Posts Tagged ‘tenant’
« Older Entries | Newer Entries »Audit or Administration? Providing Value to Smaller Spaces
Wednesday, June 8th, 2011
By Jeff Tosello, Principal
Choosing a boutique firm to audit your company’s largest leases at the lowest possible contingency fee you can negotiate—isn’t that all you need to do to ensure that your portfolio is protected?
In a word: no. You may be missing one of the greatest potential sources of cost reduction in the real estate department and passing up an opportunity to be a hero not only to the business unit with the largest amount of space, but to the smaller space users as well.
Often, lease audit is a phrase used to raise questions and entice tenants into discussions about representation. It can also mean many different things—a desktop review, an exhaustive desktop analysis, an onsite review of the landlord’s books and/or extended discussion with the landlord over any number of gray areas open to interpretation in the lease where expenses are involved. Many times, what a tenant thinks they’re going to get is not what the contingency firms actually do, and as a result, they end up paying too much to have the work done. Understanding the nuances of this business and considering a more specific approach to expense review may influence how a company proceeds with this type of program.
Used properly, lease audit is an effective means of resolving past issues and, more importantly, of ensuring compliant lease payments in the future. But the type of audits employed and how they are applied to the portfolio of locations is a big part of the equation. Further, implementing procedural changes in the payment process after audits are performed can increase the benefit of such a review exponentially.
Looking at a real-life example, let us suppose that we are considering a company with 50 locations in the US making up 1,000,000 SF and having an average size of 20,000 SF. A closer look at this portfolio reveals the following (using the old 80/20 rule):
Assumptions:
-1,000,000 SF portfolio (average = 20,000), 50 locations
-80% of the portfolio averages 8,750 SF
-20% of the portfolio averages 65,000 SF
-Of the 10 locations that make up the 65,000 SF average, only 3 are above 40,000 SF
-Average cost per square foot = $30 (base rent plus OPEX and taxes)
-Ratio of basic errors to complex errors = 1% vs. 2.5%
| Factors | Conventional Approach | Our Approach | Net Difference |
| # of Leases to Audit | 3 for 195,000 SF | 50 for 1M SF | 47 |
| Basic Errors Found on All Leases (1%) | $58,500 | $300,000 | $241,500 |
| Complex Errors on Big Leases (2.5%) | $146,250 | $146,250 | $0 |
| Total Savings = | $204,750 | $446,250 | $241,500 |
| Cost of Auditing Just 3 = | $71,663 | Flat fees of $900 + % of $51,188 = $52,087 | ($19,575) |
| Cost of Auditing the Balance | $0 | $14,100 | $14,100 |
| Net Savings to Client = | $133,087 | $380,063 | $246,975 |
As you can see from this example, avoiding review of the small locations leaves $250,000 on the table even assuming a 1% error rate! Pure audit firms won’t touch these because a 1% savings at a 2,500 SF location means saving about $750, netting them only $263 which is less than their cost of doing the work.
The bottom line: Higher value, more savings, better results – Isn’t that what wins business?
Tags: corporate real estate, cost savings, landlord, lease, lease audit, tenant
Posted in Lease Administration | Comments Off
Accounting Boards Come Full Circle
Wednesday, June 1st, 2011
By Brant Bryan, Principal
If you are into accounting, this is high drama.
After lengthy debate, the US and International Accounting Boards (the FASB and IASB) tentatively decided in their May meeting to have all leases accounted for as a financing lease. This reversed their decision earlier this Spring which would have provided an additional classification allowing some leases to be accounted for on a straight line basis. The Board decided that it is less complex, overall, for all leases to be accounted for through a single approach.
What does this mean for tenants? ON A TENTATIVE BASIS, here are some highlights:
-All lessees will reflect a front-loaded pattern of expenses. Expense will be a combination of interest expense and an amortization of the recorded asset. Higher interest expense will be charged during the early periods of a lease.
-All leases will be capitalized and added to the balance sheet as an asset and a liability.
-All measurements will be made as of the lease commencement date.
-At the beginning of a lease, tenants will determine if they have significant economic incentive to exercise options for renewal, expansion, purchase, etc. If there is such incentive, the options shall be included in the measurement of lease asset and liability.
-Reassessment of lease options will only be required when there is a significant change in economic incentive. Market based factors will not be considered in reassessments.
-The discount rate used in determined lease liability or asset value will only be revised when there is a reassessment caused by a change in economic incentive to exercise options.
-The Boards did not reach a consensus on whether there will be one or two models for lessor accounting, and thus that is still an open item.
