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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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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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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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Commencement Dates

Commencement Dates

The Commencement Date language in your commercial lease agreement is a particularly important detail not to be overlooked. As a tenant, you need to protect yourself against any unplanned delays in taking possession. If a new lease commences prior to moving in, you could be setting yourself up for a lot of additional costs and even potential legal issues with your current landlord.

To protect yourself from unexpected costs and logistic issues regarding lease commencement, your lease should state that “The Commencement Date will be the later of the 1st of the given month or the first of the month following delivery of the Premises by the Landlord”. You should also include “with substantial completion of construction” and request a CoC (Certificate of Occupancy). A CoC is a government issued document that confirms the building
construction is compliant with codes and the space is suitable for occupancy.

You can protect yourself further by including in the lease terms that the Landlord will pay a specific amount of money to the tenant for each determined period of time in which occupancy is delayed. That amount should equal the new rent costs plus any holdover penalty and any damages charged by the existing landlord if the tenant is liable for such costs. It is also wise to include a provision for terminating the contract without penalty if the lease has not
commenced by a certain date.

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.  

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Advantages of Negotiating an Assignment Clause in Your Lease

The Major Difference Between a Sublease and Assignment Provision

An assignment clause in your commercial lease can protect your company from obligation to a landlord if, for example, you need to vacate prior to your lease end or your company changes hands. With an assignment of your leased space, the terms of the original lease are carried over to a new tenant. This differs from a sub-lease situation wherein you remain affiliated with the space once the sub-lessee takes over.

An assignment clause is not always an easy sell when negotiating terms with a landlord, however. It is in the landlord’s best interest to maintain enforceable control over his or her building as much as possible. An assignment clause poses risk to the building owner. He or she may add stringent restrictions for assignee approval or not allow an assignment clause at all.

If an assignment is permitted, it is likely that there will be extended due diligence periods in place. These provide the landlord time to examine the assignee’s financials and determine whether he or she comfortable with the potential new tenant.

It is wise to anticipate any future changes that may reflect the need for an assignment. Negotiations for an assignment clause may be more acceptable if specific scenarios are laid out for the landlord rather than a general clause “just in case”. This is known as a ‘carve-out”. Essentially, a ‘carve-out” defines potential future circumstances under which specific provisions are negotiated into the lease.

When negotiating a new lease, it will serve you well to account for anticipated changes in your company’s future. Planning and well thought out negotiations now could save you serious repercussions down the road.

 

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.  

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6 Reasons to Audit Your Building’s Operating Expenses

Prevent Overpayment of Your Company’s Leasehold Expenses

Real estate and leasehold expenses are among the most impactful upon your company’s bottom line. It is an essential element of any company’s fiscal management to ensure that it does not overpay. Auditing your landlord issued expenses is your right. Lease auditing has become a common and expected practice. Here are 6 indicators that suggest your business may benefit from conducting a lease audit.

1. Increases to the Building’s Operating Expenses 

Perform a basic trend analysis of annual operating expense obligation if you notice a significant increase. Inflation and changing market conditions can contribute to increased operating expenses but if there is a significant jump issued to you, ask questions. A large increase may be due to an impermissible capital project, expense categories not reflected in your base year, vendor changes, or above standard services.

2. New Property Owner

A change in property ownership might trigger a lease audit.
Management fee levels, new vendors, and changing service levels are common issues when a building changes ownership or management. Another concern is the tenant estoppel which, if not carefully worded, has the potential to sign away rights or leverage.

3. Building Renovations or Upgrades

Renovations and capital projects may be subject to your lease operating expenses exclusions. Every project should be audited for permissibility under your lease. While you are most likely obligated to reimburse the landlord for a genuine building operating cost, you probably are not obligated to reimburse your landlord for increasing the value of his or her building if it does not reduce building operating costs in the future. If your building underwent renovations and/or capital improvements in the past, those costs were most likely amortized across future years. You may still be able to avoid ongoing expenses if they prove to be impermissible per your lease exclusions.

4. Your Lease is Commencing or Expiring

Perhaps the most valuable times to perform a lease audit are at the commencement and expiration of
your lease. If you occupy under a base year lease, the valuation of your base year will have a material impact
on your leasehold expenses throughout the remainder of the term. It is in your interest to validate all
charges and to validate expense levels in year one so as to not undervalue your base year. Likewise, lease
audits should always be performed as a standard practice at any lease expiration. Not only might you lose
rights to recoup any overcharges after vacating the premises, but you may lose significant leverages after
relocating.

5. Dramatic Change in Building Occupancy Levels

Accounting for accurate building occupancy levels can have enormous implications for your operating
expense obligation. This can be magnified with regard to fixed versus variable expenses. If the vacancy
rate in your building is sizable, it benefits the fiscally conscious tenant to ensure that occupancy shifts are
accurately reflected within a given expense period.

