Employee Harmony

There is a heuristic that brokers who have been in the business for a long time understand, which is: the location closest to the most senior level executive’s home is the location that will be chosen. Other companies are very sensitive to the drive times of all their employees and great pains are taken to reduce time spent behind the wheel, at least for the most valuable employees.

Finding office space within a specific geographical location can present a range of issues. Many executives in the process of uprooting to another location have to take into consideration the needs of their workforce when finding viable locations for office space, and this important detail can throw a wrench in the works – or, at very least, make things a lot more difficult for everyone involved.

For this reason, ask your real estate broker if they are willing to conduct an Employee Commute Impact Analysis prior to presenting you with a list of potential lease properties. This is an integral part of the kind of strategic planning that has to take place, and the establishment of certain criteria that will ultimately inform which properties are considered. To do this, the following is needed:

•             The total number of employees the company has.

•             How many of those employees work onsite full-time versus how many of them telecommute.

•             The transportation patterns of the company’s workforce (for example, how many drive, how many carpool to work, and how many take the bus or train to work).

•             The current distance of the nearest train or bus stop.

•             Average commute times for employees.

 There are many different online mapping resources, like Google Maps, that will make this work relatively easy.

Gathering this information is vital to finding office space that will minimize any negative impact that a company move will have on its workforce. This information may even make it possible to improve upon the current situation, making it far more likely for a smooth transition into a new office.

Consider the following scenario: a fast-growing Internet retailer has grown to the point where outsourcing their warehousing is the next logical step. But what options do they have when it comes to their existing distribution center leases? None of them are very good. Fortunately, there are a number of realistic alternatives, including subleasing.

The Rulers of the Tiny(er) Realm

Not terribly long ago, the mantra “bigger is better” was widely known and accepted. But people today are beginning to wake up to the fact that when it comes to operating a business and remaining profitable, “smaller is smarter.”

For example, Accenture subleased 123,000 square feet in a project where my firm, Cardinal Real Estate Partners, represented the landlord. When they first moved in, that space was filled with 546 mortgage processors. That’s one person for every 225 square feet. Today, there are 953 people in the same space, or one person for every 125 square feet. The result is that the demand for office space is changing and the total market of office space that is being subleased has increased substantially over the past 3 years.

Today there are more people in less space in the US. Meanwhile, in the instance of the Accenture example above, somewhere in India there’s a landlord asking, “Hey? Where did everyone go?”

Warning: if the thought of only recapturing 50 percent of your lease exposure through subleasing gives you heart palpitations, stop reading now. The fact is, the costs will add up. However, perhaps you have highly marketable space where the pain of subleasing is not so high.

Here are some tips and suggestions that can help you out:

• Get a good understanding of the competitive landscape. You can do this yourself, but it’s strongly suggested that you engage a professional real estate broker. Without that accurate information at your fingertips, you won’t have the ammunition necessary to deal with subtenants who feel they’re entitled to 10 to 60 percent discounts in rent.
• Consult with your accountant and your attorney. You’ll want to get your accountant involved to handle the complex expenses associated with subleasing. In order to sublease, you’re going to have to pay brokerage commissions, marketing costs, preparation of the premises, rent and concessions, property improvements, and legal costs. Also, bear in mind that the delta between what you’re paying for your lease and whatever deal you’ve negotiated with your subtenant has complex profit and loss considerations attached to it. Note that your depreciation calculations will be impacted, since the FF&E that you’ve invested into the space are likely to have very little value to your subtenant.
• Do you believe in karma? Maybe you should start. Now that you’re the sub-landlord, get ready to receive payback for any heartache you caused landlords in the past. Your subtenant will be late with rent, have unreasonable demands and a knack for causing havoc. To minimize this, be sure that you understand all subleasing and assignment clauses in your lease. The ideal situation is the latter – the assignment – because it effectively lets you assign all about your obligations under the lease. Except, of course, in the instance where the tenant is in default – you didn’t think you could really just walk away, did you? In most cases, you’re going to have to settle for being in less-than-optimal position of being a sub-landlord to a subtenant. When that’s the case, get ready to answer phone calls about broken toilet mains and to wait out the tardy rent payment. Or much, much worse.

