Tag Archives: Lease

Why going it alone is a great idea

January 27, 2014 By in Archives Tags: , , , , Leave a comment

Atlas Statue at Rockefeller CenterIf the alternative is to have someone with little to no commercial real estate experience manage a transaction, going at it alone is a great idea. Just as many of us would never dream of diagnosing and attempting to treat a medical condition on our own without consulting a doctor, buying or leasing commercial property without the insight of an expert in the field can prove to be equally disastrous.

In a 2009 article by the Harvard Business Review, “What every leader should know about real estate” the author, Mahlon Apgar IV, points out that real estate is taken for granted by company managers and that the most efficient companies team with real estate service providers. The decisions that surround commercial real estate are complex and time-consuming. Often executives do not understand all that is involved, so the decision is then delegated to inexperienced managers. Apgar points out that real estate is generally taken for granted by those managers and that the wisest companies decide to team up with real estate service firms that have salaried professionals or “relationship executives”. These “relationship executives” salaries are not maximized entirely on the size on the transaction but also on the satisfaction of the client. Therefore aligning the incentive of the real estate professional with that of their clients.

Here at The Strategic Tenant Advocate, we contend that such delegation of important real estate issues should be avoided. Whether you’re just now beginning in the real estate game, or you already have a bevy of transactions under your belt, there are quite a few reasons why going it alone is a great idea, if you are prepared and experienced.

  • There’s little room for instinct or rookies in a commercial real estate deal. As many before us have proved – and many more after us surely will continue to prove – making high-dollar decisions based on nothing more than your gut is the equivalent of taking an uneducated stab in the dark. When it works out, it’s dumb luck. When it doesn’t, it’s just dumb.
  • Real estate intelligence is contingent upon information that you likely aren’t privy to, or that you might not maximize even if you were. Having great real estate IQ involves not only being on the pulse of the market, but also having the ability to plan for your needs in the future, understand your alternatives, asking the tough questions from the others involved in the transaction, and ability to come-up with creative solutions.
  • By trying to master the ins and outs of commercial real estate on your own, you run the risk of becoming the archetypal jack of all trades and the master of none. Commercial real estate is a full-time job that leaves little room for other pursuits. Pursuits such as the primary duty of running your company.

We have found that working with a capable, qualified real estate broker can save up to 15% on your facility costs and is your best bet to making the kind of sound decisions that will make you look incredibly smart.

The allowance that disappeared – where did it go?

November 25, 2013 By in Archives Tags: , , , , , , Leave a comment

Say you’ve found the perfect office space and are ready to commit to a lease.

When it comes time to negotiate tenant improvements, however, you’ll need to pay close attention and have sage counsel at hand because tenant improvements–including how much and who pays for them–can be the most important part of the deal.

When a tenant moves into new space, it’s common for improvements to be done to make the space fit the new user’s unique needs. Tenant improvements can range from new paint and fresh carpet to knocking out walls to building out a shell.

But exactly how this work is done, such as who hires the contractor and how the money can be spent, can have a huge impact on how good a deal you ultimately secure with your lease.

Savvy tenants often want to do the work themselves so they can control the quality and be assured their tenant allowance is stretched as far as it can be. They also don’t want to lose sleep at night worrying about whether the landlord will pay bills for the contractor and architect when they come due.

The landlord, meanwhile, wants to keep the money and earn interest on it. They are motivated to control the build-out process and retain fees that cut into the money that goes to the contractor. Landlords also like to restrict what the money can be spent on, preferring it pay for changes that improve their property versus items such as furniture and cabling, which benefit the tenant.

Recently we were representing an advertising firm that was moving into a renovated, 1930s warehouse. The other tenants in the building were similar “creative” companies and my client was eager to make a deal. The landlord’s tenant improvement allowance offer was 25% above market, but during our due diligence our contractor found improvements needed to the sprinkler, HVAC and bathrooms to meet ADA requirements that would have used nearly 50% of our tenant improvement allowance. We were able to negotiate with the landlord to make the improvements at his cost, and the deal was made, but without the help of a good GC, the tenant would have spent the equivalent of 3 months rent on bringing the bathrooms up to ADA code!

Throughout the years, I’ve heard from tenants who became unhappy with their tenant improvement allowances after they signed their leases. They’d share with me how the number tossed out by their landlord sounded good at first but once construction bids were in they realized they didn’t get such a good deal after all.

A common horror story I heard after the economic downturn hit was how landlords refused to pay tenant improvement allowances, and even broker commissions, after a deal was cut. This can expose the tenant to expensive litigation. Some tenants also discovered that their space was missing critical systems that were promised (and should be standard) and they had to finish the job out of pocket.

Adding insult to injury, some tenants were shocked to learn that they couldn’t benefit from unspent portions of their tenant improvement allowance.

To avoid these disastrous scenarios, the tenant and landlord should agree during negotiations (before the lease is inked) on what the total cost of the project is and understand how much, if any, the tenant is expected to contribute.

The tenant should fight to make sure there are liberal and flexible provisions on what the tenant allowance can be spent on. Sometimes landlords will allow items such as cabling, depending on market conditions.

If the landlord is reimbursing the tenant for the construction, there should be periodic times (perhaps monthly) when the landlord pays the allowance. We recommend they pay early and often, ideally at least once a month. The landlord will push to pay less frequently.

Other caveats to include or watch for when the landlord is reimbursing the tenant for its construction:

– Landlords will insist on lien waivers before being paid. Make sure you protect yourself against minor contractors who could insist on not signing.

– Don’t let landlords withhold tenant improvement payment if the tenant is in default. If you default for a defensible reason, you don’t want the landlord stopping your construction.

– Decide with the landlord ahead of time on the form and substance of the requisition form that will be required.

– If the amount of work in a given month is less than the landlord feels is appropriate, don’t let them pay less. The tenant improvement reimbursement is a set amount, not one based on work progress.
Agreeing to a tenant improvement allowance is most definitely a buyer-beware situation. But with the right guidance, you can feel confident that the tenant improvement allowance that was negotiated for will be spent as promised. You’ll have confidence the landlord won’t disappear in the middle of the night with the cash and will instead escrow the funds in the event they are going to sell the building. And you’ll rest assured knowing that money will be available when the contractor is wanting to be paid.