Tag Archives: tenants

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.

Taking the Fast Track with Commercial Lease Transactions

May 17, 2013 By in Archives Tags: , , , , , ,

Too often it seems that the true opportunities for great landlord/tenant relations get lost in lease negotiations. However, if all parties work together to “fast track” commercial lease contracts, the benefits lead to:

  • Significantly lower legal fees: If you choose your attorney carefully, “reasonable” attorney fees when negotiating office leases range from $3,500 to $10,000, according to  Kevin Hein, a partner with the Faegre & Benson law firm in Denver. Industrial leases are typically less.
  • Working relationships: Lease negotiations are like the “speed dates” common in the 90’s. You will get to know what it’s like being married to your landlord. Brokers and attorneys often neglect the fact that this dating period sets the tenant up for a long-term relationship with a landlord that is important to your company’s success. How you allow your attorney and broker to act, says a lot to the landlord about what type of relationship he will have with you after the lease is signed.*

Certain steps can be taken to fast track commercial lease contracts for  “win-win” results:

Use your leverage: First, have a detailed Letter of Intent (LOI) that provides business terms and key legal terms you truly care about. It is critical to push to have it executed by both parties before lease negotiations begin. Get it signed before the lease is delivered. We ask that the client’s attorney review the document to ensure that he will not need to renegotiate what has been agreed to during the “dating phase”.

Do not spend attorney fees on a landlord’s onerous lease: A landlord who is serious about tenant service, will uncomplicate matters and engender trust by using a simple lease. Landlords with the reputation of having modern leases and professionals who listen to the tenant’s concerns reap the benefits of having strong broker relationships. If a landlord gives you an onerous lease, do not let your attorney spend hours marking it up. Go back to the landlord and tell him why you feel she is setting herself up for a long and costly negotiation.

A little preparation goes a long way: Hold a pre-negotiation call and invite everyone—attorneys, principals, and brokers—to attend the call. This is rarely done on small deals, but it is extremely helpful. Use this as an opportunity to establish expectations for attorney turnaround time, legal budgets, approval processes and a goal for lease execution.

Develop a partnership framework that involves working with other stakeholders, such as the landlord’s broker and asset manager. They have a vested interest in getting the deal done with you. Having these allies in your corner helps fast track commercial lease contracts. Do not be shy in going direct to the landlord’s broker to ask for recommendations for getting around sticking points. You may be surprised at how helpful he will be.

* As a landlord, when I have to negotiate with an abusive broker or attorney, I think: “What a fool! Why burn bridges when your client will need so much help from the landlord once the deal is done?” Short-term posturing from brokers can establish bad working relationships for a long time.

For more information and to ensure all bases are covered, refer to the Prepared to Win-Win checklist that is available by emailing us at jculbertson@cardinal-partners.com

8 Tips for Hiring the Right Broker

May 13, 2013 By in Archives Tags: , , , , , ,

These are the hard questions that any and all individuals and companies with real estate needs should be asking of their real estate professionals.

1. The R-Factor
Credit here to Dan Sullivan and his “Strategic Coach” method of training entrepreneurs; our first question is adapted from one of Dan’s core methods for teaching people to set goals and be effective in their lives.To test whether a firm’s foals are aligned with yours and how seriously it is listening to your goals and objectives, ask this question:

Assume that is it a year from now, and you and I are meeting and looking back at the progress made on this transaction, what will have to have happen for you to feel good?

If the broker’s answer doesn’t encompass the goals and objectives you have outlined for your transaction, you’re talking to the wrong person. At Cardinal, we have asked the question hundreds of times. We take the responses our clients give and make them a part of our Key Performance Indicators by which we are graded at the end of the deal.

2. Driven by Process, or Instinct?
Ask for samples of deliverables from past transactions that you would hope to see during your transaction — things like market reports, financial projections and spreadsheets, analyses of terms.  Ask to see due diligence checklists for leases, purchases and sale negotiations.  If a broker can’t provide basic process documents, you’re likely dealing with a hipshooter who believes real estate is still a “gut” business. Ask to see their “playbook”; and if they do not have one, ask for examples of best practices.

3. Teamwork
If you’re being offered a team to work on your transaction, ask exactly what each member’s area of expertise and responsibilities are. The team should be a well-rounded mix of aptitudes that makes sense to you. If the transaction involves real estate outside the local market, ask how the firm will handle out-of-market resources. Does the broker ever refer deals outside of their company or network?  If not, why?  You want the top team working on your transaction, regardless of whose business cards they carry.

4. Real Results
How does your potential broker measure results? Ask this as an open-ended question and note carefully whether “client satisfaction” is mentioned. If you ask the potential broker how he or she will measure results in your transaction, is there any reference to your goals and objectives?

Next, drill down: What is the broker’s plan for achieving your goals? How are they going to help you determine how much space you need? How will they find the buyer for your challenging asset? Will they just shop you around to the usual suspects, or do they have some creative ideas about how to achieve your goals that come from outside the normal playbook?

5. Doing the Details

Ask detailed questions that demand specific answers. Something like, “How can you help us reduce facility expenses?” should yield a set of specific answers and (even better) examples of how the broker has helped past clients achieve this goal. Their answer will give you a good idea of whether the potential broker regards details as things that get in the way of the deal or critical steps that must be worked through regardless of the time it takes.

6. Negotiation 101
Drill in on negotiating tactics, skills and experience. Ask for an example of a situation where the broker’s negotiating skills reversed a deal that was going down the tubes and turned it into a win. What are their goals in a negotiation?

7. Listen & Learn
As we saw during the real estate executive focus group, not being listened to is a top complaint of clients. Ask your potential broker if they survey their clients. How often? What are the results?

After you’re done with the interview, think back on the time the potential broker took with you and how respectful they were of your objectives and agenda for the meeting. If they weren’t paying close attention, there’s less than zero reason to think that will change once you’re signed as a client.

8. Pay for Performance?
Finally, we come to the bottom line: Is the firm willing to put its fee on the line for your satisfaction? Ask about the “pig in the poke” and get “the elephant out of the room” – the reality that the brokerage’s interests aren’t necessarily aligned with yours. Will they acknowledge that fact and discuss it without becoming defensive? Tell the potential broker that you expect some portion of their fee to be put at risk until you’ve met your objectives at the end of the transaction.

Anticipate pushback on this demand; national brokerage firms generally reserve this mechanism for their largest clients. But stick to your guns. To see a list of suggested mechanisms for linking fees to objectives both quantifiable and soft, visit the Cardinal Partners resources page on our website: www.cardinal-partners.com. And watch closely how your potential broker acts when you open this avenue of negotiation; see what their behavior says about Point 6 above.