As scary as it all sounds, the benefits of subleasing are obvious. By doing so, you put yourself in the position of reducing operating expenses and enhancing cash flow. But just like anything else, there are strings attached. And sometimes, those strings can tangle you up. Don’t get tangled up. Get educated and get yourself prepared. Then go in and nail it.

Being effective as your company’s in-house Real Estate Czar isn’t only about matching up your needs to available properties. It requires going the extra mile and doing what it takes to ensure your needs are perfectly suited to the properties you have found, and resolving not to stop a foot short of that distance.

There is a lot at stake: Money, morale and money. Remember that occupancy costs are typically one of the top three expense items on a company’s P&L. A 5% savings in rent can result in a meaningfully improved EBITA.

The best way to do this is to develop a checklist of critical needs that you can follow. It will ensure you cover all bases without taking an inordinate amount of time on each business unit navel gazing. Creating a Facility Critical Needs Checklist is the best way to accomplish facility cost reductions. It will help you determine where to secure real estate that’ll best serve your needs, in addition to what types of properties are out of the question.

There are available refined a market survey checklist that covers all concerns and helps speed along the process of buying and leasing commercial real estate.  Send us an email and ask for the “Client Needs Analysis Checklist”. Let us know if it is for office or industrial space, and the approximate number of SF that you think that you need. The checklist will make your programming simple, reduce your facility costs and provide you confidence that the space you commit to will work for you for a long time.

Here’s a list of some critical questions to ask yourself that will help you create your own comprehensive market survey checklist.

Taking the abstract out of space – What are your needs with respect to building functionality? Work with your stakeholders to determine how much space (if any) they’ll need for reception areas, conference rooms, mail room, copy center, employee lounges and kitchenettes, private offices, and additional business units like HR and accounting.

Plan for 36 months from now – Get an idea of the company’s projected growth. Where will the company be with respect to numbers of employees in two, four, or six years? Will you be amenable to seeking a larger property at these times, or are you interested in finding a property you can grow into?

How to get buy-in for the space that you really want – What are your financial objectives with respect to the property you’re shopping for? Find out how your internal client wants to measure occupancy costs: by square footage, by comparison to current costs, or by comparison to market costs. In addition to this, you’ll have to work closely with your team to determine if the property they’re seeking falls under the category of A, B or C class. This may be something easily determined by the type of company they have, but in some cases it won’t be as cut and dry as that.

Parking complaints (X) 2 = Your short-term reality – Determine your parking requirements. This will greatly inform a stakeholder’s decision about where to secure real estate, especially in areas where parking is at a premium. You might be able to line up your client an A-class property near walking distance of numerous restaurants, but if you can’t secure for your internal clients the necessary parking for existing staff and visitors, that’s a deal killer.

Set expectations about drive-time changes early in the process- What are your location objectives? You may discover that some stakeholders are wide open to considering any location, as long as it can meet square footage requirements. On the other hand, you may have some clients who are so averse to relocating too far from convenient amenities that they’ll be willing to consider smaller facilities to accommodate a prime location.

When you are all done, try a simple heuristic to see if you are in the right ballpark:

Number of employees (times) 250 SF = Future Total Usable SF

For space less than 3,000 SF, you will need a higher SF constant. For space over 7,500 SF, you can lower the constant. Recently we did a deal with Accenture that was 123,000 SF. The use was for a call center with little paper – they averaged 136 SF per person. On the flip side of that is that our own office averages about 350 SF per person. We have only 6,500 SF, and there is a lot of paper and projects that need to be spread-out.

Let us know if you want to see the checklist we used.

