If you expect to get a fair and competitive rental rate and terms on your renewal, you need to start early and have a process.

Your Landlord is a professional. They probably have also hired an expensive real estate leasing company and have a $500/hour commercial real estate attorney. This is serious business.

Even if you have what is considered a small lease for a short 3 year term, you are with near certainty making a 6 figure business obligation. If you have 50+ employees, you’re more likely to make a 7 figure obligation and perhaps larger. You’d better take it as seriously as if your company was involved in a lawsuit of that size.

The Landlord’s asset manager gets his/her bonus based on how much they increase the revenue on your property. The highly paid professionals on their side have to justify their fees. They all work on several hundred leases each year. They are smart professionals.

Don’t expect to do this once every 3 or 5 years and outwit them. Your only chance for success is to create market competition. Accept that you are not a better negotiator than them, but the market is a better negotiator. If you can get other landlords to bid for the future income stream offered by your firm, that market force will apply downward pressure on your rent and improve the other terms.

Let’s suppose that you’ve decided that you don’t need professional representation, or at least have not made a final decision yet, your first and most likely choice is a simple lease renewal, and there is nothing too complex happening such as expansion, downsizing or major reconfiguration.

Before you get started, pause a moment to take in the big picture and assess where you stand. If you are planning to renew, here’s the likely situation: Your existing space is not perfect, but it works for you just fine. You, or your boss, decided “It would cost us a fortune to move” and lacking any other compelling reason, you’ve already decided to renew. You’ve not received a proposal from your landlord, but assuming they are “reasonable”, renewal is a forgone conclusion.

Regarding that thought above, “It would cost us a fortune to move”? A few points:

  • It probably costs a lot less than you think. The physical move is approximately $.50/SQFT + $400 seat for cabling + furniture assembly if you have cubicles + minor IT and phone reprogramming. And a new landlord will, in almost every market in North America, provide a move allowance or free rent that will more than cover that cost.
  • However much it will cost you, it will almost certainly cost your landlord a lot more. Vacancy, marketing, completely rebuilding the space for a new tenant, lost rents while the space is under construction, and free rent as a concession to the new tenant to entice their move equals a very big number.
  • You’re doing your landlord a very big favor by staying. In fact, between 75% and 80% of all tenants renew their leases. So before they even have a conversation with you, they know that the odds are that you’ll renew. Imagine going to Vegas and knowing that you’ll win 4 of every 5 hands of blackjack.

Now imagine that the odds are reversed. The landlord is making a proposal to a company considering 5 possible locations. Their odds are now 20% rather than 80%.

Not so great for them and here is why: A commercial building is not worth it’s replacement cost without a tenant. When they sell, the building is valued on the income stream. And here is a small but very important consideration, so please excuse the all caps.

YOU CONTROL THE INCOME STREAM. YOUR BUSINESS IS THE INCOME STREAM.

You’ve got a lot more power than you probably realize. I know that it seems like the landlord is big and powerful, and that certainly is a nice big building that they own, but you can bet that the bank will come and take it away from them if they don’t keep it full of tenants just like you who pay the mortgage with those income streams. A building is, generally, a commodity. You don’t have to advertise to find people who will accept your rent money, but they have to advertise their space for rent. Think about that.

commercial lease commencement dates

A typical commercial office or industrial lease states something to the effect that the “The Commencement Date of the Lease shall be the later of X date or the date that the Landlord delivers the Premises to the Tenant.”  (Note:  If it says the “earlier of X date ….”, your landlord is really giving you a raw deal. Do not ever allow it.)

This Commencement Date language protects you in case the Landlord is late in completing construction and you don’t get possession when planned.  Right?  Wrong.  Here’s why: Read more

Mick Jagger, Net Present Value, and the new FASB IFRS Lease Accounting Rules

I took this photo of Mick Jagger when I was a photojournalism major at the University of South Florida. It made the cover of a small time music magazine, and I had visions of eventually getting my work on the cover of Rolling Stone. Just like the song.

