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

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

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

real estate is like poker

Don’t be so naive to think that just anyone in your company can handle your office or facility lease negotiations. It’s not like leasing an apartment, but more like playing poker against Doyle Brunson (2-time World Series Champ/Hall of Fame). Just like your landlord, Doyle would be plenty nice to you and let you go on believing you belong at the table, but at the end of the day, he’ll have your money…and you’re none the wiser. Read more

commercial lease demising

Here’s a simple technique that has saved several dozen of our clients literally millions of dollars in lease costs, and is very applicable to the changes happening in today’s market. We call it the Tape on the Floor Option.

Many years ago, a utility client asked our firm to help them secure 25,000 SQFT of Class A office space. After some discussion, they revealed that they’d only have about a dozen employees to start although expected to ramp up to about 60 people within 18 months. 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

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.

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. Read more

Newton’s First Law of Inertia:  An object at rest tends to stay at rest.

A Landlord’s First Law of Inertia:  A tenant in place is likely to renew.

How likely?  It is hard to find precise data although many Real Estate Investment Trusts report that in excess of 80% of their commercial portfolios renew.  With those kind of odds, most landlords will presume a low risk of vacancy at renewal time and in-place tenants will be offered less favorable rental terms than a new tenant coming in off the street.

Does a renewing tenant often pay more?  Absolutely. These tenants justify it with a number of flawed justifications:

Reason:  “We’re still paying less than the Landlord’s “asking” price.”
Flaw:  Nobody will end up paying the “asking” price.  The only amount that matters is the true market rate, adjusted for concessions such as free rent and improvement allowances.

Reason:  “It would cost a lot to move.”
Flaw:  It’s probably less than you think, and many firms never actually do the homework to determine the real cost.  Further, many prospective landlords will either provide a move allowance and/or a free rent period equal to or greater than these costs.

Reason:  “It is a hassle to move and a bad time due to limited staff resources.”
Flaw:  The productivity gains that are typically accomplished by improved workspace and layout often reduce facility costs 15-20% or more, and most tasks can be outsourced to relocation firms that specialize in corporate relocations thereby requiring very little staff involvement.

There is a term for this flawed mindset, Captive Tenant Syndrome, which I’ll cover in my next post.  Until then, don’t be caught sitting on your hands.

If you go into the grocer and purchase, for example, three pounds of salmon, you can be relatively certain that you now possess three pounds of salmon.  However, if you lease 30,000 SQFT of space in an office building, can you be relatively certain that you possess 30,000 SQFT?  Absolutely not.

Here’s why:
To start, there is the concept of “rentable” and “usable” space.  In summary, “usable space” is the space actually contained within your walls, and “rentable space” is the same number plus your proportionate share of all common elements such as elevator lobbies, bathrooms, fire stairs, and mechanical rooms.  If you lease half of a floor, the rentable calculation would apportion half of those elements for your use and add that amount to your usable calculation.

The American National Standards Industry (ANSI) has created very detailed specifications on how to create accurate measurements.  For example, dimensions are taken from the interior of glass windows to the mid-point of the wall for any walls shared in common with other tenants, etc.  This standard has been adopted by The Building Owners and Managers Association (BOMA) and some landlords agree to adopt these standards.  Fair enough.

But there is another scenario which can cost you thousands, perhaps even tens or hundreds of thousands of dollars over the term of your occupancy:  Phantom Space.  This is when either the usable or the rentable numbers or both are inflated above the actual or proper numbers.  Sometimes this occurs because the Landlord or their representatives choose to ignore the ANSI/BOMA standards in favor of their own.  These may be based on a measurement of the landlord’s choosing (the drip line of the roof for example) or could be, well, anything that they decide which may or may not be based on a real metric.  Illegal?  No, because all aspects of a lease are negotiable – including the basis for measurement – and the landlords that do this almost certainly have very smart attorneys who put language in the lease that will indemnify them and prevent recalculation to any reality-based standards.

Do you think this is a low risk concern?  A May, 2014 article in the Wall Street Journal details how the MetLife Building has somehow grown from it’s original 2.4M SQFT in 1979 to 3M SQFT today.  Indeed, NYC is notorious for floor measurements that have in some cases exceeded the outside measurement of the actual building.  Many real estate firms, including one quoted in the article that purports to represent tenants, turn a blind eye to the practice and shrug it off with the attitude, “It’s an important enough market that they (the Landlords) can make their own rules”.