-The Boards expect to complete the lease project by the end of 2011. Implementation will likely begin in 2013 or 2014.
As the Boards reach more decisions and release more information, we will let you know what is being said and what this might mean for tenants.
Tags: corporate real estate, FASB, lease, tenant
Posted in Capital Markets | Comments Off
Workplace Strategy: What is the true driver and expectation? Part II
Wednesday, May 11th, 2011
By Jack Burns, Managing Principal
In part one of the blog on this topic, I focused on how companies are addressing the changing nature of the new workforce and planning new workplace solutions designed to increase productivity and reduce real estate expenses. The first steps include reviewing what employees like and don’t like about their environment, measuring utilization, and compiling your findings.
In part two of this blog, I will outline the next steps in this process: the plan, the buy-in, implementation, and improvements. Overall, the challenge is how to best utilize your space and manage change, and key factors are securing the support of management and setting realistic expectations.
Preparing the Plan
Once you have established the current utilization of your space and the corresponding implications, you are ready for the next bold steps, starting with a new workplace strategy. Unfortunately, establishing a new plan is not an exact science. You can research what other companies have done, but you ultimately need to customize a program to meet your company’s specific needs.
If you are working on field office locations that are predominately “sales and service,” then you can really push hard on seat-sharing. Staff in these situations should certainly be spending more time selling and delivering services in the field rather than sitting in the office. In fact, you should be able to achieve a 3:1 ratio of employees to seats through hoteling and virtual offices. This kind of arrangement, with mobile employees who have no fixed seats, could involve 70% – 90% of the workforce, and it could reduce total seat needs by 40% – 70%.
If you are dealing with a back office or HQ-level operation, the challenge is more difficult. Still, a company can pursue a “Home Office” or an accelerated work-week program, and you may be able to identify 10% – 30% of staff who could be mobile. Home Office workers are those that primarily work from their homes and seldom visit the office except for occasional meetings. These workers utilize laptops, wireless air-cards, localized printer, and mobile phones. If 10% of your employees worked from home full time, you could reduce your total seat requirement by 15% to 30%.
In any event, reducing fixed seats is the main goal to cutting costs. But change can produce anxiety, and you need to address concerns in advance by providing the best in mobile and office technology, more meeting and collaborative space, provisions for remote communications (including video conferencing), and personal storage solutions for mobile employees.
Selling the Plan
Once your plan is written, you need to sell it at the top and also to rank-and-file employees.
It should be easy to secure buy-in at the CFO level when you run the numbers of seats that can be reduced. If your plan involves reducing the SF per employee from 250 SF to 80 SF, for instance, the numbers can be compelling.
However, even with significant savings and employee concessions, cultural changes and entitlement issues can present a real challenge. If employees aren’t willing to change their work dynamics, a program like this won’t succeed.
So, if you have a field office set-up, you should identify a few facilities where you can achieve the greatest ROI from a new workplace solution. First, seek a C-Suite sponsor other than the CFO. Then seek a regional level VP to join forces to sell the idea. Depending on your operation, pick three to four facilities that you can implement in a 12-month period. Usually, a leased site with an approaching lease expiration will offer the best opportunities.
Working with the regional manager, create a communication package with the help of HR and IT to clearly explain what will be happening. Then run a “town meeting” led by local office management to show support for the new venture. It is important to run communications at the impacted site level and through the management level at the same time. Seeing is believing with new workplaces, so pilot, pilot, pilot.
Implementing the Plan
Make sure your team has a good architect with a successful track record in implementing new workplaces. And make sure the design considers all the nuances that you discovered through your surveying and interviews. With such impactful changes planned for the workplace, developing a strong communication program is a must. Your Project Manager needs to be a good listener and communicator. HR can also play a major role in running internal training sessions on change management; how to work on the road or from home; how to manage mobile workers; how to use the new workplace effectively, etc.
Make sure you deliver on the things you promised. Celebrate the project with testimonials from happy workers and their managers. Identify those individuals early on through your surveys and interviews. Keep track of these folks as they will likely be your biggest supporters, and you can use their experience to sell the program downstream.
You may want to over-engineer the first new worksite rollouts to overcompensate for the big change. For example, as mentioned above, enhance the coolness of your worksite with creative touches like collaboration zones, social areas, quiet areas, interesting and fun graphics, different lighting schemes, etc.
Surveying, Testing, and Improving the Plan
Through reviews, surveys, and interviews, you can improve on the original model. This need not mean more space needs or money. Rather, it might be simple things like more IT connections and different placement for certain types of spaces, improved graphics, etc.
