FOCUS ON WHAT’S IMPORTANT
Companies searching for new office or industrial space in today’s soft office market, or conversely today’s healthy industrial market and listing brokers and landlords are guilty of this as well… They often tend to focus almost exclusively on rental rate. In other words, the lowest price should be enough to positively influence a tenant’s decision to lease space in a building. The result? We’re “commoditizing” commercial space alternatives while losing the focus on what is right and best for the tenant.
SPACE ISSUES BEYOND PRICE
Let me be the first to say that economics are always important and competing buildings must be reasonably similar. However, economics are not the most important element when it comes to making a real estate decision. I have often told clients, “What difference does it make if the landlord provides the space at no cost, if the space is not functional and does not effectively work for you?” Retail clients generally seem to have a better handle on weighing the intangibles when they make space decisions. They understand that there are issues far more important than price. Issues such as exposure, vehicle traffic counts, ease of access, parking and neighboring tenants. Issues that will impact their long‐term success more than a marginal reduction in their base rental rate.
TOTAL COST SOLUTION
So many components go into a good real estate decision, and price is only one of those components. Tenants need to look at a “total cost solution” rather than just a “rental rate” solution. The latter is the proverbial tail wagging the dog kind of decision, and decisions like that never work well over the long term. That’s why establishing a preliminary budget is critical to the process. So that companies don’t waste time looking at what they can’t afford. Companies often do themselves a disservice by discounting the importance that a well thought out facilities plan plays in their long‐term success. Space, like any other component of a firm’s business plan, should function strategically. Ultimately, ensuring long‐term success for the firm. The list of items that ensure long‐term success generally relegates price to the lower tier of importance.
RANKING CRITICAL ISSUES
Companies must address, evaluate and rank the importance of critical issues. These may include parking availability, access, visibility, building efficiency, flexibility to expand and contract, on‐site or close‐by amenities, public transportation availability, security, sustainability issues, building management, landlord financial viability ‐‐‐ and, obviously, the financial structure. Whether internally generated or broker generated, tenants must understand the total cost of the deal. One deal may provide more dollars for tenant improvements; another deal may offer less tenant improvement dollars but more free rent. Yet another may offer to graduate or step the rent and pay moving costs. And in the end, a simple consideration like ease of client access or proximity to public transportation may trump the lower base rent deal.
Guard against making an impulsive, “head in the sand” facility evaluation. Select a member of your team and a competent real estate broker who will ensure that your firm makes a well thought out space decision, not a decision based on a single issue like rental rate. Make sure you have completed the proper due diligence before signing on the bottom line!
NEED HELP FINDING THE RIGHT SPACE?
Reach out to one of our
TRUSTED. DEDICATED. EXPERIENCED.
brokers at Paramount Real Estate Corporation:
Industrial: Fred Hedberg, CCIM, SIOR, Principal
Phil Simonet, Principal
John Young, CCIM, Vice President
Joseph Schultz, Associate
Jack Buttenhoff, Associate
Office: Nancy Powell, Vice President
FOCUS ON WHAT’S IMPORTANT
Q & A
Questions Tenants often Ask Regarding Their Occupancy
Written by Bob Johnston | Vice President Sales & Leasing
QUESTION #1: What if the Landlord isn’t finished building out my space by the time I want to move in?
ANSWER: If the Landlord is actually responsible for the completed work, much depends on how the lease is written and the commencement date defined. For example, a commencement date can tie to the substantial completion of the space, so the lease will not commence until the Landlord completes the work. Sometimes, the date is even contingent upon occupancy and the commencement of business in the space. On the other hand, the lease might define a specific commencement date. If the Landlord is late, the lease language will generally state that there is no culpability on the Landlord’s part, but the commencement date becomes the date on which the space is completed and the initial term extended from that date. In short, these issues are negotiable and dependent on each tenant’s situation.
QUESTION #2: Toward the end of each calendar year, the Landlord sends us a note informing us of the new Common Area Maintenance (CAM) & Real Estate Tax estimate for the following year. However, we never get a breakdown of the actual expenses. Is that available?