Before a master tenant can sublease property, some important questions should be answered. Your attempt to mitigate a lease, may result in you litigating your lease; if you are not careful. First, the master lessor – that is you – has to ask for and receive approval from the landlord to sublease the space to a third party. I suggest that you consider waiting until you have a prospect for the space. Anytime you have a material question about your lease, before calling your landlord, read the lease. The language of the original lease should be read thoroughly to ensure that any restrictions about a sublease agreement with another business are adhered to. Beyond that, there are some important questions that the master tenant has to ask of a third party interested in subleasing office space. Here are some important ones that get overlooked:

What will the space be used for? Before the master tenant signs an office sublease agreement with a third party, it’s critical to determine what kind of business the sublessor will be conducting. Beyond weeding out individuals who intend to use the subleased space for questionable purposes, it’s critical to find out if there will be any activity taking place within the subleased space that could get the master tenant in trouble with the landlord. For example, if the sublessor decides to operate an adult entertainment club on the premises, this could cause the master tenant to be in default of their lease with regard to any language in the agreement about permitted uses of the premises. Likewise, if the sublessor is in the business of distributing hazardous materials, this could kick up a lot of dust with local authorities — not to mention the potential damage to the property that could come as a direct result. Your landlord will have a provision in the lease regarding hazardous materials; the part about leasee not handling green goo also applies to your sublessor. As a matter of fact, all of the lease will apply to your sublessor. It’s okay for a master tenant to be discriminating, especially if the activities of the sublessor could result in these kinds of issues.

Are there any special needs the sublessor will need in the course of its regular business operations? Before subleasing office space, it’s a master tenant’s responsibility to find out if the sublessor’s electrical needs could cause problems for other tenants sharing the facility. Businesses that operate high-powered equipment should only be considered if the property they’re subleasing was intended for that express purpose. Also, don’t forget that most office lease agreements specify caps in electricity use. If a master tenant agrees to sublease office property to a company that either operates around the clock or will be using an inordinate amount of electricity, the master tenant could find themselves in the unenviable position of having to pay a massive bill for electricity overage. Most of the time, these types of restrictions will be spelled out in the section of the master lease that speaks to office sublease agreements.

How many parking spaces will the sublessor require for regular operations? If a master tenant intends to sublease office property to a business whose need for parking outweighs what’s available, this could be a deal breaker. If parking is scarce but the sublessor is okay with that, it’s still important for the master tenant to determine if it’s possible the business will create an undesirable parking situation by taking up more than a fair share of the allotted space. This is especially important if the parking lot is shared with other businesses.

Other Considerations – If you’re the master tenant and you want to sublease office space, ensure there’s no ambiguity in the agreement. Spell out what will be included with the subleased space, and cover your interests by taking pictures of the property before the subtenant moves in. This will come in handy in the event you ever have to go to court to recover damages caused by the sublessor.

If you want a comprehensive list of sublease gotchas, let us know and we will get it to you

Everybody knows the old saying: if you want something done right, you’ve got to do it yourself. But sometimes, if you’re dealing with a negligent landlord, getting anything done at all can be an uphill struggle – forget getting it done right. When this happens, your business could suffer catastrophic loss. Think about it. What would happen if a toilet line suddenly burst and your entire data center was submerged in an inch of water? What would you do if you call your landlord and he is sitting on boat somewhere fishing and his maintenance guy will get to it sometime tomorrow? You’d probably want to take care of it yourself and bill your landlord. Stop before you do this and read your lease. The problem is, most leases include specific provisions that call this out as what we call a “big D” Default – one that allows the landlord to claim serious remedies like fees and even lease termination. So what can you do to protect yourself? Great question. Here’s the answer.

The Self-Help Provision

It’s called a self-help provision, and it’s language that’s added to your lease that will allow you the freedom to make any emergency repairs that your landlord fails to make. It also ensures that you get reimbursed for your expenses. This sounds like a great arrangement, and it is – if you can get the landlord to agree to it. The fact is, the vast majority of commercial leases don’t include self-help provisions because landlords don’t like them. And they’ll fight you tooth and nail if you suggest it because the idea that a tenant may make repairs to a building terrifies a landlord, the only thing that bothers them more, is that the tenant might not pay rent to reimburse themselves for the cost of the repair.