Complete a survey right after the move to determine how well you did during the relocation and the transition to the new workplace. Then, at minimal intervals of 90, 180, and 365 days, you should issue surveys to the employees at the facility. Compare surveys and make improvements or changes as necessary to address concerns. Also, send a team to the site four to five months post move, stay a few days to observe how the space is used, and offer follow-up training. If it is running smoothly, create a model case study that you can sell to others. Remember to learn from your mistakes and look to constantly improve on the model. Listen to your staff and try to get them what they need to succeed.
In the final analysis, this process is worth your patience and persistence. Because the bottom line should be greater savings, increased productivity, and even improved morale.
Tags: corporate real estate, flexibility, mobility, office space, office utilization, real estate expenses, tenant, workplace
Posted in Corporate Services | Comments Off
Industry Speak or UNA?
Wednesday, May 4th, 2011
By Phillip Infelise, Chairman
The Project Management side of this industry is no different than the real estate side in terms of (potentially) overwhelming clients with our industry speak. Sometimes it can be harmful to clear communication; sometimes it’s just plain comical.
For years now I have authored an annual Project Management Lexicon, meant to introduce our clients to the terminology that we use or that they will hear from others around the table. It has now grown to more than 23 pages, including three pages of nothing but acronyms. Often the best contributions are from clients themselves.
We often believe that the simplest or more complex terms are understood, when our clients continually remind us that they are not. And, of course, even our most basic terminology varies from region to region across North America, irrespective of the languages spoken. At the most basic level, we expect our client to know what simple terms like “TI” means (let alone TIA – tenant improvement allowance) with little understanding that our project meetings may be the first time such terms have been heard by that individual.
Some of the best examples of misunderstood terms or acronyms are:
Base Building or Core & Shell. What does it describe in your region? Likely it means exactly the same thing but the use varies from region to region across the country.
Dry Wall or Rock. Some places it may even be called plasterboard, but that is technically a misnomer. Again, it is the same thing, but varies in description across the country. What do you think your client is thinking the first time they hear you refer to a “drywall mechanic?”
RFP – Request for Proposal. But virtually everyone says they have completed or submitted an RFP. No, they completed/submitted a “Proposal” in response to an RFP.
SCIF. On many projects, everyone around the table refers to the acronym SCIF. When asked (and I do it sometimes just to test the waters) perhaps 2 in 10 actually know what it stands for. By the way, it’s a Secured Compartmented Information Facility.
IDF. Similar to SCIF, I am often surprised that folks know you should have one or two on every large floor plate and know what IT gear is usually found inside of one, but really don’t know what it stands for. It means Intermediate Distribution Facility.
FFE. A classic that is often misstated. Should be Furniture, Fixtures, and Equipment. Often misstated as Furniture, Finishes, and Equipment. At least the equipment is always right!
Straight out of the Lexicon comes the best story, with all due respect to my old client and forever friend, Mary Anne Ward in Phoenix. Working on her build-to-suit laboratory headquarters, she frequently heard us refer to “Core and Shell”. However, when spoken quickly and without enunciation, Mary Anne heard “corn shell.” She thought we were referring to some very evolved, indigenous wall section that incorporated natural insulation in the form of corn husks. When she finally asked and got clarification the team was in stitches. True story.
But the best was another client so frustrated with the constant flow of acronyms that he coined one of his own, which is forever embedded now in the Lexicon. UNA. Use no Acronyms.
At the end of the day, we should all be more diligent about using industry speakology until it is obvious that our client has evolved in their understanding of those terms. Best hint: when they start using them in everyday conversations. At that point we may have created a monster – but at least we are all speaking with a common voice. UNA.
Next entry, as previously promised, we will dig into the dreaded C.O. Change Order, that is. Or is it Certificate of Occupancy?
Tags: acronym, corporate real estate, PM, tenant
Posted in Project Management | Comments Off
Modest Job Growth Helps Recovery in Select Markets
Wednesday, April 20th, 2011
By Bill Goade, CEO
In mid-2010, economists declared that the recession was over, and the recent unemployment rate drop to 8.8% seems to confirm modest job recovery. Real estate is a lagging economic indicator which generally trails other economic indicators by 9-12 months, so it is little surprise that in a few select markets real estate has shown signs of recovery. In most office markets, job growth has remained modest, and demand has been relatively flat, but in Silicon Valley, the real estate recovery is already happening. High-profile tenants, including Google, Facebook, and Yahoo, have all taken significant blocks of space there. In addition to Silicon Valley, the exceptions include high-rise view space in New York City, the Bay Area, Cambridge, MA, and Pittsburgh. But it will still probably be another year before national vacancy begins to fall significantly and average rental rents rise. A full market recovery will probably not occur until 2013, when we likely will reach pre-recession employment levels. For the most part, there is little velocity for class B space, and suburban areas are generally suffering more than CBDs.
