Lease renewals are one of the most profitable leasing transactions for landlords. As most tenants look to renew their lease to avoid the disruption associated with a relocation and as landlords perceive existing tenants as a “captive audience”, I’ve outlined below 10 steps for tenants to employ so as not to leave money on the table based upon my 20+ years representing office tenants in Chicago and throughout the country.
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.
Reliable high-speed internet access is mission critical to businesses today. With rapidly changing technological improvements from video conferences to 3-D printing, a building’s connectivity must be vetted by tenants early in the site selection process as a key infrastructure element with the same level of due diligence as are utilities and HVAC. Unfortunately, there has been a lack of transparency as to buildings’ internet connectivity which can vary greatly. Moving to a building with inaccurate information about a building’s internet connectivity can lead to unforeseen costs and delays, not to mention loss of business. That, however, is changing in New York and soon in Chicago as well as other cities across the country.
How does your office space affect your health? If you think about it, most office spaces and buildings are designed to minimize the physical activity of its occupants. While many office spaces today are certified as meeting the sustainability standards of LEED, that does not necessarily equate to an office environment positively affecting its occupants’ health. Since its introduction, we are seeing many of the LEED sustainability standards incorporated into building codes and construction practices. These standards fulfill two primary objectives – preserving the environment and saving money. While it is assumed that they benefit the occupants’ health, that’s not necessarily the case. To help combat the national obesity epidemic and rise in the diagnosis of chronic diseases, new building standards are being introduced to focus on how the physical environment supports the occupants’ well being. Outlined below is an overview of The WELL Building Standard® (originated by the Delos Group, a New York developer) and what it means to office space occupiers. In my next post, I will address a broader healthy building standard from New York City. This standard, known as the Active Design Guidelines, was developed in a public-private partnership in 2010, which was supported by Mayor Bloomberg, and led to the 2013 launch of the non-profit Center for Active Design.
Many creative and technology companies gravitate to loft office buildings due to their unique character as they are typically renovated warehouse buildings (either concrete or timber construction). In addition to the usual office building due diligence, below is a checklist that tenants should use in evaluating loft office buildings. To thoroughly evaluate a loft office building, a tenant should consider the assistance of a knowledgeable tenant representative, project manager, architect, engineer and general contractor.