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Good Real Estate Business In A Bad Economy

The economy ebbs and flows.

The real estate market is particularly vulnerable to its changes. But there are a couple of things about a ‘bad” economy that we can be thankful for as real estate professionals.

Income and Appreciation

Property investors know that the value of their property is created as much by the income stream provided by their tenant as it is the value of the bricks and mortar and the land it sits on. This makes a leased building very attractive to a potential buyer looking to score a deal in a struggling market and hold onto it for the long term.

Availability and Lower Rental Rates

In a “bad” economy, there are generally more options available for tenants who are in the market to expand. As tenant representatives, this puts our clients in a powerful negotiating position. Most landlords will take a lower rental rate over long-standing vacant space any day of the week. During a downturn in the economy, a tenant may be
able to secure space at a reduced rate because the property owner has no competing offers and doesn’t foresee any in the near future.

So how do we make the most of a “bad” economy?

Realize there is no such thing. The economy and real estate markets change and develop in cycles. So, it stands to reason that we as real estate professionals must do the same. Attempting to operate in a hot market the same way you do when the market is cold just sets you up for struggle and frustration. Go with the flow. Learn how to identify and predict market changes and adjust your strategy accordingly.

 

Looking to move or expand your space? Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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The Build-Out Process : One Simple Way to Save Time and Money

For years, the process of planning a commercial build-out has been a slow moving and somewhat tedious game of guessing and waiting.

It consists of handing off an idea to one professional who might make a few changes before sending it off to the next one. This typically results in a great deal of time spent and gaps in communication that could have prevented unnecessary work, frustration, and expense.

When your company is preparing for a move or expansion, make the build-out process as efficient as possible by doing one very simple thing.

Get all of your professionals into a room at the same time. With modern technology, this could mean a video conference if an in-person meeting is too difficult to schedule. Have an open discussion with your company VP’s, your real estate professional, architect, contractor, and any other relevant people who may be involved.

Come to an agreement at the start about timing, expectations, and money.

This puts everyone on the same page and gets the ball rolling in the right direction. Rather than only focusing only on their own small piece of the puzzle, the bigger picture is known to all. Honest feedback and discussion can take place to establish workable parameters and, ideally, everyone’s part becomes a little easier.

An added bonus.

Collaboration is a great networking opportunity. It is to your advantage and theirs that they each come to this meeting with their best feet forward. Rather than hiding behind a desk and noting a name on the paperwork, they get to shake hands, talk, expand their knowledge and co-create a great working environment. Win-win.

Looking to move or expand your space? Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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Explaining Tenant Improvement Work Letters

What Is a Tenant Improvement Work Letter?

The tenant improvement work letter is essentially a contract to complete construction work in a commercial space. It is generally an addendum to the lease agreement involving third parties, architects, and commercial general contractors. Unless a tenant occupies a space “as-is”, there will be a work letter defining the condition of a space when the tenant moves in. The work letter also explains how that condition will be achieved. A work letter specifies the design of a space and materials to be used. It clearly outlines who is responsible for carrying out the work as well as who will pay for it. It should specify who controls the design and construction. This can include an architect’s fees, insurance, permits, and other incidentals.

Building Standards Should Be Clearly Defined  in the Work Letter

All building standard finishes and items should be clearly defined in the work letter. This ensures a buildout is sufficient to meet code requirements. All work must be completed in accordance with construction drawings, and the work must comply with all laws and ordinances. It is also wise to include a caveat that covers liability if a latent defect is discovered during the buildout process.

Tenant Improvement Allowances Are Negotiable

Generally speaking, a tenant improvement allowance for construction is based on the square footage of rentable space. Note that commercial contractors should be calculating material needs based on the usable square footage of the space – not the rentable size. Limits need to be clear and include a buffer for the punch list. A punch list is a list of items that a contractor will include in a project. The items listed may not necessarily be part of the outlined work but are necessary in order for him or her to complete it. This list can be loosely estimated early on but by its very nature won’t be well defined until near the end of the project. All things considered, it is important to be clear about the what’s, who’s, when’s, and how’s in a work letter. This helps everyone to plan and it protects all parties against potential misunderstandings and unexpected costs.

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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Two Ways To Save On “Pass Through” Operating Expenses

A property owner decides what expenses get passed through to his or her tenants. Understandably, they want to get as high a return as possible on their investment. The following two methods can protect you from inappropriate pass-through expenses and save you big on your lease costs.

Ownership Expense Exclusions:

Most commercial leases say something to the effect that the landlord may pass through all expenses (or the expenses over a base year) related to the ownership, maintenance, and operation of the project. The costs of maintenance and operation may make sense to pass through to a tenant. Ownership costs are another story, however. These could include costs of refinancing, marketing the property for sale or lease, legal costs related to the ownership structure, accounting fees for ownership tax returns, income tax, and even executive salaries. Tenants should usually try to exclude ownership costs. It is wise to have a prepared list of specific items that are not allowable pass-through costs. Of course, read the details in your landlord’s lease documents. You might be surprised to find that he or she expects you to cover certain items. If it doesn’t make sense, don’t agree with it.