The national availability rate of 17.3% is slightly down from Q3 2010, the high point since 1993. Meanwhile, average rents are still more than 25% below the highs in 2008 in most markets.
In most places, it remains a tenant’s market and an especially good time for credit-worthy tenants to exercise their leverage in negotiations with landlords. While some landlords are becoming more bullish, most are focusing on tenant retention at almost all costs as demand remains sluggish in most markets nationwide.
Along with modest job growth is the phenomenon of unused “shadow space.” Companies will backfill that space as they hire rather than expand. At the same time, over 70% of transactions continue to be renewals rather than relocations.
Bright Signs
Positive indicators include the following: The amount of occupied space increased slightly for the second straight quarter, and average office rents also rose slightly, their first spike since Q2 2008. In addition, investment activity rallied last year, recording $168 billion in sales, up 60% from 2009.
Opportunities for Tenants
The window is still open for tenants in most markets, and we continue to encourage companies to be proactive in negotiations before their leverage begins to slip. In some instances, one or two-year extensions are available as landlords anticipate a better market in 2013 and beyond. Because of the likely tightening in availability, we rarely recommend the short-term extension strategy at this time, unless the business plan simply cannot support a longer commitment. However, tenants need to weigh flexibility versus likely rent hikes in two or three years. In other instances, tenants, especially those with strong business plans, have an opportunity to lock into leases of eight years or more. Finally, given low interest rates and impending changes in lease accounting, this may be an excellent time for some tenants to buy real estate.
To learn more about your local market, check out our Tenant’s Guides here.
Tags: corporate real estate, job growth, landlord, recession, tenant, unemployment
Posted in Tenant's Guides | Comments Off
The Incredible Shrinking Office
Wednesday, March 30th, 2011
Technology Hinders Real Estate Recovery But Gives Office Tenants Added Leverage
By Joe Sciolla, Managing Principal
It’s a case of the incredibly shrinking office, and technology is a prime culprit.
Here’s how it works: As technology increases productivity at the workplace, it also leads to a decreasing need for space. Thanks to automation, we need fewer employees, we use less space per employee, and we outsource more jobs overseas. As a result, with new job growth still limited, class A and B office vacancy rates in most markets continue to be high, and rents continue to be flat.
Indeed, technology, while it generally boosts efficiency and cuts costs, also compromises the commercial real estate recovery. This is bad news for landlords. At the same time, however, it’s good news for tenants since they have added leverage as they look to renew their leases or relocate in a “flight to quality.”
Fewer Bodies
With laptops, smart phones, and iPads becoming more sophisticated and more ubiquitous, fewer employees are needed at the office. Today, seven employees can do the work that required ten before the dot-com boom. Moreover, wireless technology has created an environment in which anyone can work practically anywhere at any time.
Today’s virtual office can be a home studio, a car, a plane, or a hotel. While this is clearly not the best set-up for everyone, it has proved to be effective for mobile salespersons, consultants, etc. If a dedicated area in the employee’s home allows for telecommuting, corporations may invest in off-site furniture, phones, faxes, and computers.
Another intriguing arrangement is hotelling, in which companies reserve office space on a “check-in, check-out” basis for employees who are typically on the road. These fully equipped, shared workstations are effective in certain situations, but they may not work when workers are involved with team projects or need face-to-face supervision.
Fewer SF
In the last 10 years, we have seen a significant reduction in the average office space per employee. In 1995, it was approximately 300 SF; in 2000, it was 250 SF to 275 SF; and today, it is about 225 SF or less. A continuing trend is to place more employees in workstations rather than private offices. Today, as much as 70% to 90% of staff members are assigned to workstations, some as small as 36 SF. Almost half of employees today occupy less than 250 SF.
Another trend is the use of collaborative space outside and inside the office. Conference rooms are getting more use, and there’s also greater use of collaborative technology such as videoconferencing, which brings people together at the workplace. Videoconferencing as well as virtual meetings further reduces the need for everyone to work on site. In the office, wireless technology means less hardware, and flat screen computers and TVs consume less space. And while the paperless office is not quite a reality, less paperwork means less space needed to store these supplies.