Around the same time, I took an elective real estate course and showed the photo to my professor. The unimpressed professor said, “If your photos are great, your photojournalism degree won’t matter. And if your photos are bad, your photojournalism degree won’t matter. Why don’t you change it to a finance degree in case the photos don’t work out?” Read more

Let’s consider the corporate headquarters of a fast growth service business. Suppose that 1) they have a preference for keeping everyone together in one contiguous space, 2) they desire to strategically minimize cost and risk, and 3) growth rate is a variable based on many factors. What is the smart way to scale facilities? Read more

Driving Business Growth using Smart Real Estate StrategyIf you have a growing service business, you probably used to shop for office space by comparing rental rates. The lowest cost space, of comparable class alternatives, was often the best choice. That’s no longer the case.

The cost of labor, including attracting, hiring, compensating and retaining staff is typically between 8 and 12 times the cost of the real estate that houses that staff. So while you certainly don’t want to overpay, in the grand scheme the cost of the real estate is just a fraction of the cost of labor, so perfect placement to attract and retain that talent is far more critical than rate. Read more

With the exponential rise in online sales over the past few years, and an expected additional increase of 54% by 2020 according to Forrester, retailers as a category are hurting. A June 2017 article in the L.A. Times predicted that up to 25% of U.S. malls will close in the next five years.

It is not that people are buying less, it’s that Amazon (mostly) and others are selling more product directly from a warehouse. The game changer that is making this possible is speed. Today’s consumers value speed to such a degree that many are willing to pay in advance for it: take Amazon Prime as an example, where $99 a year buys you a year’s worth of free two-day shipping upgrades on purchases. Read more

The Eight P&L Impacts of a Corporate Lease

On many CFO and financial executive’s Urgent Issues or Focus List, real estate often doesn’t make the top ten. Why? I think in part it is because the impact of a real estate decision is spread over many categories of the Profit & Loss Statement. (I won’t get into FASB ASC 842 even though it is one of my favorite topics — for now anyway, keeping watching this space for future posts) Read more

How to Screw Up an Acquisition

Acquisitions often focus on just a handful of items: synergy, talent, perhaps geographic coverage and/or technology, and revenue of course. The investment bankers and attorneys that orchestrate the deal generally do a great job of ferreting out the business issues that need resolved. Except for the real estate. Read more

When choosing professional services, there exists an old adage that the largest providers are the safe bets. “Nobody ever got fired for hiring IBM” was the well known saying implying that a large company offered at least the reasonable perception of reduced risk over smaller firms. In regards to technology consulting, those advantages may have been real or simply perceived. When choosing commercial real estate advisors however, often the risk increases significantly as the size of the provider firm increases.

Read more

The City of London realized, shortly after WWII that they would need a new airport, now known as Heathrow.   The job of determining the location was entrusted to Alfred Critchley, a successful businessman.

Consider the many criteria that must be considered when choosing the location for a major airport: Transportation access, proximity to the population, geotechnical suitability, environmental impact, utility infrastructure, land acquisition costs, many others. Read more

Most commercial office leases contain a provision that requires the tenant to promptly return an estopple upon request.  What exactly does this bit of legal jargon mean?

It’s actually pretty simple: an estoppel is a common legal document that serves to 1) confirm various aspects of a lease agreement and to ensure that important documents and facts are accurate, 2) affirm that the landlord has met all of his or her obligations and 3) confirm that there are no additional addenda or other modifications to the terms. Read more

FASB-3-1

It seems like every accounting, real estate, and asset tracking software firm has published an article on the new FASB Lease Accounting Standards.  I’ve noticed that they all tend to talk in generalities about the actual mechanics, and none that I’ve found seem to offer suggestions from a corporate user perspective aside from “Get ready!”. Read more

