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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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Workletters Explained

A tenant improvement (TI) workletter is, more or less, a contract for construction.

It is generally an addendum to a lease agreement involving third parties, architects, and contractors. Unless a tenant occupies a space “as-is”, a work letter defines the condition of a space when the tenant moves in. It also explains how that condition will be achieved. A workletter 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.

A workletter should include a clearly defined set of building standards.

This ensures a buildout is sufficient to meet code requirements. This means that all work is completed in accordance with drawings and complies 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.

Of course, there has to be a limit on the monetary allowance and costs.

Generally speaking, a tenant allowance for construction is based on the square footage of usable space. This is not necessarily the same as the rentable space. 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 workletter. 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.