Advice to Tenants How to Survive the Big Ugly by Dan Mihalovich
In many respects, we’ve been here before. Seriously, I’ve been representing tenants in the City since 1982—all but a few of which have been great years for tenants! The Dot Com period comes to mind, now, but with seasoned experience; better tools and technology; greater flexibility to address HR issues than years ago. Facing soaring occupancy costs, tenants, what should you do about it?!
Don’t assume that your next office leasing transaction will be anything like your last negotiation. There may be far more at stake this time, and a great deal more strategy may be required in order for your organization to survive—and hopefully thrive—during your next lease term.
Strategy Sessions
For a tenant of 10,000-20,000 square feet, it normally takes between 12 to 15 months of planning to either effectively renew one’s lease or execute a relocation to a new site (longer for larger tenants). However, we recommend starting the entire process even earlier—giving yourselves an additional three months or more to delve into the really tough issues facing you in your next set of decisions.
- Hire your broker—us!—and assemble your representative management team, first.
- We’ll help you to assemble the rest of your Strategic Team, including an architect/space planner, contractor, furniture consultant, IT specialist, and any other primary consultants necessary to launch a strategic study about your current and future occupancy needs.
- Everything about your office leasing needs should be on the table for discussion, since the magnitude of expenses have risen so dramatically since your last negotiation.
- HR will play an ever more critical role on this next lease. You should carefully examine not only current and prospective employee home-locations, but also perform a study to detect employee sensitivities to relocating to either “suburban” or outlying areas of San Francisco—or potentially out of state.
- Telecommuting/hoteling/”hot-desking” should be explored. To what extent, if any, could your organization “export” its full-time and/or part-time employees to either work in the field and/or at home. It may become feasible, with rising rental rates, to build out and furnish work spaces in home offices—potentially to even contribute or pay the entire cost of retrofitting an employee’s home to accommodate a work space.
- Parking and transportation costs should be considered as well as the organization’s carbon “footprint”.
Furniture
Clients are relieved to know that we’re here to assist them with renewal negotiations, not just to orchestrate the competition for your business amongst several outside building owners. Your current landlord must compete for your business, too.
Early on during our strategy sessions, the conversation may focus on what you know best—the space you currently occupy—with all of its benefits and challenges. Before assuming that the existing space is too small or that it can’t possibly be renovated to accommodate additional growth, let your team explore all the possibilities.
- It may turn out that buying all new furniture and phasing a renovation of your space while you occupy it may be a lot cheaper than relocating.
- New furniture systems may be more efficiently laid out than when you last shopped systems.
- Given a choice between new furniture systems versus keeping the old and relocating to an inferior location, your management team and employees may opt to renew and “refresh” the space.
- You may explore “green” systems as well as “green” paint and carpet tiles.
- Explore the democratic nature (or lack thereof) of your organization. You may decide to demolish some or all of the private offices in favor of creating more efficient space, adding more people without taking more space while opening up the light and views to more employees.
- A new lease—even a renewal—is a good opportunity to purge old files and examine all storage capacities and efficiencies including off-site storage. Can more office space be created within your premises by creating either central files and/or taking storage off-site? Is condensed filing an option—even if it means adding structural elements to the floor, walls or ceiling—if it saves office-space rent?
New furniture systems today are more efficient all-around. They are built to handle “modern” filing, new telecom equipment and power, and can generally be moved within the office with greater ease than older systems. Remember, we are planning for the future, too. In rising rental rate markets, one should maintain as much flexibility as possible.
Operating Expenses and Tax Assessments
Long before your lease is due to expire, your broker should review the history of operating expenses and tax pass throughs from the landlord. Each and every building you will consider during the landlord “contest” for your business will provide us with their operating expenses—past and projected. We will also verify the tax status and the currently assessed value of the property.
With many months still running on your lease, it will be time to close out any old issues with the landlord before getting on to the new.
- Have you been overcharged for operating expenses all these years? How do you know?
- Did you ever exercise your right to audit the landlord’s books?
- The way you do business and how people flow in your space. Are the current and projected adjacencies appropriate?
- What are you losing, if anything, being on more than one floor?
- Could it make sense to departmentalize and locate a “support” or “service” group on a lower floor? In a nearby building? In a suburb? Can your IT people support such a split? Will morale allow it, even if the economics make sense?