How do you protect yourself?  Take these precautions:

1. Insist that measurements and rentable adjustments be done in accordance with ANSI/BOMA standards.  Note that The International Property Measurement Standards Coalition mentioned in the article is working towards a global standards, although it will likely be years before it is adopted in any significant way – and more likely never by unscrupulous landlords.

2. Hire your own architect, rather than relying on the Landlord’s architect.  The architect, like most professionals, has a fiduciary responsibility to their client.  Make sure that you have someone on whom you can rely for accurate and honest representations.

3. Include language in the Lease document that affirms measurement to to ANSI standards and allows for adjustment if a discrepancy is discovered.

4. Be certain that you have a tenant representative that insists on the items above, manages the transaction to meet ANSI compliance, and will not passively accept the non-conforming measurements of unscrupulous landlords.

When it comes to Phantom Space, Less is More.

We have a rule for our real estate project management process:  No Surprises.

Typically our clients are either doing a major construction project to build out or expand their business space, relocating to another facility, or both.  Usually these are operations critical to providing their products or services to their customers.

So what happens when a freak storm like Hurricane Sandy arises well after the usual season, misses the tropical coast, and heads for New Jersey & New York?  Isn’t that a surprise to everyone?  Well, no.

Here’s why:  Stuff Happens.

Of course we could not predict that particular storm, but you don’t need to anticipate every possible scenario. You simply need to realize that Stuff Happens and have a contingency plan in place in case something occurs that will prevent you from executing on your plan.

Perhaps it’s a labor strike, bankruptcy of a contractor, fire, failure of a piece of equipment, unanticipated code or licensing violation, even death of a key team member.  All undesirable and unfortunate, but, from your customer’s perspective the show must go on.

Have a plan in place to deal with how you will handle unavoidable delays.  We’ve found that there are three key components to keeping your project moving forwardas anticipated, or at least with the absolute minimum disruption possible:

  1. Be Proactive – If even a hint of trouble is brewing, communicate with staff, property owners, contractors and other team members to discuss how to handle and respond immediately as problems occur.  Know operational alternatives: Can product ship from another location or staff lease temporary office space in another property?
  2. Establish Relationships in Advance – The time to look for a roofer is not after the hurricane has passed through town.  Know who you can use, talk to them in advance, and assemble your back-up response team before your project starts.
  3. Experience Counts – Staff the project with people that have experience commensurate to the importance of the project.  If you deliver mission-critical products or services, or a delay of the project puts a multi-million dollar contract at risk, don’t put a relocation/construction newbie in charge no matter how competent they are at running your [Fill in Blank] division.  Get someone who has been through many of the same situations before.  They may not anticipate a Hurricane Sandy, but they will know how to deal with seemingly insurmountable issues. A couple of those seem to happen on every major project, don’t they? No surprise there.

We are working with a multi-location user with several leases in an unnecessarily precarious state of month-to-month lease term. As they are finding, this situation leaves them extremely vulnerable…more so than they imagined.

In Florida this month-to-month tenancy is a tenancy at will which is cancelable by giving “—not less than fifteen (15) days notice prior to the end of any monthly period.”  So rather than requiring a notice period equal to the rental period, that is, one month, as little as fifteen (15) days notice is all that is necessary.

Consider a month-to-month holdover with rent paid in advance for the month of January. The landlord could terminate this tenancy at will in Florida with a notice delivered on January 16th. (See Florida Statutes Sections 83.02-83.03).

In the case of our client, they require unique tenant improvements and industry  permitting prior to occupancy in a new location. With only weeks to vacate and occupy a new location, they would need to close their doors for up to 3 months.

The good news is that this situation is easily avoidable. Have a real estate expert take a look at any leases expiring within the next 12-24 months to fully understand your timing and requirements should you decide to vacate your space. At minimum, a single page addendum should be permissible requiring either party to provide at least 90 or 180 days notice in a month-to-month or holdover situation.

As originally posted by Casey Bourque on LinkedIn