There’s also the related environmental benefit: fewer trips to the office helps to conserve energy, and less paper helps to conserve trees.
Fewer Jobs
Slow job growth continues to hinder net absorption. Meanwhile, corporate mergers and acquisitions contribute to job losses and excess space. Further exacerbating job growth is the continued flow of jobs to India and other locations overseas.
Reports show that engineers from India perform similar tasks to their counterparts in the States for about one-fourth the salary. In this light, it gives tech companies an efficiency edge when they offshore jobs and operate 24 hours a day.
More Opportunities for Tenants
How can tenants capitalize on these soft market conditions? Clearly, they can use their leverage in many ways as they negotiate with landlords anxious to limit their liability.
First, companies should consider partnering with a corporate real estate advisor that puts their interests first and can save them thousands of dollars. In selecting a real estate service provider, companies should factor in the value of start-to-finish services, including strategic planning and project management.
For companies with fewer than two years remaining on their lease, we recommend they look into early lease renewals. Chances are they will be able to negotiate better terms as well as concessions like free rent and tenant improvement allowances. For companies thinking about relocating, they should, if appropriate, look into trading up into higher quality space.
During contract negotiations, tenants should strive for lease flexibility. This is particularly important for high-tech firms that operate in a volatile market. They should negotiate for expansion as well as contraction and termination options.
Also important during upfront negotiations is space planning and construction management. For example, if a company has downsized, it might consider reconfiguring its space to maximize efficiencies. Here, a project manager can be a huge help.
In the final analysis, technology naturally helps us become more productive. But as technology giveth, it also taketh away. If you’re a landlord, you must deal with our shrinking offices and high vacancies. If you’re a tenant, you should study the market and then crunch some numbers on your laptop. Do your homework—whether at the corporate office or in your home office—and make the numbers work for you.
Tags: corporate real estate, landlord, office space, technology, tenant
Posted in Transaction Management | Comments Off
Tenants Start with Project Management, Finish with Big Savings
Thursday, March 24th, 2011
By Dwight Patten, Director of Project Management
While the recovery slowly continues, it continues to be a tenant’s market, and cost-conscious companies are finding opportunities to save that go beyond reduced rental rates. Whether companies are upgrading or renovating existing space or building out new space, many are discovering that they can realize significant additional savings—in some cases more than $1 million. How? By adapting upfront, value-added Project Management.
Project Management—often overlooked and misunderstood—is a process that oversees all components of commercial real estate projects following strategic and portfolio planning. It involves managing all the elements that help you optimize your space needs, align your real estate with your business plan, and improve your bottom line.
To maximize savings, you should engage a Project Manager before the lease signing. Typically, the Project Management sequence includes the following steps:
-Lease negotiation (right-sizing space, maximizing tenant improvements, ensuring on-time project completion)
-Needs analysis and project objectives
-Vendor selection (architects, engineers, general contractor, IT, furniture)
-Design planning and space programming
-Construction control
-Move-in coordination
The right Project Manager orchestrates the whole process (including measures to “green up” your office, as needed), ensuring that your project comes in on time and on budget.
What Are the Benefits?
As far as cost savings, we have found that tenants will save at least the cost of the Project Manager by the project’s completion. One way Project Managers can guarantee savings is by leveraging relationships with vendors who want to work with them. For instance, they can drive 70% price reductions from furniture manufacturers alone.
Beyond cost savings, they will help you mitigate risks and minimize your time and stress. And additional benefits continue long term as space upgrades often lead to improved employee productivity and morale. For instance, through space reconfiguration, you can avoid empty pockets of vacant space, bring employees closer together, and establish a more collaborative environment. Sustainable practices will also produce a healthier workplace—and they are proving to help companies be more competitive, enhance recruitment efforts, and not necessarily cost additional “green.”
Overall, alternative work optimization strategies such as space restacking are now particularly timely as a new generation of younger employees are benefiting from new technologies, working in virtual areas, and sharing space at the office.
How to Proceed?
Meet with a project manager and real estate advisor who can integrate all your real estate needs, objectively arrive at a consensus, and represent your best interests. And remember to put project management to work before the deal is done.
Think of project management as an insurance policy that gives you peace-of-mind. The right team will provide a single source of accountability with professionals who will navigate around potential pitfalls and squeeze savings every step of the way.
Whatever the economic climate you should consider engaging an experienced, knowledgeable Project Manager who will plan intelligently and deliver as promised.
Tags: corporate real estate, cost savings, lease, PM, tenant
Posted in Project Management | Comments Off
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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