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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
When Should an Office Tenant Hire Their Own Architect?
As a tenant searching for new commercial office space the process can often be complicated and time-consuming. After hours of touring properties and narrowing down options the first phase of negotiations begins. With this phase comes an important decision to be made: Should the office tenant hire an architect or use one provided by the landlord? Several factors will determine whether this makes sense or not. These may include the overall complexity of the construction work required, and the desired amount of interior design needed to make the space ready for occupancy.
Before we dig into the reasons for and against hiring your own architect let’s review the basics of space planning.
What Is Space Planning?
Typically when a commercial office space tenant finds a vacancy they like the first step offered by the landlord’s broker is a space plan or test fit. The landlord will usually have a preferred architect to use for this. The cost for a basic test fit will be approximately $0.10-$0.15 per square foot. This usually includes a couple revisions to the plan as the tenant and architect fine tune the design. This cost is usually paid for by the landlord as an inducement to engage negotiations with the prospective tenant, and is considered a cost of doing business for them.
Below is an example of a simple space plan which illustrates how a tenant might occupy and utilize a prospective office space.
Reasons for Having Office Tenants Hire an Architect
So what are some reasons an office tenant may decide to hire an architect?
1. Guaranteed Impartiality: the Landlord will have no influence in the design of the space and specific elements of the design which can drastically affect costs.
2. Workspace Efficiencies: by definition, architects design workplace configuration. Using your own architect allows you to make your space a function of your organizational culture. Whether you’re looking for an open floor plan, office intensive layout, break-out spaces, etc, the architect is tasked with achieving your required needs within the most efficient layout possible. The square footage savings here can more than make up for the added cost of the architect’s fees.
3. Construction Scope Complexity: if the scope of the job is significant it can be very useful to have your own architect managing the details of the design process.
4. Optimizing the Tenant Improvement Allowance: all tenants want to maximize the value of any tenant improvement allowance provided to them. The architect can play a key role in ensuring these dollars are spent how the tenant desires.
5. Ensuring the Space Meets all Governmental Codes and Regulations: it is in the tenant’s best interest to ensure a new office space meets all necessary codes and regulations prior to accepting and occupying the space.
When office tenants hire an architect they can be sure the design and specific elements contained within are aligned with their desired use. The landlord will not have control of the design process and generation of the construction plans. There can be opportunities to secure cost-savings which a tenant’s architect will be more motivated to identify and capture. The tenant can also be assured that the area calculations for the usable square footage are 100% accurate (which is not always the case).
Many business owners want to strategically organize and plan their office space to impact the organizational culture and operations of the business. When office tenants hire an architect it can be a great way to work collaboratively to achieve this result. Whether an open floor plan is desired, or finding space for the right number of private offices, or building a large enough break area to give employees space to unwind, an architect can assist with all of these and more. Finding ways to organize a space layout efficiently can greatly reduce the square footage and therefore lower the monthly rental expense for the business.
SCOPE OF CONSTRUCTION REQUIRED FOR YOUR BUSINESS
If the current as-built layout for an office space is similar to the tenant’s desired plan, it may not be necessary to have office tenants hire an architect. With a small project scope for construction the work could be completed without detailed architectural and construction plans. However, this is often not the case, and as a result the complexity and cost of the deal will increase. A significant change to the space configuration is a key reason why office tenants hire an architect to assist them.
Relocating an office space is a lengthy process and can be disruptive to the business. For a move to make sense the new space should be efficient and laid out properly to accommodate the desired business operations. Changing the layout or configuration of a space can result in numerous construction updates, but may be necessary for the space to work.
OPTIMIZING THE TENANT IMPROVEMENT ALLOWANCE
One key component of any office space negotiation is the amount of tenant improvement allowance. This is the amount of money the landlord agrees to pay toward improvements for the space to make it ready for a new tenant. The space plan and construction documents prepared by the architect will greatly influence the costs bid to complete the construction work. It is crucial that tenants and their brokers review all elements of the plans to verify they match the desired outcome. Items missing from the initial plan may require costly change orders after the lease has been signed if the landlord ultimately agrees to turn-key construction. Alternatively, fluff items may have been inserted in the plan which inflate the project cost. The inflated cost will negatively impact the tenant’s bargaining position during negotiations, and the fluff items may be removed at a later stage to save the landlord money.
The tenant’s architect can help identify costly building materials and elements which may not be necessary. Removing these items early in the process can help optimize the improvement allowance negotiated and avoid surprises after the lease is signed.
ADDING INTRINSIC VALUE AT THE COST OF THE TENANT
All commercial office buildings are assets to their owners. These assets have an intrinsic value which is affected, in part, by the value of the materials and finishes within them. Within any large-scale construction project to update a commercial office space there can be many decisions made that affect the value of the space and therefore the building. The key point here is to ensure that all of these decisions align with the tenant’s desired occupancy and use of the space.
ENSURING SPACE MEETS ALL GOVERNMENTAL CODES AND REGULATIONS
Another advantage to using your own architect is to ensure that the newly updated office space conforms to all applicable codes and ordinances. Changes can occur over time and some offices will need to be updated and brought back into compliance. The architect will have key knowledge regarding these necessary updates and how much they will likely cost. As the tenant it is in your best interest to have the space meet code to avoid any disputes with inspectors down the line.
Not all commercial office space tenants will choose to hire their own architect – and not all of them should. This decision comes down to the overall complexity of the work to be performed, the amount of tenant improvement allowance at stake, the quality of the building and materials finishes, etc. Generally speaking the larger the space and construction scope, the more to be gained by hiring your own architect.
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