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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.  

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Rental Rate Structures

Rental Rate Structure

The structure of your lease depends on a few factors. It’s important to understand how your lease is structured and what the basic terminology means when negotiating your agreement. The type of property you are leasing plays a big part in determining the type of lease offered. An industrial property lease will be structured differently than one for a retail property or office space.

There are common (even expected) lease structures used within these sectors and the details can change from deal to deal. The type of lease you enter into will determine your share of property costs above and beyond your basic rent. Each lease is unique and it’s important to be sure you fully understand the basic structure and the details that will affect your bottom line.

 

Gross & Modified Gross

A Gross lease is less common today than a Modified Gross lease. In a gross lease all operating
expenses are inclusive of the tenant’s base rent amount and paid in full by the Landlord. In the modified version a stipulation is included to protect the Landlord against any major or unexpected expenses incurred by taxes, insurance, and property maintenance. In a modified gross lease, the tenant pays base rent plus an agreed amount toward these expenses after the first year. Typically the agreed amount is in the form of a percentage of the property’s total costs. The percentage is equal to the percentage of the square footage in which the tenant operates. Fifty percent of the building pays fifty percent of the costs.

 

Net, Double Net, & Triple Net (NNN)

In Net leases, the tenant agrees to pay specific outlined types of operating expenses related to the property. “Net” is a generic term that could mean all the property operating costs are negotiated into the lease, or a portion thereof. Double Net means that two of the main operating expenses will be the responsibility of the tenant. Generally speaking, those are taxes and insurance. And, as you might expect, Triple Net leases add a third expense into the mix, usually the building maintenance.

There are various differences within these fundamental lease structures that are associated with specific types of businesses. For example, a retail property lease may offer reduced rent or costs in exchange for a percentage of sales paid to the Landlord. Everything is negotiable, as they say. It’s to your benefit to discuss options with your Agent or Broker. Learn as much as you can about common expectations of lease terms used within your industry and location. Ensure your Agent or Broker negotiates all of the details into the lease. Don’t assume anything. Ask questions. This is where their expertise will benefit you the most.

 

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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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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Why Most Tenants Overpay

Landlords know that the overwhelming majority of commercial tenants renew their leases.

There are common and understandable reasons for this. First, let’s face it, it’s a hassle to move. It disrupts business and it’s stressful for everyone involved, including employees. Besides that, evaluating options requires an investment of both time and money. And then there’s the additional expense of making a move. Without actually quantifying and verifying these potential woes, and choosing instead to remain in a current lease situation based on an assumption that they exist, a tenant is said to be suffering from “Captive Tenant Syndrome”. This is the mistaken belief that they are, in a way, stuck in the space they currently occupy. What if those issues could be minimized or mitigated entirely? Consider the possibility that improved efficiency of the new office may offset the required effort to move. What if the excitement of a new workplace improved morale and increased employee productivity? Perhaps the potential new landlord may be willing to incentivize the agreement. This might mean absorbing the cost of the move or paying to outsource coordination of logistics to make it happen.

When considering a move, it is important to understand the position of both the current landlord and a prospective landlord.

For instance, what would a move cost the existing landlord? And, how motivated is a potential landlord to gain a new tenant? Landlords know that a tenant will consider the negative impact a move may have on their business when facing a lease expiration. Many will count on it to achieve higher profits on renewal leases compared to attracting a new tenant and negotiating at a slightly higher rate. For an existing landlord, there can be significant losses when a tenant vacates. Depending on the type of space and its location, a landlord faces months or years in lost rent while carrying the property tax, insurance, and other expenses. Once a new tenant agrees to move in, there are usually additional costs to get the deal done like improvements, and discounted or deferred rent payment. Both the tenant and landlord have significant considerations when it comes time to negotiate a lease-end extension or renewal. This should be a collaborative effort that acknowledges any challenges and benefits for both parties.

So how does a tenant avoid leaving money on the table when a commercial lease expiration is approaching?

