By: Rick Pearson, Cresa Woodland Hills
Whether you have negotiated a TI Allowance or your landlord is going to perform the TI work based on a pre-approved scope of work, I’m 99% certain something will be overlooked that will result in added costs for you. If you have read any of my articles in the past, you will know that I am a big proponent of doing a Landlord Build because it puts the responsibility of unforeseen conditions and problems with infrastructure on the Landlord. However, even with a Landlord Build, the Tenant will end up paying for things that are not agreed to in the Scope of Work. Therefore, it is important to plan ahead and think about everything that needs to be done, because if you forget them, their costs can be significant.
Light Fixtures: Be sure you understand (and see) what types of fixtures are going to be used. Indirect LED fixtures are the most modern-looking but many landlords have not adopted standard yet. If the LL is pulling a permit, they may be forced to upgrade the fixtures but they may be able to get by just upgrading the bulbs. It doesn’t hurt to ask for new fixtures, or at least know what the cost is to upgrade to them. It may make a big difference in the quality of the light and the look of your space.
Carpet Tiles: Most landlords use rolled carpet because it costs less, but carpet tiles are better if you can get them. Besides giving you more flexibility in design and pattern, it’s less expensive and easier to replace stained or damaged areas. Again, know what you are getting and don’t be afraid to ask for this upgrade.
Glass & Sidelights: Glass walls for conference rooms are a nice touch that most landlords will include in a turn-key build out. A sidelight is a panel of glass alongside the door of a private office. It’s a great way to let natural light into the inner office, especially if you are designing a space with private offices along the entire window line. It also allows someone to look into a closed office to see if the occupant is on the phone or sleeping. Most of the time the landlord will pay for this if it is included in the initial drawing.
Sound Proofing: Unless it is specified in the initial plan, most new walls will be built up to the ceiling grid only and will have no insulation. If you sit in one office and hear people talking in the adjacent one, this is the type of wall you probably have. If the ceiling is already in place, it is costly to build the walls above it, but if the ceiling is new, it doesn’t cost much more to build the walls above the grid and add insulation. Many landlords will include sound-related things into at least some of the space, if it’s specified early.
Millwork: Upper and lower cabinets, built-in work surfaces, reception counters, and mail slots are referred to as “millwork.” Most landlords will include six or eight feet of millwork in the kitchen or break area but nothing more. Think about where else millwork will be needed and get it into the plan early. If not, you will pay for it and it’s costly: $300 per linear foot is typical. Also, think about building trash enclosures and microwave shelves into the millwork in the kitchen so that you can have more usable counter space: it’s an efficient upgrade with a negligible add-on cost.
Electrical / Data / AV: If you miss some of the other things on this list, you can probably still operate your business effectively. However, correctly locating electrical receptacles and data connectivity is imperative to running your business. Audio-Video (AV) used to be something that was only in the main conference room but more and more, it’s is being incorporated into all areas of an office space. Using TV’s as monitors and for video conferencing–even in private offices–is now seen as a very productive communication tool. The infrastructure for all of this needs to be carefully thought-out. Even if you don’t have the budget to buy the equipment now, adding the conduit in the walls and floors for future needs will save a ton of money down the road. In my experience, Phone and IT people just assume the infrastructure will be provided for them and the Landlord will just assume the IT people will deal with their own infrastructure. Determine what you need now and what you might need in the future and try incorporating that into the design of your space. You’ll be surprised at how much you can get the landlord to do as part of the initial build out.
Security / Access Control: Card readers are common place as a security measure but mostly used as access control only, allowing a business owner to monitor the access of employees and avoid changing locks when a disgruntled employee leaves the company. In order for card readers to work, a low voltage wire must run down to and through the door to active/deactivate the lock. Calling that out on the plan will often get it paid for by the landlord. Adding it later will not only cost more, but it will certainly be on your dime.
Locking Doors: Most building standard doors don’t have locking hardware. Determine where you need to have doors that lock with a key and have the plan reflect that hardware. It can be as much as $500 each to replace the hardware if it needs to be added later. Most landlord will agree to add locks on some of the doors at their cost.
