be great, but the space isn’t user-friendly at all.
J.M. – I am seeing tenants waiting until crunch time to make major decisions about construction. They seem to have the misconception that in the down market, construction companies will jump through hoops for them. In actuality, I am seeing tenants being charged construction premiums, and construction deadlines slipping for lack of manpower.
B.G. – Tenants want to believe they can get a steal, and in certain submarkets, they can. Overall, they are much more difficult to find, though. Last year, it was easier to get class A space at class B rates; this year not as much.
S.R. – As compared to last year, tenants should be even more wary of owners and their ability to fund any capital expenses such as Tenant Improvement Allowances and other economic incentives.
Are there any trends in particular that you are seeing with tenants?
P.R. – I am seeing a lot of tenants attempting to consolidate and sublease space. Budgets are tight, and the outlook is very short term. Tenants are unsure of what is to come with the market and are trying to realistically predict the future.
B.G. – The oil & gas industry and its ancillaries are very strong. I recently picked up two start-up oil & gas companies. Insurance seems to be struggling, and as a result, medical companies are struggling as well due to insecurities about what healthcare reform will bring. Big companies seem to be excelling and focused on future growth, while small companies seem to be drowning in the down market.
So it seems like the market is still in a trough. Is there any glimmer of hope in the near future?
E.P. – Well, the government job growth is still going strong. Here in Houston, consulates are steadily expanding.
S.H. – I am seeing tenants in the oil & gas and energy fields continuing to expand.
P.R. – I think there is a light at the end of the tunnel for tenants due to some active bidding and new contracts, but I believe we still have some time left before we are out in the clear.
J.M. – If tenants are thinking about expanding, now is still a good time. Contractors are eager to work, so it is a very competitive market – a big benefit for the client.
S.R. – The safest move for tenant rep brokers is to work with reliable landlords to avoid an unhappy outcome for your client. Pent-up demand and continued expansion in the oil industry is good news for landlords but could create a shortage of “deals” in preferred submarkets.
How does the Houston market compare to your market? Would you respond differently to any of these questions based on your market’s conditions?
Tags: corporate real estate, free rent, landlord, tenant, tenant improvement allowance
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OPEX: The Hidden Costs, Part II
Friday, February 18th, 2011
By Jason Jones and Kathy Burke, Principals
In Part I, we gave an overview of operating expenses—what they are, what tenants should know about them, and when tenants should be concerned about an operating expense statement from their landlord. In Part II, we will continue the discussion.
The following issues are often predictive of errors and overcharges:
-Substantial capital improvements made within the past year. If improvements have been made to the building during the year, pay very close attention to make sure that the treatment of your operating expenses is recorded according to generally accepted accounting principles (GAAP). For instance, if a new roof is put on the building, or if the lobby was renovated, these types of expenses should be capitalized and, in the case of most leases, excluded from the operating costs charged to tenants.
-Transfer of the property to a new entity. New owners will often implement their own accounting practices and methodologies. In the event of a refinance or sale, it is not uncommon to experience significant clerical mistakes made because the new owner did not properly read your lease.
-Increased vacancy in the building. Vacancy frequently leads to errors and overcharges as a result of the landlord’s process of extrapolating the building’s expenses to reflect what they would have been at full occupancy (commonly referred to as a “gross up”).
What can tenants do to mitigate expenses?
Since you do not control the operation of the building, you need to rely on the professional expertise of the landlord. The items that a tenant can control are typically limited to your HVAC and electric consumption. Keeping thermostats at a reasonable temperature and turning off lights or, better yet, having light sensors installed can help.
Another way to mitigate your expenses is to have a well-negotiated lease document with the right to audit operating expenses. Without this right, you have limited recourse should expenses escalate rapidly.
Many companies perform annual audits as a matter of business practice. This practice alerts everyone that attention is being paid to this issue and increases the level of accuracy. Historically, 80 percent of reconciliation statements contain items that require further clarification, with 25 percent of those statements material enough to warrant an in-depth audit.
What should you ask for from your landlord?
The landlord should be able to provide documentation confirming what was budgeted as well as the actual expenses incurred. This documentation should include a detailed line-item statement with an explanation, by account, of the actual versus budgeted expenses.
It is not unreasonable for the tenant to request at least two prior years’ worth of history, if you have had the same landlord or property manager. This historical data will help you ascertain the validity of the charges, category by category.