When companies acquire or merge with other competing or complementary firms, real estate is, as a part of the transaction, generally a small overall concern. However, we frequently see major risk being absorbed by the acquiring firm with potential for a very negative surprise down the road. Read more

real estate timing

In honor of Back to the Future, let’s talk time travel in commercial lease negotiations…because business decision makers often need it. Many companies wish they could go back and start things sooner or change that one clause in the lease document that they overlooked in haste. Who would have thought that a holdover provision would prove so important in a simple lease renewal? Why does the landlord take so darn long to respond to our counter offers? Maybe we should have just bought a building or built to suit. Unfortunately, options are drying up and Doc Brown’s Flux Capacitor doesn’t exist. Read more

amazon prime logistics

A few months ago, I joined Amazon Prime.  That’s a $79/year program that Amazon developed that gives members free 2 day shipping on Amazon-stocked products (which is most of the stuff that they sell).  For me, having nearly anything I want conveniently delivered anywhere I want in two days is fantastic.  However, the second time I bought from them, I was given a choice:  Free 2 Day Shipping, as I had signed up for, or Free No Rush (5-7 day) Shipping with a $1 credit to their Amazon MP3 Music Store (with most songs priced $1 or less). Read more

multiple real estate locations

Any corporation with more than one office/branch/site is large enough to have real estate portfolio objectives. With just a handful of locations, the C-level executives are likely very hands-on in determining the best solution as real estate opportunities or decisions present themselves. Once the number of sites grows to a point where that oversight is delegated though – whether placed under the responsibility of another staff member such as Regional VP’s, Controller, VP of Finance, General Counsel, or a dedicated Director of Real Estate – there are three styles that the management can typically be classified under: Read more

key performance metrics

Every business has a learning curve as it grows, and the collective wisdom learned along the way becomes an invaluable knowledge base.  This is especially true in regard to your facility strategy.  By analyzing  what was done right and what could be improved in each new location or lease renewal process, you can develop rules to achieve the greatest return and avoid pitfalls. Read more

It is a great time to be a tenant, and here is another example.  Because almost all options are written with the assumption that rates will climb forever upwards, we’re seeing some interesting effects as rental rates tumble.  Some options are literally not worth the paper they we’re written on.  However, declining markets have made some usually unattractive renewal options have new value.  Here’s why: Read more

If you were around and fortunate enough to have a cell phone 30 years ago, you most likely had a Motorola “brick”.  It made calls.  It did not have a camera, email, mapping or navigation function, calculator, clock, or play music.  It could act as a paperweight, mini-dumbell, or a defensive weapon in a pinch.

Now, think about how much has changed in cell phones in the last 30 years. Read more

operating expense pass through

I’m not crazy about condominiums.  Here’s why:  Other people (the condo association – which is often controlled by a very small group of individuals) get to vote on how to spend your money.  Some of those choices may not add value for you or to your property.  Operating expenses on leased commercial property work the same way.  The management company, which is the property ownership or someone under their direct control, gets to decide what expenses get passed through to the property tenants.  So what expenses do they pass through?  Every single one that they can possibly get away with.  There are only two methods of protection for tenants, and I’d estimate that more than half of all leases don’t fully take advantage of them. Read more

captive tenant syndrome

In a recent post, Newtons First Law, we discussed how the “house odds” favor landlords since the overwhelming majority of tenants renew their leases.  Why?

Because:

  • It is a hassle to move
  • Evaluating options would require time and effort
  • A move would cause disruption to already stretched staff resources
  • It is expensive to move

Read more

You’ve negotiated commercial leases from New York and Washington D.C. to Beijing and Moscow. What has that taught you?

EB – Negotiating an office lease is like playing chess for money. Very significant amounts of money. However, unlike chess, you cannot study and learn the moves from the masters in a book or from a computer. Certainly laws vary between municipalities, although so do customs and customary lease terms. Something learned in Abu Dhabi might spark an idea for a transaction in Chicago, or vice versa. The only way to learn is through personal experience and direct involvement, and this cumulative global experience expands the solutions available.