ANSWER: Most landlords will provide that information if requested. It always helps to have language in the lease that allows for a tenant’s review of the costs; and with larger tenants, audit rights are always helpful.
QUESTION #3: What do I need to do to get the tenant improvement allowance provided by the Landlord?
ANSWER: Typically, smaller tenants with smaller budgets, the only requirement is a formal letter requesting Landlord reimbursement of the allowance and proof of completion accompanied by all subcontractor lien waivers. Larger jobs can have a title company involved to administer “construction draws” and monitor the construction progress.
QUESTION #4: Do I need to hire a disinterested third party architect to confirm the size of my space?
ANSWER: Typically not, but each situation is different. The buildings architect can pre-measure individual spaces or bays. From the measurements, floor plans can be drawn. Therefore, the space computation is generally accurate. RU factors can vary by building, and are often much higher in smaller buildings. It helps to check the accuracy of the actual useable space and clarify the respective RU factor to calculate the rentable area (the number that determines the annual rent).
Get answers to all your commercial real estate questions & questions tenants often ask.
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Successful Commercial Leasing = Understanding Your Rent
by Bob Johnston | Vice President Sales & Leasing
THE TERMINOLOGY OF RENT
Successful commercial leasing is all about understanding your rent. Most commercial leasing today are “net leases.” Meaning that the tenant pays a “base rent” which is “net rent”, or separate from, the operating costs and real estate taxes for the property. The operating costs are then passed on to the tenant as a separate cost. Equaling a total rent cost and what many then refer to as “gross rent.”
Even this varies, however, from property to property. For example, often times in retail and industrial properties, tenants pay for their use of electricity and gas as well as janitorial services. In addition, sometimes the tenant, at its expense, must contract for local trash pick-up. These separately contracted costs are not part of the ordinary operating expenses. On the other hand, office leases typically are “full service” leases. In other words, there are generally no extra charges. Other than perhaps charges for extraordinary use of services such as air conditioning or cleaning, etc.
It is critical that a tenant understand the complete picture and know what the total rent will be. Also, it is critical that the tenant understand what expenses make up operating costs. Then understand what costs are reasonable and legitimate. It is obviously to the landlord’s advantage to get the tenant to pay as much of the total operating budget as possible. This is even more critical in mixed-use projects. Mixed use is where landlords tend to shift maintenance costs for the residences to the office component. Thus, the office tenant contribution is actually more than what it should be. I once audited the landlord of a very large mixed-use project in Chicago. I found over $100,000 wrongfully allocated to the tenant even though the lease prohibited their doing so.
WHAT SHOULD NOT BE INCLUDED IN RENT?
Here are some suggestions as to what to eliminate from the landlord’s menu. The list is obviously not exhaustive, but rather illustrative of some of the costs landlords attempt to pass on to tenants:
Leasing commissions, space planning expenses with architects/interior designers, or even attorney costs associated with a lease negotiation or existing tenant dispute.
Costs associated with the construction of tenant improvements, either with new tenant relocations or existing tenant renovations and remodeling.
Costs associated with the entity of landlord, particularly as it relates to partnership/ownership issues or the selling or refinancing the property.
Many large landlords have affiliates or interests in affiliate companies, so it is important to ensure that the contracted vendor costs are no more than what an unrelated third party vendor might charge.
Be careful about the expenses for salaries, benefits, etc. that go into “management fees.” Executive salaries, or any allocation of those salaries, should not be part of the operating costs for the building.
Capital improvements are not, by accounting standards, expense items. Although, landlords can routinely pass on the amortized cost of the improvement as an operating expense.
Make certain that in a retail environment, the tenant’s pro-rata share of operating expenses is calculated over the entire leasable area of the property. Rather than only on the space currently leased and occupied.
Proper due diligence and understanding of the components of a building’s operating budget are critical to a tenant’s successful occupancy, financial stability and long-term enjoyment of the space.