Homerun: A “homerun” is a conduit that connect the telephone room in the common areas to the server room in your space. It may only cost $1,000 or $2,000 to have your cabling company do this, but if you ask for it up front, the landlord will provide it most of the time. Be sure you specify the correct size conduit that you need, based on the amount of wires that need to be pulled through it.
My advice is to take some time and discuss all of this information with your staff, consultants, and vendors long before you start looking for space. Knowing all of this will make you better equipped to discuss all of this in your first meeting with the architect / space planner. The more you can include in the plans, the better chance you will have of getting the landlord to include it in his TI package. Be prepared for the Landlord telling you that you are responsible for paying for some of this. In that case, request costs for each item and agree to those costs before you sign your lease. After the ink is dry, you have no leverage.
Don’t assume your real estate broker knows all of this. Most don’t get involved in the Tenant Improvement, short of negotiating the allowance for you, and most don’t come to the job meetings once the construction starts. I’ve always been interested in how space was built so I try to attend most job meetings with my clients. At some point in my past, I have seen clients pay for things I did not feel was appropriate and other times I have been able to get landlords to pay for things simply because they were included in the drawings Defining what improvements you need and including them in the plans early gives you the best chance of getting the landlord to pay for them so you don’t have to.
By Rick Pearson, Principal, Cresa Los Angeles
Everyone is looking for ways to incorporate energy saving-technology into their lives. Solar energy is now an excellent, viable option, especially for commercial buildings: most commercial roofs are flat, above the trees, and provide an undisturbed, spacious area for the panels. Naturally, we are going to see more and more roofs covered with solar panels, which will bring the cost of electricity down for the occupants of those buildings, right?
Many owners are renting their roofs to third parties who install solar panels and sell the power directly to the power grid, with zero benefit to the power meter (and hence, the tenants) of the building that hosts the panels. If you are a tenant in such a building and pay for your electricity, you might assume that your utility bill would be reduced. Or, at least, that you could install your own panels at some point to help lower your usage?
But once the third-parties’ panels are installed there will likely be no room for additional ones. Therefore, even though you pay the cost of your electrical usage, the landlord has taken away any hope you may have for directly reducing your costs by installing your own panels. The landlord may tell you “I own the building, I can do what I want with it,” and while this may be true, it doesn’t seem fair.
I’m not bringing up this issue to alarm you, or taking a position on your landlord’s right to do it. I just want you to be informed if it happens to you.
By Rick Pearson, Principal, Cresa Los Angeles
As someone who only represents tenants or buyers, I always prefer to have an agreement with my client that defines the scope of work and protects my ability to get paid (as long as I perform). I’m an advocate of Exclusive Rights to Represent agreements and I have no doubt that they are in the best interests of both parties.
If a tenant is not willing to commit to a broker who is spending time and effort on his behalf, then they are probably not going to find someone who is willing to work hard and smart for them. A tenant can always find a broker to do a survey and show him property without an agreement. Most likely, those brokers are either too inexperienced to provide good advice, or they are only sending information on their own listings, which may not be the best fit for the tenant.
Although I am advocating that tenants get better service by hiring one broker to represent them, I clearly understand why many tenants shy away from it. After all, you really don’t know how hard your broker is going to work or how helpful they are going to be until after you sign the agreement. By then, you are locked-in for some period of time. I blame my industry for this. There are way too many inexperienced and incompetent brokers and agents in this industry. There are way too many brokers who are just looking to earn a quick fee and move on to the next deal. Being a good advocate for the tenant/buyer is more difficult than you might think.
A few things to consider on this topic that may help you avoid problems:
Ability to Terminate an Agreement – Be sure any Representation Agreement gives you the ability to terminate, if your interests and expectations are not being met. You should not be forced to work with someone whom you just don’t trust or don’t feel is working hard enough on your behalf. If the broker is not willing to give you that right, then they are not the right broker.
Quality over Quantity – If your broker sends you a survey with 50 buildings on it, I would question the broker’s understanding of your requirements. It is much less work to send over 50 building than it is to properly screen 50 buildings and eliminate ones that don’t work. I’d prefer to see the best 10-20 options after my broker has screened them all.