Are there mistakes that you commonly see being made by firms leasing space?

EB – Of course. Real estate is a relationship business, primarily because it is business that requires a very high level of trust. People tend to trust the people that they know, and they should of course, but that can also cause them to be blind to recognizing competency and seeking out the highest level of expertise. For example, we often see law firms that will choose a real estate representative based on that firm sending business to the firm. So in exchange for some nominal amount of legal work that primarily benefits a few real estate partners, the entire firm might suffer six or seven figure missteps in their lease strategy.

Well, yes, that certainly could be painful. Anything else?

EB – Most firms generally do not allow enough time for planning and wait for an event, such as an expiration or need to expand, before developing a strategic plan. The real estate strategic plan should be ongoing. It should start at the beginning of a lease term, so that it can be tweaked and refined over time, and the tenant can properly position themselves with the landlord and in the market. The best time to start is not a year before the expiration.

Your website has a “Canon of Ethics” that discusses conflicts of interest. Should that be a concern?

EB – There are only two types of representation: No Conflict and Not Quite No Conflict. Which do you think is best? I’m an attorney, and each state Bar where I’m admitted has a set of rules of professional conduct that says to effect, that “a firm will not represent a client if their responsibilities to that client might be adversely affected by their responsibilities to another client”. Unfortunately, the commercial real estate industry does not hold itself to such standards and client firms tend to therefore overlook the issue. The simple fact is, a real estate company cannot represent both tenants and landlords, because the other party represents prospective business to their firm, and that can cause unfavorable judgement or pressure on the part of the representing firm. The full service firms try to explain this away by saying that they manage it, but they cannot manage both the interests of individuals in their firms and of their stockholders to maximize profit.

Your client list includes some of the largest law firms in the world and presumably some of the smartest attorneys. Does that make it more difficult for you to represent them?

EB – On the contrary, the smartest attorneys are the easiest to work with because they understand that it takes intelligence combined with experience focused in a very specialized area to create excellence. Whether hiring an attorney or a real estate advisor, or both, you have to decide whose brain power and personal experience you want working for you.

Dubai commercial real estate

The world’s tallest building is perhaps the greatest architectural and engineering accomplishment of man.  While most construction methods used for our local homes and buildings have not changed in the last 50 years or so, the Burj Dubai pushes the envelope of technology, sustainability, and functionality.

The fact sheet is amazing.  For example, the concrete used in the structure would be sufficient to build a sidewalk 2,065 miles long – about the distance from NYC to Monterrey, Mexico.

Here’s an infographic with more detail:

worldstallesttowertheburjkhalifa_52d2af15985d4_w540

One of the easiest and most effective ways for a corporation to keep real estate costs low is to regularly perform Market Rate Audits on their leased locations.  Often many companies get caught up in reactionary tasks such as simply handling leases as they come up for expiration, so they never get ahead of the curve with a proactive approach. Read more

By Ed Harris
(Editors Note:  Ed Harris is VP of Commercial Tenant Services, a NYC-based auditing firm that specializes in corporate lease review. We hope you enjoy this guest article.)

Few areas hold as much impact on capital outlay as real estate and leasehold expenses. Ensuring that your company is not overpaying is integral to fiscal management.

