Occasionally, we hear of a tragedy where a bomb explodes in a former war zone. Likewise, in commercial real estate where most markets have recovered from the recession, there is a time bomb of building ownership that can be disastrous for office tenants. That ownership structure is a TIC (Tenancy-In-Common). In this post, I outline what is a TIC, the challenges they present and how tenants can safeguard their interests.
On the heels of the great recession in December 2010, I wrote about whether the trend of office tenants moving to urban areas is a secular shift or an aberration (“Downtowns Drawing Tenants Over Suburbs: Secular Shift or Aberration?“), concluding that companies that are location neutral (i.e., don’t need to be suburban or urban) will be driven by qualitative factors including, most importantly, labor. Here in Chicago and many other markets nationally, we’ve seen an increasing number of companies relocating all or a portion of their operations to the Central Business District (or surrounding areas). Most recently, it was announced that McDonald’s Corporation will relocate their HQ from west suburban Oak Brook to Chicago. With urban office rents being considerably higher than suburban, these companies are not looking at real estate from purely a cost perspective, but rather how it can be a strategic tool in driving their core business. In this post, I summarize the reasons underlying this trend, what we can expect in the future and what is happening in Chicago as an illustration of this national and global trend. I also explore why some companies have decided to stay in the suburbs.
While your ultimate decision on leasing office space will be based upon how it supports your business goals, the building tour is an initial litmus test. A thoughtful inspection of a building and space may identify potential issues that you can address early on in negotiations as well as avoid dead-ends. Before you look at new office space, here are some “do’s and don’ts” to consider based upon my 20+ years representing office tenants in Chicago and nationally.
Now that the holiday season is over, ‘tis the season for Operating Expenses and Tax reconciliation for office tenants. As most office leases allow the landlord to recapture increases in Operating Expenses and Taxes (which tenants commonly pay on an estimated basis over a calendar year), landlords are required to reconcile the year’s actual expenses and taxes to the tenant’s estimated payments. That reconciliation statement is typically issued in first quarter. If not carefully reviewed by a tenant, in all likelihood money is being left on the table as 90% of these statements have some errors. This is particularly important in cities like Chicago where tenants are seeing major increases in property taxes. While there’s not much a tenant can do with rising property taxes, they can lessen that blow by closely scrutinizing the operating expenses. Now, more than ever and in light of the new accounting standards, tenants must be aware of their occupancy costs and diligently pursue their audit rights. Outlined below are strategies tenants should employ in reviewing these statements as well as some ideas on how to craft these provisions in future leases. I am joined on this post with Mirela Gabrovska of MBG Consulting, a national expert in lease administration and auditing.
On November 11, 2015, the Financial Accounting Standards Board (FASB) decided upon the effective date for the long awaited and much debated new lease accounting standard requiring companies to recognize leases on their balance sheets. The effective date for public companies will be in fiscal years (including interim periods within those years) beginning after December 15, 2018. The effective date for private companies will be for annual periods after December 15, 2019. Upon issuance of the final standard, which is expected to be early 2016, FASB allows for early adoption which some companies will do to meet SEC requirements.
With strong office markets in many parts of the country, landlords are becoming rather bullish. In that spirit, they are looking to maximize leasing flexibility in accommodating new and growing tenants. One leasing flexibility tool that landlords have in their toolbox is the right in the lease to relocate a tenant. While tenants want to see their landlords succeed in keeping the building well occupied, they are more concerned with maintaining a productive office. Relocation is extremely disruptive for businesses when they are planning to move at the expiration of their lease; it’s even worse when the landlord issues you a notice out of the clear blue that they are going to relocate you. Even though the relocation move is typically paid for by the landlord, assuming the tenant has negotiated that into its lease, that is little consolation for the intangible loss in productivity to the tenant’s business. Outlined below are strategies to fundamentally eliminate this right and, where that is not feasible, to neuter it as much as possible.
The best time for a tenant to negotiate key lease terms is before the tenant negotiates the lease. After a tenant requests the landlord to prepare a draft lease (on its landlord favorable form), the tenant has signaled to the landlord that it has committed to the building and consequently loses market leverage. As office leases and the entire leasing process is decidedly tilted toward landlords, to level the playing field, tenants should negotiate a detailed Letter of Intent (“LOI”) memorializing all business terms and key legal terms to serve as the “blue print” for the lease draft. A well negotiated LOI will maximize lease concessions for the tenant as well as save time and money in the lease drafting process. Additionally, the inherent process of negotiating an LOI, will tell you a lot about the landlord and their “hot button” issues, etc… Discussed below are strategies that tenants should employ to effectively negotiate an LOI.
Willis Tower sells for $1.3 Billion. Such eye-popping sales headlines are fairly common today. With low interest rates and rising rental rates, we’re seeing record volume of office building sales in Chicago and many markets nationally. As part of the sale of an office building as well as refinancing, tenants will receive a document known as an “Estoppel Certificate” from their landlord as is commonly required in most office leases. Below is a brief explanation of “Estoppel Certificates” and what tenants should consider when negotiating their lease and what to look for when reviewing one.
With the start of the new year and with the stock market continuing to break new levels, there’s a strong sense of optimism in our economy. As office vacancy mirrors employment rates, we are seeing vacancy rates continue to fall and rents rise nationally. Like the stock market, the office leasing market has its ups and downs. Maybe as an office tenant you were fortunate to lock-in low rents for a long term. But as companies grow, the demand for office space continues. Having 20+ years representing tenants during the office leasing cycles, here are some ideas on how to best navigate today’s increasingly landlord favorable markets.