Annual Operating and Maintenance Expense Reconciliation Audits:

If you have excluded ownership costs to modify your lease, check that provisional changes have been notated. Be sure that negotiated caps or limits have been honored and ownership costs haven’t (mistakenly) been added. Do your due diligence! Know whether other items being charged are in line with the current market. Hire someone to do it for you if you don’t have the time or resources to audit the reconciliations yourself. Also, do it in the first year of your lease. This will establish with the landlord that you are paying attention. It demonstrates that you will not tolerate inappropriate charges. Besides, leases will commonly prevent you from challenging expenses or auditing prior years after a certain period. Insert language into the original lease that prohibits pass-through of ownership costs. And audit the operating and maintenance expense reconciliation to enforce your rights.

For additional information about lease language and audits, please refer to our blog post titled “6 Reasons to Audit Your Building’s Operating Expenses”.

 

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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Four Strategies Landlords Use to Maximize Lease Renewal Profit – And How to Respond

Effectively planning and timing your company’s real estate transactions can mean the difference between whether your money stays in your pocket or ends up in your landlord’s pocket.

Leverage in the negotiation of rent is directly proportionate to market competition. A landlord will charge you the highest price they think they can charge in the current market. Lease renewals are desirable and profitable transactions for a landlord. Costs related to vacancy, major construction, and marketing are eliminated when a tenant renews.

A landlord can employ many strategies to maximize their renewal profit. Here are four examples and suggested responses:

1. Landlords may approach tenants early to negotiate a renewal before the tenant has thought about options or professional representation. If this happens, tell your landlord that you’re
considering a move. Of course, moving is disruptive, so if he makes it worth your while, you’ll consider staying.

2. When a tenant needs expansion space, the landlord may offer space contingent upon a new long term extension. Even if you have an expansion option, it pays to consider other options as well. Treat any expansion as a new lease. Evaluate the market and compare. Approach your current landlord with the same scrutiny as every other possible option he is competing against.

3. The common “Option to Renew” in a lease can provide a false sense of security.
Exercising this option without the benefit of comparative market analysis could end up costing your business. If your option provides a “Market Rate” do some research and know what the current market rate is. Don’t worry about losing your option. If the only one you have is not beneficial, you won’t lose anything but your money if you choose it. Remember, if you stay, you save your landlord the trouble and cost of vacancy and improvements.

4. If a landlord perceives that you plan to get a renewal number from him first then shop around if needed, he may stall to create urgency and leave you without adequate time to do any comparison shopping. Meet with, and get proposals from, other landlords early on. You can tell your landlord that you’re doing this and also request a proposal from him. Let him know that you’ll consider his proposal, along with other options, and make a decision.

Research and negotiation take time. Plan accordingly and start this process at least a year prior to the end of your lease. If your company footprint is large or if the market is tight, two years is not too early to begin the process. Work with an experienced and competent tenant rep. Hiring the right person to help you through the process will save you valuable time and money and probably alleviate some of the stress.

For more information on lease renewals, you can also refer to our previous blog post titled “Renegotiate Your Lease Terms – Create A Win-Win With Your Landlord”.

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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Three Ways to Improve the Efficiency of Your Company’s Real Estate

Today’s digital world demands that most companies focus their real estate on maximizing utilization and efficiency while trimming costs.

Here are three areas to consider to make the most of your space:

1) Utilize second-generation space

This alone could save your company and/or your landlord a significant amount in build-out costs and time. It is also an opportunity to negotiate a reduction in the lease rate if the landlord expects to shoulder the cost of a build-out for a new tenant.

2) Share space and/or create co-working areas for employees

Sharing space with another division, branch, or a different company altogether can be a highly effective way of reducing cost while maintaining a standard that is in alignment with your brand. Co-working areas within your space eliminate the need for additional equipment and square footage. With so many businesses now encouraging remote working and collaborative environments within the office, this makes perfect sense and creates a win-win for everyone.

3) Shorten the timeline for your company real estate processes and establish standard communications protocols for all departments.

This is especially important in your operations and finance divisions where the greatest communication challenges tend to happen. Market trends require that companies act quickly and shorten the due diligence process to see a deal through.

 

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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Is Your Company Throwing Away Money On Phantom Space?

Phantom space has nothing to do with a building being haunted. But it is scary to think of the money you could be throwing away if it exists in your company’s lease.

To understand what this means you first need to understand how your landlord determines the square footage of your leased space. “Usable space” is the space actually contained within your walls. “Rentable space” is the usable space plus your proportionate share of all common building areas. The American National Standards Industry (ANSI) has created detailed specifications on how to create accurate measurements. Some standards have been adopted by The Building Owners and Managers Association (BOMA). Some landlords agree to adopt these standards. Some don’t.