  1. Significant Jumps in Operating Expenses / Additional Rent
    Performing a simple trend analysis of your year-to-year operating expense obligation is a must. And while inflationary and market forces generally create an escalating building operating expense profile, when you see a marked jump in expenses issued to you, a red flag should rise. Causes of significant jumps might include new and potentially lease impermissible capital projects, new expense categories not reflected in your base year, new contracts or vendor changes and/or related party issues, and newly increased or above standard services which are not reflected in your base year.
  2. Change in Property Ownership / Property Manager
    A change in property ownership or property management should always trigger a lease audit. Property management changes create a very real risk of affecting accounting category integrity which is integral to an apples-to-apples comparison to your base year level. Management fee levels and composition, related party vendors, and changing service levels are also common building operating expense issues when a building changing ownership or management. Another potential trap fall in a building transaction is the tenant estoppel which, if not carefully worded, has the potential to sign away rights or leverage. Finally, once a building changes hand, future audit finds and recoveries may become complicated should overcharges be identified in years under previous ownership.
  3. Building Undergoing Capital Improvements or Renovations
    If you are walking into your building and notice construction – audit your landlord. Renovations and capital projects may be subject to your lease operating expenses exclusions, and every project should be audited for permissibility under your lease. And while you are most likely obligated to reimburse the landlord for a true building operating cost, you probably are not obligated to reimburse your landlord for increasing the value of his/her building if it does not reduce building operating costs in the future. And if your building had undergone renovations and/or capital improvements in past and unaudited years, it may not be too late. Those costs were most likely amortized across future years, and there may still be an opportunity for avoid ongoing expenses if they prove to be impermissible per your lease exclusions.
  4. Your Lease is Commencing / Expiring
    Perhaps the most valuable times to have a lease audit performed are at the commencement and expiration of your lease. If you occupy under a base year lease, the valuation of your base year will have material impact on your leasehold expenses throughout the term of the lease. It is in your direct interest to both validate all charges in Year One, and to validate expense levels so as to not undervalue your base year. Likewise, lease audits should always be performed as a standard practice at any lease expiration. Not only might you lose rights to recoup any overcharges after vacating the premises (audit windows), you may lose significant leverages after your move. Lease audits and the potential uncovering of over- or mischarges may also have a material impact on any lease renewal negotiations and construction of lease amendment/renewal language.
  5. Sizable Shifts in Building Occupancy Levels
    Accounting for accurate building occupancy levels is integral to an accurate gross up methodology and can have enormous implications to your operating expenses obligation. This can be significantly magnified vis-à-vis fixed versus variable occupancy-level driven expenses should the vacancy rate in your building be sizable. And of course it directly benefits the fiscally conscious tenant to ensure that occupancy shifts are accurately reflected within a given expense period.
  6. No or Limited Backup Supplied to Annual Reconciliation Statements
    Just as you would not accept your credit card statements if they did not itemize your charges, accepting an annual reconciliation on face value is fiscally unwise. Yearend reconciliations can carry significant and lease term long financial impact – particularly if your lease terms include caps or index-driven escalators. And any failure to timely challenge a landlord’s computations and/or inclusions may forfeit your rights thereafter per potential audit windows as discussed above. Accepting a rudimentary reconciliation, even one broken down to expenses per billing category is to trust your company’s finances to an outside party with a vested interest in maximizing its profits. Whenever an annual reconciliation crosses your real estate department’s desk without sufficient back up to verify expenses and calculations, a lease audit should automatically be triggered.
  7. Building or Landlord is in Financial Straits
    While it might not always be obvious, it is in a tenant’s best interests to periodically inquire into a building and its owner’s financial wellbeing. These are difficult financial times, and few sectors have been hit as hard as commercial real estate. Commercial Tenant Services (CTS) has uncovered multiple examples of landlords in difficult financial straits materially overcharging their tenants. And while we would never suggest that such a situation directly underlies the overcharge in any specific example, the coinciding of the two – a landlord in financial distress and overcharges to its tenants – can be a recurring theme.

It is important to remember that auditing your landlord issued expenses is your right. It is sound fiscal practice and required compliance protocol in many of the most efficiently run companies in the North American markets. Lease audit has become commonplace, and chances are your landlord has been audited by its tenants many times before your inquiry. Nowadays, landlords expect to be lease audited and have generally already prepared for your call.

Edward Harris is the co-founder of Commercial Tenant Services and has over twenty-five years of real estate finance and lease audit experience. Mr. Harris holds degrees in physics and engineering from Columbia University, and an MBA joint degree in Real Estate Finance and Operations Research from the Graduate School of Business at Columbia University.