Don’t Sign Proposals – Unless there is a very good reason to sign a proposal or LOI, don’t!! It’s just not needed, especially if you don’t already have an exclusive agreement with your broker. Often brokers will add exclusive representation language into a proposal, have the tenant sign it, and then claimed that the tenant acknowledged the agreement as being “exclusive.”
Broker Disclosure Agreement – In many states, brokers are required to have all of the parties involved in a transaction sign a form acknowledging the specific representation of the broker: defining who represents the Tenant, who represents the Landlord, as well as any Dual-representation, if applicable. Brokers like to add exclusive representation language to these forms and tell you they are “mandatory” to sign. Look carefully at these forms and be sure you are not committing to something you don’t want.
Commission Language in the Lease – By the time you are signing a Lease, hopefully you are comfortable with your broker getting paid for the particular transaction. Many leases, especially the AIR lease, provides language for the brokers to ALSO get paid if the Tenant expands, renews, and/or purchases the property any time in the future. This is a real problem in our industry and brokers don’t do a good job disclosing it. Allowing this protection to remain in the final lease could prohibit a tenant from hiring a different broker in the future. I’m all for protecting the broker’s right to get paid for the transaction he’s worked on, but it’s not right to guarantee payment for future transactions.
Know the Total Fee Amount – Don’t be afraid to ask the brokers exactly what the fee is and how it is being shared before you complete the transaction. It’s your right to know and if your broker won’t tell you, you have the wrong broker.
These tips will better prepare you for dealing with real estate professionals. Hopefully, you already have someone you trust and are confident that they are always advocating for your best interests.
By Rick Pearson
In order to provide a comfortable working environment for your employees, especially this time of year, your air conditioning system needs to be running at its intended capacity, with all components working properly. Most systems fail at some point, which results in tension and frustration on for all parties; either you call your property manager and they call their HVAC contractor, or you call your contractor directly. When the days start to get warm, people start to use their cooling systems, and contractors get so busy that it can take several hours or more to get someone onsite to evaluate a problem. If any parts are needed, it could be days before a system is fixed.
If you lease office space where there is a professional property manager the obligation is always on the landlord to fix a broken HVAC system. They typically do in a reasonable amount of time. If you lease industrial or flex space, or if you are in a multi-tenant office building with separate HVAC units for each space, then you may be responsible for the HVAC system yourself. Sometimes that is advantageous because you don’t have a middleman to go through. However, if something major needs to be fixed, you might also have to pay for it. If the system is old and at the end of its useful life, you may be looking at a substantial cost to replace it. This may not seem fair, especially if you just moved in a year or two ago.
Be sure you fully understand what your lease says about who is responsible for the HVAC system: both on-going maintenance and repairs or replacements. Most industrial leases, in my opinion, put undue responsibility onto the tenant. Landlords and their brokers will argue that the lessee is the only one using the HVAC so, accordingly, they need to be responsible for it, in case they abuse it or don’t maintain it properly. I agree that there needs to be a provision to ensure the system is maintained properly, and a way (directly or through CAM charges) for the tenant to bear those costs. However, even properly maintained systems break down, and the older they are the more prone to problems they may be, so the tenant should not be obligated to pay for repairs and replacements.
The bottom line is this:
• Know the age and condition of the HVAC system before you lease space or renew your current lease.
• Evaluate the useful life of the unit(s) compared to the term of your lease.
• Be sure your lease provides for language that requires the system to be in good working order at the time your lease commences.
• Try to put the entire cost of both maintenance and repairs on the landlord.
• At the very least, limit your exposure to some amount per year, calculated considering the useful life of the system, its age, and your lease term.
• Be certain an experienced HVAC contractor is doing regular maintenance, and that any recommended parts are being replaced.
HVAC systems are pretty simply if you understand how thermostats work and which areas/rooms are controlled by each unit. Have your HVAC contractor or building engineer explain this to you, and make sure all your employees understand how to correctly operate the system. Have a floor plan made showing which thermostats control each area. Most importantly, remind people that if the room temp is at 75, turning it to 72 will cool the room just as fast as turning it to 60 will. If you set a thermostat unreasonably low, the system may become overtaxed trying to make the air too cold…which may lead to system failure, accusations of abuse or incorrect operation, and may put the responsibility for its repair onto the lessee.