  • Be honest with the current landlord and any prospective landlord.
  • Conduct a serious evaluation of relocation options to get the best terms:
  • Search spaces
  • Tour
  • Meet with prospective landlords
  • Get construction estimates
  • Issue formal requests for proposals
  • Prepare a fully loaded financial analysis
  • Get feedback from employees and the people who will be affected by the decision.
  • Get to know the motivations of the landlords in question.
  • Learn the history of any new space being considered.

In other words, go in with eyes wide open and know where you stand. Putting in the effort to evaluate a situation is the only way to determine the true cost of relocation versus renewal. Weighing the pros and cons creates an opportunity to negotiate a lease that makes sense for both sides.

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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Add On Factor: Why Office Tenants Pay for Space They Don’t Use

Add On Factor: Why Office Tenants Pay for Space They Don't Use

Rentable and Usable Office Space

When leasing office space in a multi tenant office building it is important to understand the difference between rentable and usable square feet.  Some office tenants are not familiar with these terms.  Tenants unfamiliar with the concept of an add-on factor may be confused about how much space they truly need. Essentially as an office tenant you are paying rent based on the “rentable” size of your space. The rentable square footage is not the actual size of your office space.  Let me tell you a story about just how unbalanced that difference can become…

Energy Corridor Case Study

Recently I worked with a client in the Energy Corridor in Houston looking for new office space. He expressed strong interest in a property which had recently converted from a single tenant corporate use to a multi-tenant layout. This means the property was designed originally for one company – think of an office campus setup. Since the conversion was not yet complete the floor plates and common areas were under construction and not fully determined. During construction the new ownership would be making decisions about which common area corridors, restrooms, lobbies and other common area elements would remain. As a result the leasing agent was unable to provide the true add on factor at the time we toured the property.

What Is An Add-On Factor?

As a quick refresher, the add on factor (sometimes referred to as core factor) is the amount of a commercial building taken up by common areas such as hallways, restrooms, elevators, the lobby, etc. The add on factor will typically fall between 15-20%. This means the usable square footage of a company’s office space will be inflated by 15-20% to account for the common area space in the office building. In this way each tenant pays for their share of the common areas they may use throughout the building.

Back To Our Story

After touring the property with my client we began discussions with the leasing broker. Upon receiving an initial proposal we discovered an add on factor in excess of 60%! Understandably this was not an acceptable calculation for my client. Imagine leasing an office space consisting of 3,000 actual square feet, but paying rental expense on 4,800sf – out of the question. After much discussion and negotiation we were able to reduce the add on factor to 37%, but ultimately this was not enough to make a deal.

It is not uncommon to find re-purposed office buildings with a high percentage of common areas. With the headwinds facing retail developments and malls we may see this trend continue to grow. Typically landlords will opt to use a “market factor” which is artificially lowered to compete with other properties in the area. In this situation the landlord was attempting to secure lease agreements with an add on factor 3 times the market rate. I advised my client throughout this interaction and we decided to pursue alternative options in the area.

Relocation to Multi Tenant Office Space

One important thing to mention is that most types of commercial real estate do not use an add on factor. This type of calculation is typically exclusive to multi-tenant office buildings. This means if you are a tenant in an industrial, flex office, retail or single-tenant office building you are not paying for an add-on factor. Tenants in these types of properties have a rentable and usable square footage which are identical. This can lead to some confusion for tenants looking at relocation to a multi-tenant building. These tenants may expect that the 5,000sf they currently occupy will be the same 5,000sf they need upon relocation. But again, this is 5,000sf usable, and with the add-on factor included they will require at least 5,750sf – and possibly more.

At Oxford Partners we will frequently begin the process of working with a new client by preparing a minimum space analysis. This allows the client to visualize all the necessary space elements for their office, and understand how much space will be required. Part of this assessment is an estimation for add-on factor. You can access our free Space Planning Tool here. Contact us directly for more information about the minimum space analysis if you’re interested in learning more.

Conclusion

Companies leasing space in a multi-tenant office building must always be aware of the add on factor used in their building. At some point a tenant will want to relocate, and it is key to know the exact usable space required for their operations. It is also important to ensure the rentable square footage for your lease agreement is calculated correctly. There should be a clearly identified common area markup listed in the lease. When considering a relocation verify these numbers ahead of time to ensure a market factor is being used. This will help avoid paying for space you don’t use and likely will never see.