6. Limited Support for Operating Expense Increase

A lease audit should automatically be triggered whenever an annual reconciliation is provided without sufficient back-up to verify expenses and calculations. Year-end reconciliations can carry significant financial impact. This is particularly true if your lease terms include caps or index-driven escalators. Any failure to timely challenge a landlord’s computations and/or inclusions may forfeit your rights thereafter. Accepting a rudimentary reconciliation is to trust your company’s finances to an outside party with a vested interest in maximizing its profits.

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.  

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Purchasing with an SBA Loan: How to Lower Your Rent and Create an Investment

Dramatically cut your company or professional firm’s “effective” lease rates. An SBA 504 loan could be the answer to saving a significant amount of money compared to the high costs of leasing.

If a creditworthy tenant can find a viable building or commercial condo space to purchase, then buying with an SBA 504 loan could mean reduced costs and increased income potential.

A couple of important points to note:

  • The upper limit for most buyers on an SBA 504 loan is $5,000,000, except for manufacturing companies, for which it is $5,500,000.
  • The new Financial Accounting Standards Board (“FASB”) rules for lease accounting will force tenants that use Generally Accepted Accounting Principles (“GAAP”) to show the entire value of their multi-year leases, plus all renewal option periods, on their balance sheets. This means it may make sense for smaller to mid-sized, privately held companies and professional firms to seriously consider buying or constructing their own buildings.

If your firm has fairly stable space needs, owning your own building and paying rent to yourself can make a lot more sense than continuing to lease.

Not to mention that owners can also take advantage of tax depreciation and, hopefully, gain appreciation of the property value on their investments.

Case Study for Buying with SBA 504 Loan

A client received a national landlord’s offer to renew its lease for five (5) years at $11.04/SF triple net (“NNN”) per year. While the representing brokerage initially objected to the landlord’s proposal, their research and multiple forays into the market ended up validating it as a fair market lease renewal deal in their area.

They didn’t accept the landlord’s proposal or tight market options without a fight. They persevered, broadened search parameters, toured more buildings for lease, and eventually found an excellent opportunity for the client to purchase. The client’s commercial banker supported the decision by offering an SBA 504 loan.

Buying effectively lowered the client’s annual rental rate by 37.4% to $6.91/SF NNN, versus renewing for five (5) years at $11.04/SF NNN.

CAVEAT: 

The Client was very wise and avoided the #1 mistake that most commercial occupiers make: starting their evaluation and search process too late. In this case, this client started the lease renewal process eleven (11) months before its lease expired, not thinking at all that it would end up buying a building. Starting early enough enabled time to explore all of the lease options available and evaluate the “what if” scenarios of buying.

 

Here are some important details to know about many lenders’ SBA 504 loan programs:

  • Down Payment: 10% down payment. Tenant improvement (“TI”) costs and upfront expenses incurred by the Buyer, up to 10% of the Purchase Price, can count towards the down payment.
  • Interest Rate: Low, fixed interest rate (blended rates from the lender and SBA).
  • Loan Term: Five (5), seven (7) and ten (10) year loan terms are available, fifteen (15) years in some instances.
  • Amortization Period: Most SBA lenders allow a 25-year amortization period for the buyer’s monthly payments of principal and interest. (These monthly payments, in effect, are the NNN rent.)
  • Origination Fees: Some SBA lenders do not charge origination fees. Some banks will pay a 0.5% “Participation Fee” when an SBA 504 loan closes.
  • Personal Guarantee: No personal guarantees are required. This is a huge benefit to a well-qualified buyer with good credit.
  • Occupancy Requirement: Buyer must occupy at least 51% of the floor area of the subject building or condo space, as per SBA 504 loan program requirements.

 

SUMMARY & CONCLUSION

If your privately held company or professional firm has good credit and is experiencing sticker shock over today’s rental rates, then buying a building or condo space with an SBA 504 loan might be the perfect way to beat your landlords’ high rates.
Other major benefits of buying space include depreciation for tax purposes and, potentially, appreciation in the value of the property. Even if your company or professional firm comes to an end in the future, there may be the opportunity to lease the building or condo space to someone else and turn the investment into a valuable vehicle for retirement. An SBA 504 loan can make buying an ideal alternative to paying high lease (renewal) rates.

 

 

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.  

 

Note: Portions reprinted with permission of William Gary, MBA, MIM,  based on Canonical Reference to MacLaurin Williams Worldwide’s blog article How to win with SBA Loan and rent from yourself, posted at http://www.maclw.com/blog?post=How-to-win-with-SBA-Loan-and-rent-from-yourself&xid=040700-01