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By Rick Pearson, Cresa
In most “gross” leases, there is a provision whereby the tenant is responsible for increases in operating expenses. In office space, it’s known as either a “Full Service Gross Lease” or a “Modified Gross Lease.” In industrial, it’s just called a “Gross Lease.”
Although some landlords don’t charge their tenants for these increases, many do. Since the calculations are cumbersome and the concept is difficult to grasp, I see many mistakes made, which can result in tenants paying more than they are required to pay.
The first step to verifying the accuracy of the increase is to verify the accuracy of the figures and methods used to determine its bases. Here’s what you’ll need:
- Base Year (either a calendar year or other period of time)
- Base Year Expenses (broken down into categories, i.e., taxes, insurance, janitorial, R&M, etc.)
- Average Occupancy During the Base Year (for multi-tenant office projects)
- Percentage Share of the Building (What percentage of the building does your premises occupy?)
- Comparison Year Expenses (broken down into the same categories as the Base Year, above)
- Average Occupancy During the Comparison Year
If these items are not provided by the landlord or property manager, ask for them.
It is very important to see how much each category of expenses increased during the Base Year. Often, the landlord will give you the total expenses for the Base and Comparison Years, calculate the difference, and then apply your Percentage Share to that figure. But that information alone is insufficient. Only once you can see how much each category increased, can you ask some of the following relevant questions:
Have the property taxes increased by more than 2%?
- The primary reason property taxes would increase by more than this amount is due to a sale, but many leases indemnify or otherwise protect the tenant against property tax increases triggered by a sale.
- Many properties have sold at high prices in the past two years so the potential for property taxes to increase significantly is very real, and can be costly.
Are there increases in Repair and Maintenance costs (R&M)?
- Some R&M costs may not have anything to do with the general repair and maintenance of the property. For instance, new flooring in the common area lobby or major repairs to the mechanical system could be considered “capital improvements,” and should not be included in R&M. If R&M charges are substantial, it is worth investigating to learn exactly what they are, and to make sure they have been expensed correctly and are, indeed, subject to tenant reimbursement.
- Similarly, some R&M cost may result from a new tenant moving into the building. These are not operating costs and should be removed.
Are there increases in management, utility, and janitorial costs?
- We call these “variable expenses” which means that they increase and decrease based on how much space in the building is occupied. Most leases provide that these costs are adjusted to a 95% or 100% level. This applies to both the Base Year and the Comparison Year. The important thing to remember here: Just because the costs increase, does not mean you are responsible for your calculated share of them.
- This is the one areas where the calculations get difficult for both the property manager and for the tenant. Calculations must be based on Average Occupancy rates. But most Landlord’s don’t provide them; they may not even know them. If the landlord cannot provide the Average Occupancy rates used to calculate these variable expense categories, there is no basis for their increases, and he cannot charge for them.
- To further confuse things, landlords typically have the right to estimate these charges at the beginning of each year and then make an adjustment if needed at the end of the year. But remember:
- While you do not have the right to formally audit the estimated amount, you can ask for the back-up information that supports the estimate. Most likely, you are required to pay it and then question it when you finally get the reconciliation the following year.
- Be sure the landlord does a proper reconciliation the following year and makes all applicable adjustments.
In summary, be sure you have all the information to which you are entitled, so you can analyze the bases for the increase you are being asked to pay. Be sure you are actually obligated to pay for each portion of the increase, and be sure all of proper adjustments have been made. You have the right to receive a clear and detailed explanation from your landlord, with figures to back-up the calculations used to arrive at amount he’s asking you to pay. If you feel you haven’t: call me; I’ll try to help.
By Rick Pearson, Cresa Woodland Hills
As an advocate for Tenants for the past 25 years, I am constantly looking for ways to build flexibility into the lease term. Ideally, the ability to expand and contract as business needs change would be included in all of the leases I negotiate. For several reasons, that typically does not work for the landlord, especially when the landlord is investing money into tenant improvements. Most of the time, Tenants are resolved to committing to a fixed term.
