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.