Tags: corporate real estate, landlord, lease, opex, tenant
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OPEX: The Hidden Costs, Part I
Wednesday, February 16th, 2011
By Jason Jones and Kathy Burke, Principals
Much like a residential home, commercial office buildings experience normal operating expenses (OPEX) such as taxes, utilities, and ongoing maintenance charges. And, as is the case with a home, the occupant is billed for these expenses on a monthly basis.
Every year, landlords provide tenants with their annual operating expense reconciliation statements. This statement is basically a “true-up” of the actual costs incurred by the landlord versus the costs budgeted and already paid by the tenant. When you receive this document, it would be worthwhile to take a closer look to confirm whether or not the charges are appropriate.
In spite of everyone’s best efforts, there are often mistakes within these documents. Aside from mathematical errors, it’s important to realize most landlords issue their reconciliations based upon the “standard” lease, and your lease may deviate from that standard.
What should tenants know?
A well-negotiated lease document will clearly define allowable operating expenses, detail proper accounting treatment, and specify which costs are not allowed to be charged to the tenant. Typically, “operating costs” include your real estate taxes, cleaning, common area maintenance, building insurance, management fees, and repairs that had to be done during the year.
In practice, your landlord will estimate property expenses for the upcoming calendar year. Tenants pay their percentage share each month throughout the year, based on the budgeted amount. At the end of the year, the actual expenditures are calculated, and during the first quarter of the following year, the landlord will deliver an annual reconciliation statement. Over the course of the lease, these adjusted operating expenses can become a significant expense that should, at the very least, be reviewed and justified. Note that there is enough gray area in calculating operating expenses that entire businesses exist just for the purpose of auditing these costs for tenants.
When should tenants be concerned?
If the expense numbers appear excessive, you should ask your landlord for an explanation, subsequently following up with your real estate adviser to confirm whether or not they are consistent with the market.
Often, the best way to ensure accuracy is to request that your real estate advisor perform a “desk-top” audit. The first indicator of a billing error is an excessive percentage increase from your last year’s operating expense statement. Note that with the exception of taxes, insurance, utilities, repairs, and maintenance (based on the age of your building), it is customary for most categories of operating expenses to escalate less than 5 percent per year. Anything beyond this number requires further clarification. If you reach a double-digit number, an explanation is due.
Stay tuned for Part II, where we will discuss issues to look out for, what tenants can do to mitigate expenses, and what tenants should ask their landlord for.
Tags: corporate real estate, landlord, lease, opex, tenant
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Conflicts of Interest: Tenants Should Question Dual Representation
Wednesday, January 12th, 2011
By Craig Zodikoff, Managing Principal
The economy may be improving, but companies are still trying to cut costs and maximize value with all of their outsourced services. Since real estate is often the second greatest corporate expense following payroll, there is added incentive for companies to evaluate their commercial real estate service provider.
These dynamics are causing more corporate space users to reassess their real estate plans, including the consideration of firms that specialize in tenant representation in addition to traditional firms that represent tenants as well as landlords.
Another consideration is fueling discussions about service providers: Corporate America today is more vigilant as a result of the Sarbanes-Oxley legislation and ensuing business reforms and regulation. CFOs continue to have more oversight for real estate decisions and are ever-mindful of sweetheart deals and murky relationships. In fact, senior management is now more sensitive to even the perception of conflicts.
Protecting Your Interests
A conflict of interest may result if brokers represent landlords and tenants in the same market. When this happens, brokers may lose their objectivity, and the interests of tenants may be compromised.
To use a legal analogy, it’s common sense for plaintiffs and defendants to have separate representation in the courtroom. Should it be different for tenants and landlords in the boardroom, where high-stake real estate decisions are made?
This question has caused companies to challenge business as usual. The Watkins Research Group surveyed corporate real estate executives (CREs) to determine preferred business models. It found that 70% of CREs surveyed cited “no conflict of interest” as a significant criterion in selecting a real estate service provider.
Sometimes, tenants question why conflict would be a problem if their broker doesn’t represent their landlord. The issue is that firms whose primary source of revenue is landlord representation have a vested interest in preserving the strength of that client base. They also have a vested interest in avoiding the devaluation of a building—or the market as a whole—since their other clients would not like to hear that lower market comps are tied to their broker’s deal.
Considering the Bottom Line
The largest real estate brokerage houses derive about three-quarters of their revenue from owners and investors and only one-quarter from space occupiers. Tenant firms can more objectively push the landlord for better terms and not worry about future agendas.