Why Some Landlords Flake on their Duties

A lot of tenants have a false sense of confidence that their landlords will do the right thing. “I don’t need a self-help provision in my lease,” say some prospective commercial tenants, “because I can read people well enough to know that this landlord is on the up-and-up, after all, they are institutional quality and are responsive to my requests.” Maybe you can trust your intuition, maybe you can’t. But regardless, some landlords are not able to live up to their duties to make critical property repairs. Sometimes, it’s plain old circumstance. Let’s face it. The economy has taken the real estate business on a rollercoaster ride. As a result, there are many examples commercial landlords that are under financial distress, struggling to pay for expensive cap expenses like roof repair. To make ends meet, some have even made severe cutbacks on maintenance obligations that could prevent hazards like burst pipes from happening in the first place. All combined, this perfect storm of circumstances could render a landlord financially incapable of taking immediate action – even if he desperately wants to.

Getting Your Way

In order to boost your chances of getting a landlord to agree to the inclusion of a self-help provision in your lease, you’ve got to start early. As a potential tenant, you have the greatest amount of leverage early on in the leasing process when the landlord is still trying to win you over. For this reason, don’t be shy about mentioning a self-help provision at the outset. Instead, have your commercial real estate broker add specific mention of it in the initial letter of intent. Your broker should also issue an RFP with a breakdown on what you’re requesting, and why it’s important to your leasing decision. This will give the landlord plenty of time to wrap their minds around the idea that without agreeing to a self-help provision, they may lose your business.

Dotting Your I’s and Crossing Your T’s

Sit down with your real estate broker and have a long conversation about what should be included in your self-help provision. Make sure that the language that’s added to your letter of intent, RFP, and lease includes the following critical requirements:

• You will only take care of an emergency situation if the landlord is unable to respond to within a reasonable period of time. Establish that time frame explicitly and don’t jump the gun on taking action, otherwise it could cost you.
• The landlord will pay for all repair costs, including labor, materials, rental charges, and other associated costs.
• You will have the right to offset your monthly lease payments to recoup all expenses within a reasonable length of time. Specify the timeframe so the landlord doesn’t assume that you’re agreeing to some arbitrary five-year repayment plan.
• If offsetting the cost of rent isn’t acceptable to the landlord and he prefers to reimburse you directly, you will have the right to charge interest if the full amount isn’t paid back to you within a specified period of time.

As always, it’s a good idea to get your lawyer involved in the writing up your self-help provision. Frankly, you will likely not make much progress with a landlord without an experienced real estate attorney or a savvy broker as an advocate for you. Contract laws vary from state to state, and even though most courts will defer to what’s expressly agreed to in a lease, it’s important to have someone looking over your shoulder who knows the law inside and out.

True Stories and Cautionary Tales

In 2009, a Burlington Coat Factory location took action and completely replaced the leaky rooftop of a building it was leasing. This came after repeated unanswered requests asking for the landlord to take care of repairs. Although you’d think this would be an open-and-shut case, Burlington Coat Factory was found in court to have had the rooftop improperly replaced – ruining any chances it had of suing the landlord for reimbursement. This cautionary tale serves as a reminder for two important points: always have a self-help provision in place before making any repairs, and always be certain that the right kind of repairs are made.

If you have a critical component to your operation in someone else’s building, make sure that you can help yourself in the instance that a catastrophe occurs.

In the world of commercial real estate, there are pros and cons to “going rogue.” But whether or not roguish behavior is beneficial or harmful to a commercial realtor’s aims depends on the circumstance—as well as what your definition of the word is. Traditionally, the word rogue has been used to describe deceitful behavior. But these days the word can also define a person who uses unconventional and cutting-edge techniques of getting something done.