“Five (5) years”, “Sixty (60) Months” has been the most common lease term commitment over the past 25 years that I have been in this business. A 5-year lease gives the landlord enough time to amortize the tenant improvements while still giving the tenant the ability to reevaluate its space needs every 5 years. All-in-all the 5-year term has been a good compromise and seemed to work for both parties.
For those of us in the business, we’ve been seeing a change for the past 2 years. For those of you who will be looking at relocating or to remodel your space, you will soon learn that “7 is the new 5”.
A combination of factors have led to this change:
- Generally, the commercial real estate market has improved in almost all submarkets and segments, giving landlords stronger negotiating power.
- In California, Title 24 standards have dramatically added to the cost of new TI construction and remodels.
- TI contractors and subcontractors are busier, so they are less aggressive to get jobs.
- Material costs continue to rise.
Where a typical TI cost used to be $45/sf, the same build out is now $65/sf. When the cost of doing a deal increases, Landlords need to be able to amortize these cost over a longer lease term. Unless something dramatic changes, I don’t see this trend changing. Seven (7) years may become a more common lease duration.
There will continue to be a number of ways to build flexibility into these longer lease terms that all brokers and business owners should consider:
- Carefully plan for space needs into the future.
- A termination right, where a portion of the TI cost is paid back as a penalty.
- Try to find space that needs fewer TI’s
- Capitalize some of the TI costs on your own.
Between these longer lease terms and higher rental rates, I’m a bit concerned that my clients are going to be paying “above market” rents in the last few years of their leases if the market turns. If that is the case, we may be looking at doing “blend and extend” negotiations in 5 years from now.
I’ll certainly be talking about that, when the time comes.
By: Rick Pearson, Cresa Woodland Hills
Years ago, Landlords started adding wireless hotspots in the common areas of buildings. Most commonly in the lunch rooms and outdoor seating areas. Especially when the building catered to high-tech and entertainment tenants.
Today, WiFi is a common amenity in most buildings, however the bandwidth is usually too slow and hard to consistently access.
Looking into the future, “internet access is not enough”. Modern buildings and forward thinking landlords are starting to use technology to not only allow their tenants to work anywhere in the building, but also to streamline and enhance the landlord – tenant experience.
The following are only a few of the ways I see buildings “connecting” with their Tenants and occupants:
Touch Screen Displays
We already see touch-screen directories in the lobby and TVs showing local business news. But how about interactive touch-screen monitors in the elevators and common areas, which will act like a virtual concierge service? In additional to picking the local news, weather and sports that you want to see, you could also get recommendations for local eateries, dry-cleaning, and other businesses. After finding a place to eat, press a button and your reservation would be made and directions will download to your personal device.
Automated Building Services
I’m certain most buildings built after 2000 already have HVAC systems that the property manager can control with a computer program. I can’t tell you how many times a tenant requests the air conditioning to remain on past normal business hours, only to be told that they need to provide 24 hour’s advance notice. I’m sure there is a way to provide Tenants with access via their smart phone to control the air conditioning in their space. Let’s take it a step farther and allow the tenant to control access to the building and to their space electronically. How great would it be to avoid dealing with 1-Hour or Full Day visitor validations and simply scan your visitor’s ticket and automatically pay for the exact time they are in the building.
Custom Building App
Websites for a particular building or project are common. I’m sure some of them have connectivity via a streamlined application. In most cases, these websites are created as a marketing tool to help brokers lease space and distribute information such as floor plans. I’m thinking the Building App needs to be much more robust. In addition to incorporating all of the technology from the Touch Screen Displays and the Automated Building Services, this could be a great way for management to communicate with tenants. I see no reason why many of the accounting functions, notices and project management roles of the property manager could not be included in this new, wired building application.
I think I read somewhere that over 60% of people use handheld devices more than they use their PC. Let’s allow technology to take over the way building owners and managers interact with their tenants. It just might make for a better experience…for both parties.