Phantom space occurs when either the usable or rentable square footage numbers or both are inflated.

This can happen because the Landlord or their representatives choose to ignore the ANSI/BOMA standards in favor of their own. Calculations may be based on a measurement of the landlord’s choosing. This can be anything that the landlord decides and may or may not be based on a real metric. Illegal? No. All aspects of a lease are negotiable, including the basis for measurement. The landlords that do this almost certainly have attorneys who include
language in the lease that will indemnify them and prevent recalculation once the lease is signed.

Take these precautions to protect yourself:

• Insist that measurements and rentable adjustments be done in accordance with ANSI/BOMA standards.
• Hire your own architect. Architects have a fiduciary responsibility to their clients.
• Include language in the lease document that affirms measurement to ANSI standards and allows for adjustment if a discrepancy is discovered.
• Be certain that you have a tenant representative that insists on the items above, manages the transaction accordingly, and will not passively accept the non-conforming measurements of unscrupulous landlords.

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

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The Modern Office

Ethonomics is the study of the delicate balance between ethics and economics.

It has become somewhat of a buzz word in modern office management culture. Why is that important from a
commercial real estate perspective? Because it is literally changing the way offices are designed.

Numbered are the days of cubicles and long hallways of doors to hide behind as we drudge through our 40 hours, counting down to the weekend. Office design is a reflection of our awareness that work-life balance is not just important for employees to be healthy, happy, and productive. It is imperative.

There is a radical transformation happening.

The modern office is a place for interpersonal connection, collaboration, and co-creation. It is no longer necessary for phone calls, accessing computers or files, attending meetings, and pushing paper. In fact, more and more companies are going paperless and most productivity and communication are digital.

Office spaces feature WiFi throughout, gourmet kitchens, and unconventional, creative meeting spaces in open plan settings that feel more like cozy cafes or living rooms than dedicated workspace. Design is taking advantage of technology and integrating the promotion of living healthier lifestyles. Fitness rooms are as common as blended schedules that offer employees the opportunity to work both remotely and on site. Ultimately, staff are more productive and happier and the office provides efficient, as-needed space.

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

 

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Defining Reasonable Wear and Tear

What is the “reasonable wear and tear” condition of a premises?

It is important to understand your landlord’s definition of this term when signing a new lease or renewal. This can prevent unexpected costs and stress when it’s time to move. A landlord wants to preserve as much cash as possible when a tenant vacates. Finding a replacement tenant and preparing the space can be a significant cost. If a landlord can pass those costs on, he or she probably will. That can mean that “reasonable wear and tear condition” includes at least a portion of the landlord’s costs to prep for an incoming tenant.

“Reasonable wear and tear” is a matter of opinion.

A tenant can save money, frustration, and potential legal issues when they leave by outlining and agreeing what the specific expectations are in the lease. In some cases, a tenant will receive a landlord improvement allowance upon taking occupancy. That doesn’t mean they are obligated to reimburse those costs when they move or cover those same costs for the next tenant. This is especially true if a tenant has occupied a space for a significant period of time.

 

Companies can be so focused on what is entailed to move into a new space that considerations about vacating it are overlooked.

A landlord should certainly have recourse when it comes to property damage. It is essential to Agree on what is considered damage and what is normal wear and tear. It is to everyone’s benefit to ensure there is a fair balance and that all parties agree about the defined terms.

 

Any questions? Contact Ryan at [email protected] or (713) 840-8528.

Ryan J. Hartsell, SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, is the architect of a highly successful career in the commercial real estate industry. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients. Contact Ryan to discuss your commercial real estate needs.

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Renegotiate Your Lease Terms – Create a Win-Win with Your Landlord

Many companies believe that they must live with whatever terms are stated in
their existing lease until it expires. However, many property owners will consider a
proposal to change the terms of an existing lease if it provides long term
benefits. There are creative ways a tenant can renegotiate lease terms that will
provide security for the landlord while saving themselves a considerable amount
of rent at the same time.

If the market changes during the term of a lease, it might make sense for both
parties to negotiate a new agreement. If the current market rates have dropped
since the original lease was written, a landlord may be willing to reduce the
monthly rate in exchange for a longer term commitment. This creates security for
the landlord while providing potentially significant savings for the tenant.

If the market rates have increased or remain equal to a tenant’s current rate it
could be beneficial to both the landlord and tenant to reevaluate the need for
space. If a tenant can reduce their footprint in a building it will save them
unnecessary rent while offering the landlord the opportunity to lease the
unneeded space at an equal or higher rate. Like in the previous example, this
could be negotiated by extending the tenant’s term commitment or other
items within the lease agreement.

The renegotiated total financial obligation must exceed that which is remaining
on the existing lease for any proposed changes to make sense for the landlord.
It is wise for a tenant to conduct regular audits of their lease situation to
maximize the use of space and financial obligation.

 

Any questions? Contact Ryan at  [email protected] or  (713) 840-8528.

Ryan J. Hartsell, SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.