- What flexibilities are there in your Program? These areas should be well defined, if possible, since many a landlord may be quite rigid about offering expansion or contraction options. How tight can you manage, if you feel compelled during negotiations to gravitate toward lower square footage alternative sites? Your architect will need your direction on these fronts, to be prepared to react to highly expensive construction costs and/or higher rental rates.
- What is your after-hours usage? In our experience, the vast majority of building owners do not know how to calculate their actual costs for providing after-hours HVAC service beyond the basics of the cost of union labor to run the system. Power calculations are complicated, but we want to ensure, at a minimum, that you’re only charged at-cost—without markup. Most often these charges made by landlord are arbitrary. Your architect and contractor should explore ways to create more efficient systems within your premises…all to minimize the extraordinary costs of after-hours occupancy. Using just three hours of “extra” air conditioning per day, at say $150/hour, would cost you over $540,000 during a five-year lease. Can we save some money…and energy?
Although we have an article covering this topic in detail, suffice it to say, you need to square up with the landlord and collect on any overcharges before entering into renewal discussions.
Under Proposition 13, your landlord’s real estate taxes, and therefore their billings to you, should not have increased more than 2% per year during the lease. Noting that your building may have been sold and would subsequently have been reassessed to current “market” levels, the pass throughs could be (to put it mildly) horrendous. Judging from past history, many tenants may have seen $5.00 per square foot per year increases in taxes with no incremental value towards their tenancy!
Understanding and quantifying your current building expenses along with forecasts will lay the groundwork for your team to assess all of the competing buildings in our comparison matrix. The grass may not be all that greener, as ugly as it may appear in your current building.
Total expenses—and the ensuing pass throughs—may be a lot more expensive at other buildings. The process we lead you through will flush it all out.
Operating expenses and tax bills are just a couple of the many line item budget points for us to consider—as we calculate your projected total occupancy costs.
The Architect’s Job. What are you really after…efficiency?
The Tenant-Team Architect will assist us in many ways, not the least of which is to interview all key management team personnel to produce a working-document—“The Program”—which outlines your space needs.
Your current space, if at all a possibility for renewal, will be carefully examined by your architect to explore any and all productive ideas for renovating to create additional efficiencies—all juxtaposed to your Program. Your architect will likely see opportunities that the rest of us cannot.
They will also examine:
Negotiate. Negotiate. Negotiate.
Negotiating your business terms and lease will be “the meat” of the process. We’ll have you simultaneously pursue at least three and up to five buildings, including a renewal if possible and desirable.
Do we really need all five to meet the best-of-the-best of terms in order for your project to be successful? Only one alternative, assuming that all of your short-listed buildings are serious contenders, needs to be the “perfect fit”. After all, you’ll sign only one Letter of Intent in the building where you decide to spend your future.
All options will be considered for renewal and relocation sites, provided that you want to pursue a renewal or relocation within your building. Perhaps the expansion space you desire isn’t currently available through the landlord. That’s okay. We’ll still pursue all options, including those that may become available through other tenants in your building. Be flexible. Be creative. We’ll explore all the options together.
The most aggressive, straightforward, eager and forthcoming landlord usually rises above the rest fairly early in the process. However, you must keep your options open until you are ready to make a commitment.
Our Letters of Intent are more thorough than any of our competitors. Why? There are scores of business issues, and the purpose of a LOI is to flush out and identify all of the important ones—leaving the balance of legal issues to be reviewed during lease documentation.
We will not “bury” or defer important points to a later date after LOI execution, when much of the leverage is diluted. Leverage is paramount.
The availability of time is also paramount to creating a successful negotiation. Don’t delay the entire strategy process or subsequent processes because you think your lease expiration date is too far out. It’s never too early to start building your team and you can surely use the extra time to your advantage.
You have only one chance to have your transaction put together on time, on budget, and in the most methodical and productive way for everyone. We should not be rushed through this process.
In the end, creative brokerage is key. We’re here to save you lots of time and lots of money—even in the face of a tightening market and we have dozens of past examples that we can share with you.
Unlike our competitors, we’re focused on a small number of deals each year—and we solely represent tenants—never landlords.
It’s okay to be demanding. We’re used to it. We’re up to it and we’re ready to help you.
Most importantly: plan, plan, and plan some more. There is far too much money at stake. In fact, your business is at stake.