This conflict can be very costly for occupiers seeking the best terms and conditions. Today, the stakes are even higher with fewer tenant advocates available (following the merger of The Staubach Group and Jones Lang LaSalle) and more potential for conflicts.
Challenging the Old School
Why haven’t tenant representation firms gained a greater foothold in the marketplace? Landlord clients tend to provide greater revenue to listing brokers than tenants do. Not surprisingly, they are motivated to enhance their future listing opportunities with landlords.
In addition to handling transactions, tenant advisory firms focus more on start-to-finish corporate services like Strategic Planning and Project Management. These offerings are typically lower on the priority lists of traditional brokers because they aren’t as lucrative as transaction-based services, but they are critical to the success of the project for the tenant.
Another deterrent to would-be tenant-only firms is tied to marketing considerations. Brokers who represent landlords receive valuable visibility when they post their signs on their clients’ buildings to advertise the space. Tenant representatives typically don’t enjoy this free advertising and brand name awareness.
Advocating for Tenant Rights
As the market grows more sophisticated, more corporations are questioning their existing relationships, and many tenants are discovering that their interests are best served when they have their own advocates.
We recommend that tenants raise the issue of conflict from the get-go, starting with the selection of their real estate provider. We advise clients to exercise their rights and ask for full disclosure from brokers. Ultimately, to ensure the fairest and best representation possible, tenants need to understand the interest of their representative to be sure their best interest is the top priority.
Tags: conflict of interest, corporate real estate, landlord, tenant
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Creative Tenant Solutions: The Blend and Extend
Wednesday, January 5th, 2011
By Darren Fleming, Managing Principal
As vacancies rise and rents begin to fall, some companies may grow frustrated about being unable to take advantage of a newly favorable market. So I thought I’d discuss a strategy that might be of interest: the blend-and-extend.
A blend-and-extend is when a tenant, typically with a few years of remaining lease term, signs an early renewal agreement with the existing landlord to add a few more years to their current lease. Usually this is done for one of two reasons: 1) to achieve a lower rental rate today or 2) to secure financing from the landlord to offset future construction costs. In both cases, the rental rate on the additional term is blended into the existing rate to create a new ‘blended rate’ that is often lower than the original one.
The mechanics of a blend-and-extend are relatively simple to understand. Let’s imagine a 15,000 SF company that has two and a half years left on its office lease and is paying $30/SF in a market where the rental rate for a new lease has dropped to $25/SF. Using simple math, if that tenant extended its lease for an additional two and a half years at $25 then the new average, or blended, rental rate would be $27.50. This would represent an immediate reduction of close to $100,000 spread over the original two and a half years.
Executing a blend-and-extend, however, can be very challenging and depends heavily on timing and reading the market. How do you know market conditions are right? How do you convince a landlord to go along? When is the right time to bring it up? It all depends on the situation.
The best part is if you aren’t able to negotiate enough of a savings, you already have several years of lease term remaining and have lost nothing but time.
In the context of a falling market, tenants can look at things from the landlord’s perspective and identify a positive rationale for the owner to go along with. Perhaps having your firm extend by a few years will eliminate some upcoming risk in their portfolio due to the chance that you might leave. If they aren’t open to this type of idea, in a few years they may have to compete for your tenancy on the open market and have a better chance of losing you to a competing building. Showing them how to eliminate that risk could be very appealing.
If your firm is planning major renovations or a purchase of expensive equipment that’s cost prohibitive or even impossible to move, then a blend-and-extend might be a good solution. Spending major, non-recoverable dollars in someone else’s building is a clear sign that you aren’t likely (or able) to move at the end of a lease. Thus, a savvy tenant should take preventative measures to avoid the appearance of captivity. Otherwise, they may find themselves without any real leverage come time to renegotiate the rent.
A successful blend-and-extend requires a lot of work and a high degree of market intelligence. Tenants must have a good idea of their landlord’s current bottom line, or they are setting themselves up for a failure before they even begin. Do your homework. Talk to other tenants in the building or in the business park to get a sense of where the market is heading. Are there any big leases expiring close to your own in your landlord’s portfolio? Will they be eager to lock down your tenancy, or will they be happier to wait a few years in hopes that the market recovers? This is information you must have because, rest assured, your landlord is a local market expert and certainly takes the time to stay informed; it’s their job.