Going Rogue: The Bad

Let’s break it down in plain English. If you really want to know when it’s okay for a commercial realtor to go rogue, the answer to that question is: never. The reasons why are simplistic and straightforward if you take a moment to about it. In the commission of the everyday duties of the commercial real estate broker, there simply isn’t any room for lone wolf tactics. Most of the time as a broker, you’ll be reliant on fostering working relationships between parties to advance your aims and speed real estate deals along to their rapid conclusion. If you want a perfect example of why rogue behavior doesn’t work in these cases, think about property owners interested in leveraging commercial assets by leasing a building, or lessees who want to take advantage of extra space by bringing in subtenants. If a realtor doesn’t adopt a “team player” approach when trying to work out one of these deals, nothing will ever get accomplished.

Going Rogue: The Good

On the other hand, there are some instances when roguish or “lone ranger” approaches to conducting business are perfectly acceptable, even welcomed like a breath of fresh air—but there’s a catch. It’s only okay when it’s a concerted effort made by an entire brokerage firm, acting in unison to break new ground. Most of the time you’ll hear people slap labels like “forward thinking” or “innovative” on these types of firms. But regardless of what you label them, there’s little doubt that a commercial real estate brokerage taking bold steps at improving the performance of its agents by offering only performance-based commissions, and redefining the relationships between realtors and clients, is a good thing.

Rogue vs. Non-Rogue

If you’re confused, you shouldn’t be. Simply put, a rogue mentality works only on an conceptual level. When dealing with individuals in the real world, though—just as you would when serving a client leveraging commercial assets—the only acceptable action is to throw a lasso around the shoulders of that inner cowboy and hogtie him to the ground. If you don’t have a lasso and you’ve got lousy aim, try these more mundane approaches.

Focus on teamwork. If that requires you to work with another broker outside of your geographical area, so be it.

Focus on the long term goal of the client and what it’ll take to make them happy.

Forget your own best interests.

Strive for a multi-sided win-win situation.

Point your thoughts and concerns away from your commission.

Put your verbal communication skills to work by engaging all parties in a personable manner.

Don’t resist pursuing certain options because they promise to be time consuming.

Develop a disciplined manner of working that emphasizes patience and diligence.

A Better Way to Broker

Every three years, Bill faces one task with dread: As CFO, part of his responsibility includes negotiating a lease renewal for office space. Every year, as he enters the world of commercial real estate, he feels like he’s “walking through the valley of death.”

Every dollar saved on the lease goes straight to his company’s bottom line, yet no one seems to have his best interests in mind. The landlord’s interests are clearly his own—the more space, the higher the price, the longer the term, the better. The tenant representative broker working “for him” receives most of the commission, which is calculated as a percentage of the value of the lease—again, the more space, the higher the price, the longer the term, the better. So it’s hard to believe that either one has Bill’s best interest at heart.

Bill faces the entire ordeal with dread. It has been Bill’s experience that soon into the process; he’ll find that he’s the one managing it, not his broker. He’ll show Bill various expensive properties with long-term leases that are unsuited to the objectives Bill stated at their first meeting—did he listen at all? He’s certain they could get a three-year lease with a few months of free rent, but his broker will continue to show him five-year leases with no free rent. Bill will shake his head in frustration, asking, “Why can’t I get a termination option if I’m willing to pay a fee for it!”

Bill will end up being the one who spends hours calculating office sizes to see if he can get away with less space, a job clearly not in the interest of those getting paid. Negotiations never go well. He’ll ask for termination options but will be told, “There’s no give on the other side.” He’ll wonder if his broker even tried to fight for what he wanted. His concerns will go unanswered, time will run out, and once again, he’ll sign a lease that results in a commission split between people who weren’t working as advocates on his behalf.

The above story is based on actual experience. In companies across the USA, mid-level and senior executives, CFOs, and real estate managers have reached a breaking point from their encounters with commercial real estate brokers. It’s not simply a case of poor service, lack of communication, or limited experience—though these are all factors. The commercial real estate market is in the midst of a shakedown. Amid economic recession, falling property values, and increased scrutiny of the large institutions that caused much of the economic collapse, there’s an increased awareness of the serious misalignment of interests between the client and the broker. This breakdown in the client-broker relationship is leading many to ask, “Is there a better way to broker?”