In the late 1960’s, Herman Miller, an American manufacturer of office furniture and equipment, spawned the idea of office cubicles. The cubicle’s popularity was sustained until about 10 years ago, when companies began to notice that the way in which people worked was changing; people were collaborating in small teams as well as relying on portable electronic devices that do not require that they be “tethered” to a fixed workspace.
Category: Pre-lease Issues (page 2)
How Tenants Can Prepare for the Unthinkable
Hurricane Sandy devastates the northeast. As recently reported on Bloomberg (http://www.bloomberg.com/news/2012-11-09/lower-manhattan-quiet-as-sandy-shuts-one-third-of-offices.html) 33% of the 101 million square feet of lower Manhattan’s office space was inoperable as of November 7th, several days after Sandy’s landfall. Likewise, immediately after 9-11, areas of lower Manhattan were closed off for months. Manmade disasters and storms are not just limited to New York or the coastal areas. In 1992, Chicago’s Central Business District was closed for days due to a flood of an abandoned underground tunnel system. Falling into the trap – “it’ll never happen to me” – many tenants and landlords pay short attention to the lease provisions pertaining to a casualty. Outlined below are steps tenants can take pre-lease and during lease negotiations to safeguard their interests. Also addressed below is where there is no damage to the building, but the building is inoperable due to lack of utilities, access, etc. Most leases, however, do not provide the tenant with any rights if they are denied use of the building without building damage. Under a separate post, I address what tenants need to know about insurance.
Overview of Tenant Improvement Strategies
While many lease provisions never come to light for tenants, there is one that all tenants face after the lease is signed: the Tenant Improvement Provision a/k/a “Work Letter”. Given the amount of dollars at stake and its operational significance to the tenant, it requires the utmost attention. 
Tenant Improvement Strategies – Allowance Approach
Under the Allowance Approach, the tenant is allotted a cash allowance from the landlord for construction and related costs. To the extent the total costs are less than the allowance, and if properly negotiated, the tenant retains the savings. On the flip side, if the costs exceed the allowance, then the tenant bears those excess costs. Outlined below are the pros and cons to this approach, common pitfalls and strategy to successfully implement.
Tenant Improvement Strategies – Turnkey Approach
As the name implies under this approach, the landlord – at its sole cost – is responsible for all elements of construction based upon an agreed to scope of work. Many tenants are attracted to the simplicity of this approach, but if not properly structured and implemented can lead to unwanted financial surprises, delays as well as a space that is not constructed to meet their needs. Outlined below are the pros and cons to this approach, common pitfalls and strategy to successfully implement.
How Reliable are Lease Comps?
In office lease negotiations, like most other negotiations, there’s the “sticker price” and the final deal terms. As to the latter, landlords and office brokers frequently talk about comparable lease transactions, a/k/a, “Lease Comps”. Many tenants confuse the reliability of Lease Comps with those of property sales. While Lease Comps have some validity, they need to be taken with a grain of salt.
Update on Proposed Lease Accounting Changes – Heeding Industry Comments
Responding to the comments from the corporate real estate industry, several weeks…
A watch-list, a special servicing event, and maximizing NPV recovery all have this in common.
Question: “What is a landlord with a troubled CMBS loan?”
Back in the day, a landlord may have had a loan with a life insurance company in Iowa or a pension fund in California that retained the loan through maturity.
Then smart money came along and structured a secondary market for the trading of commercial mortgage backed securities (CMBS).
Now, mortgage bankers could transfer loans to a tax-advantaged trust. The trustee, with promissory notes in hand and an expectation of receiving regular interest payments on the pool of loans, could issue a series of bonds varying in yield and risk. Rating agencies could come in and assign ratings to the various bond classes: from the most secure AAA down through the below-investment grade and unrated bonds. Bankers could underwrite and sell the securities to investors. Bond investors could select from the tranche matching their credit risk, yield, and term preferences. Meanwhile, down in the boiler-room, a master servicer, engaged by the trustee to service the loans, would collect mortgage payments, release disbursements from escrow, and handle other routine loan matters, all so long as a loan performs as expected.
However, a wheel or two came off the truck during the last few years and some loans have not performed as expected.
And rating agencies expect more troubled CMBS loans to surface, despite the gradual improvement in the economy.
Plugging the Lender Loophole: Tenants need Nondisturbance Agreements
Taking advantage of the depressed office market, as a savvy tenant you just renegotiated your office lease reducing your rent and locking in a low rent structure for the next several years. But did you close a big loop hole that could negate this great deal? If your lease is like most leases, it contains a subordination clause making your lease inferior in position to any existing or future lenders. In many states where a lease is subordinate to a mortgage and the lender forecloses on the property, the tenant is at the lender’s mercy as the lender can elect to terminate or recognize the lease. In such an event, the subordinate tenant is in a very vulnerable position as the lender has leverage to force the tenant to renegotiate the lease on the lender’s terms. To plug this loophole, a tenant should have a Nondisturbance provision in its lease and have a Nondisturbance Agreement with the existing and future lender(s). In today’s market, tenants are well advised to preserve some negotiating capital for this important issue.
Tenants’ Due Diligence of Landlords: Landlord Background Check
Today’s office market presents unprecedented opportunities for tenants. At the same time, tenants face risks that were uncommon a few years ago related to the financial well being of landlords. With some of the biggest names in the industry struggling, savvy tenants are extending their due diligence to the financial strength of their current and prospective landlords. Unlike a real estate sales transaction where the parties go their separate ways after the transaction is finalized, tenants must keep in mind that a lease is a long term business relationship. As this business relationship in most cases is vital to the operation of a tenant’s business, tenants must thoroughly vet their landlords.