Tags: blend and extend, corporate real estate, cost savings, landlord, tenant
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Forewarned is Forearmed: Read Your Lease
Wednesday, November 17th, 2010
By Darren Fleming
It may seem like simple advice, but reading their lease is something that a disturbing amount of tenants just do not take the time to do prior to signing, or resigning, their office lease. In fact many of our clients are not the same person who handled the last transaction on behalf of their organization. As a result, they do not possess any of the historical context that was at play five or ten years ago when the current contract was signed.
That’s why it is so important that before any action is taken that you read the lease – thoroughly. This means cover-to-cover, all the schedules, and any amendments that might have been made. Take notes and call an expert you trust if you have questions. There are potentially many hidden costs in a commercial lease and several of them come into play only at the end of the contract. So before you decide to talk to your landlord you had better be up to speed on your rights and obligations in order to avoid any nasty surprises. In this entry I will discuss two of the more common lease clauses I have seen that can cause problems and offer some tips and strategies to deal with them.
Protect your option to renew
The majority of tenants do not understand the purpose of an option to renew, or why it is a must-have in any lease. These clauses, which usually carry a requirement to give the landlord six or nine months’ advance written notice if they are to be exercised, are not just there to provide a reminder to talk to the landlord. Their sole purpose is to prevent a landlord from leasing your space out from under you in the event a more attractive tenant comes their way.
You may have spent major dollars retrofitting your 5,000 SF office when you moved in five years ago, only to have the property’s anchor tenant negotiate to take your beautiful space should you forget to exercise your option to renew. That is why it is essential to be aware of your notice obligations at all times. If you miss your notice window you have likely lost the option forever.
Restoration/reinstatement obligations
Unbeknownst to most tenants is that at the end of the lease term most standard commercial leases require a departing tenant to return a space back to its base building condition. This usually means bare concrete floors and the demolition of all interior walls. In most cases the landlord also has the right to insist on doing the work on the departing tenant’s behalf and all at the tenant’s expense. What’s worse is that many leases state that even if you were not the one who did the construction in the first place, you can still be on the hook for the removal. This particularly nasty surprise can be hard to spot and if you suspect you might have this type of clause in your lease, call an expert for advice on how to handle it.
Many uninformed tenants have had their negotiating leverage eliminated in one stroke when informed by their existing landlord that they would be charged thousands of dollars should they fail to renew their lease and leave. In some cases a tenant may then find themselves in the position of being unable to move and they typically renew at a higher rental rate than they might otherwise have been able to negotiate. The best defense is of course to strike this clause from the document before you sign but since time travel isn’t an option, when faced with a potential restoration obligation, you will likely have to get creative to avoid writing a big check.
It is vital to ensure you are aware of any potential pitfalls in your lease that could affect your company at the end of the term. Failure to do your homework and take preventative steps will undoubtedly cost you money. Forewarned is forearmed.
Tags: corporate real estate, landlord, lease
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A Guide to Addressing Commercial Loan Defaults: Part II
Friday, July 23rd, 2010
By Craig Zodikoff and Tyler Kellogg
In Part One of this entry, we presented the topic of landlord financial difficulties and how tenants can leverage their rights. We introduced three scenarios, starting with tenants who are completing a lease within three years. Now, in Part Two, we address other circumstances that may be appropriate:
Scenario # 2: Tenants in Buildings at Risk for Default, Delinquency, and Landlord Liquidity Issues
Tenants in at risk buildings need to know specific details in their lease agreement. Your lease may have been negotiated with certain protections against this type of event. Even so, every lease is different, and not all of them offer adequate protection. Tenants should learn and understand the default process and the roles of each party. Tenants should also record a “Request for Notice of Default” so that they will receive notice of the initiation of any foreclosure proceedings against the landlord.
To protect your interests, take the following measures:
-Review specific details in your lease. Check your right of self-help and rent offset in the event of landlord default in payments for improvement allowances. Also, pay special attention to your non-disturbance clause.
-Identify concessions or benefits that haven’t been realized or might be challenged by a new landlord. Do you have unfunded tenant improvements, fixed-rate renewal options, or back-loaded free rent during or at the end of your lease term?
-Evaluate your building. Are capital improvements needed? How responsive is building management?
-Learn and understand the foreclosure process. What are the steps in a foreclosure process? Who are the people involved in a foreclosure process? What are their roles?
-Seek advice to clear up any issues.
Scenario # 3: Tenants Who Think Their Building Is Not at Risk
A lesson from this recession is to not assume companies or institutions are safe. Your current landlord might appear to be in a safe position, but it is prudent to investigate potential risk. Although the investment markets are still slow, your building may sell to a new landlord. Given the risk, it is appropriate to do a thorough review and evaluation of your lease portfolio. If you are planning to renew at your current location, you can improve upon the non-economic terms in your lease.
How do you know if you’re in an at-risk building? Determine when the building was acquired, at what cost, and what type of debt is on the building. Be cautious if your building was acquired and financed in the past few years. Next, look at what type of owner and what type of lender are involved in your building. This information might give some clues to the likelihood of certain outcomes in the event of debt or liquidity issues.
What does the reality of commercial loan defaults mean to the leasing market? The obvious impact is a continuing trend of declining property values. Many properties will be acquired by new owners at a lower cost. The new landlords will be able to offer more competitive lease transactions than landlords who acquired a building at a higher basis. This will help sustain today’s competitive leasing environment and provide significant concessions for tenants.
This is good news for companies, especially if they partner with the right advisors and legal counselor to protect their rights.
Tags: commercial loan, default, landlord
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A Guide to Addressing Commercial Loan Defaults: Part I
Wednesday, July 21st, 2010
By Craig Zodikoff and Tyler Kellogg
While the financing of commercial real estate has received much attention this past year, most of the focus has been on the impact on banks and property owners. But what about the implications for tenants? Do they have an opportunity to leverage their negotiating strength as landlords continue to struggle?
The contributing factors that led to the Corporate Real Estate (CRE) credit crisis are obvious. CRE investment markets exploded with record years leading up to the recession. During this period, property values climbed, and lending practices loosened.
As the recession deepened, landlords were forced to lower rental rates and increase concessions. Today’s rents cannot accommodate many of the debt structures placed on buildings over the past few years. Many CRE loans are at risk of delinquency, and many are set to expire in the next couple of years. Normally, these loans would simply be refinanced. However, while credit markets have improved, many experts are wondering how these buildings can secure new loans given the current loan-servicing abilities of the properties and the availability of loans.
This issue is also critical to tenants and end users. There are specific steps companies can take if they are in the middle of their lease: evaluate upcoming lease expirations or negotiate lease agreements. Companies should look at ways to minimize their risk in existing leases and in new lease transactions over the coming years.
First, consider which of the following three scenarios best matches your situation:
-Tenants Completing a Lease in the Next Three Years
-Tenants in Buildings at Risk for Default, Delinquency, and Landlord Liquidity Issues
-Tenants Who Think Their Building Is Not at Risk
In this blog entry, we will look at the first of these scenarios. In the next entry, we will focus on other circumstances that may match your situation.
Scenario No. 1: Tenants Completing a Lease in the Next Three Years
Today is a great time to evaluate your lease portfolio and negotiate lease transactions since there has been only modest absorption of vacant space, even as the economy slowly improves. While tenants remain cautious and sensitive to increasing operating costs, they should recognize that the CRE lending crisis has put an unusual twist on the leasing market: In the past, landlords thoroughly vetted their tenants to analyze the risk involved in lease transactions. Tenant risk is still a factor, but tenants now need to do more investigation of their landlord to evaluate landlord risk.
You should evaluate your current and potential landlord in terms of the following:
-Who are they? What type of landlord/ownership?
-When did they acquire the building?
-What type of debt is on the building? Who is the lender? What type of lender? What is their role in transaction approval?
-What capital improvements have been made? When were they made? How were they financed?
-What are the building operating expenses? What is the likelihood of the landlord cutting back on expenses?
-When was the last tax assessment of the building? Has the property value declined since the acquisition? Is the landlord challenging the most recent tax assessment?
-What is the current vacancy and projected rollover in the building? How does the landlord vacancy and churn look over the coming years?
-Has the landlord completed any lease transactions recently? Is the landlord negotiating with anyone else right now?
Negotiate the lease terms to reflect the risks of the current market:
-What is your right of self-help and offset of rent in the event of landlord default of payment of tenant improvement allowances and failure to maintain the building? What specific terms are included?
-What is in your non-disturbance clause? How protected are you?
Stay tuned for Part Two of our blog entry on Friday.
Tags: commercial loan, default, landlord
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