Archive for July, 2010
|Lease Administration in Smaller Bites
Wednesday, July 28th, 2010
By Jeff Tosello
In this economic climate we rarely hear our clients use the words “over-staffed” or “under-worked.” It seems that now more than ever, our clients have less time to focus on strategic or proactive decision-making. Strategic or proactive projects are getting put on hold as our contacts try to keep up with never-ending task work. As a result, the lease administration service has an even longer sales cycle than in previous years even though it could help clients alleviate some stress. The analysis and internal approvals necessary to get lease administration moving represent one more project that just cannot seem to make it on to the full plates of Corporate Real Estate Managers during these challenging times.
In order to help, we are suggesting clients take things in smaller bites. By doing so, we are potentially reducing the analysis time (due to the lower scope and cost), helping improve the client’s ability to focus on the project, and reducing the risk that making a decision typically represents to the status quo.
Smaller bites means offering a “trial period”, “evaluation period”, or “pilot program” designed to mobilize on one or more of the lease administration service products on a limited basis. Abstracting leases and hosting data for one business group or auditing only a portion of the portfolio are examples of lower cost projects on a restricted timeframe. Smaller bites provide an opportunity to address some low hanging projects and show the value of a program if expanded on a wider basis.
We’re also trying to provide an easier means of engaging our service contractually. Conceptual proposals that are shorter often have a few lines of agreement language and a signature line that get a project or service started without any further documentation. We also routinely agree to use the client’s internal service agreement format and simply add our proposal as a scope of work exhibit.
The bottom line is that rather than let clients stand in the crossroads paralyzed by their progress or pursuit of some strategic initiative, we’re trying to use good old fashioned entrepreneurial flexibility to break the gridlock.
Do you think lease administration in smaller bites would work for your company?
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A Guide to Addressing Commercial Loan Defaults: Part II
Friday, July 23rd, 2010
By Craig Zodikoff and Tyler Kellogg
In Part One of this entry, we presented the topic of landlord financial difficulties and how tenants can leverage their rights. We introduced three scenarios, starting with tenants who are completing a lease within three years. Now, in Part Two, we address other circumstances that may be appropriate:
Scenario # 2: Tenants in Buildings at Risk for Default, Delinquency, and Landlord Liquidity Issues
Tenants in at risk buildings need to know specific details in their lease agreement. Your lease may have been negotiated with certain protections against this type of event. Even so, every lease is different, and not all of them offer adequate protection. Tenants should learn and understand the default process and the roles of each party. Tenants should also record a “Request for Notice of Default” so that they will receive notice of the initiation of any foreclosure proceedings against the landlord.
To protect your interests, take the following measures:
-Review specific details in your lease. Check your right of self-help and rent offset in the event of landlord default in payments for improvement allowances. Also, pay special attention to your non-disturbance clause.
-Identify concessions or benefits that haven’t been realized or might be challenged by a new landlord. Do you have unfunded tenant improvements, fixed-rate renewal options, or back-loaded free rent during or at the end of your lease term?
-Evaluate your building. Are capital improvements needed? How responsive is building management?
-Learn and understand the foreclosure process. What are the steps in a foreclosure process? Who are the people involved in a foreclosure process? What are their roles?
-Seek advice to clear up any issues.
Scenario # 3: Tenants Who Think Their Building Is Not at Risk
A lesson from this recession is to not assume companies or institutions are safe. Your current landlord might appear to be in a safe position, but it is prudent to investigate potential risk. Although the investment markets are still slow, your building may sell to a new landlord. Given the risk, it is appropriate to do a thorough review and evaluation of your lease portfolio. If you are planning to renew at your current location, you can improve upon the non-economic terms in your lease.
How do you know if you’re in an at-risk building? Determine when the building was acquired, at what cost, and what type of debt is on the building. Be cautious if your building was acquired and financed in the past few years. Next, look at what type of owner and what type of lender are involved in your building. This information might give some clues to the likelihood of certain outcomes in the event of debt or liquidity issues.
What does the reality of commercial loan defaults mean to the leasing market? The obvious impact is a continuing trend of declining property values. Many properties will be acquired by new owners at a lower cost. The new landlords will be able to offer more competitive lease transactions than landlords who acquired a building at a higher basis. This will help sustain today’s competitive leasing environment and provide significant concessions for tenants.
This is good news for companies, especially if they partner with the right advisors and legal counselor to protect their rights.
Tags: commercial loan, default, landlord
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A Guide to Addressing Commercial Loan Defaults: Part I
Wednesday, July 21st, 2010
By Craig Zodikoff and Tyler Kellogg
While the financing of commercial real estate has received much attention this past year, most of the focus has been on the impact on banks and property owners. But what about the implications for tenants? Do they have an opportunity to leverage their negotiating strength as landlords continue to struggle?
The contributing factors that led to the Corporate Real Estate (CRE) credit crisis are obvious. CRE investment markets exploded with record years leading up to the recession. During this period, property values climbed, and lending practices loosened.
As the recession deepened, landlords were forced to lower rental rates and increase concessions. Today’s rents cannot accommodate many of the debt structures placed on buildings over the past few years. Many CRE loans are at risk of delinquency, and many are set to expire in the next couple of years. Normally, these loans would simply be refinanced. However, while credit markets have improved, many experts are wondering how these buildings can secure new loans given the current loan-servicing abilities of the properties and the availability of loans.
This issue is also critical to tenants and end users. There are specific steps companies can take if they are in the middle of their lease: evaluate upcoming lease expirations or negotiate lease agreements. Companies should look at ways to minimize their risk in existing leases and in new lease transactions over the coming years.
First, consider which of the following three scenarios best matches your situation:
-Tenants Completing a Lease in the Next Three Years
-Tenants in Buildings at Risk for Default, Delinquency, and Landlord Liquidity Issues
-Tenants Who Think Their Building Is Not at Risk
In this blog entry, we will look at the first of these scenarios. In the next entry, we will focus on other circumstances that may match your situation.
Scenario No. 1: Tenants Completing a Lease in the Next Three Years
Today is a great time to evaluate your lease portfolio and negotiate lease transactions since there has been only modest absorption of vacant space, even as the economy slowly improves. While tenants remain cautious and sensitive to increasing operating costs, they should recognize that the CRE lending crisis has put an unusual twist on the leasing market: In the past, landlords thoroughly vetted their tenants to analyze the risk involved in lease transactions. Tenant risk is still a factor, but tenants now need to do more investigation of their landlord to evaluate landlord risk.
You should evaluate your current and potential landlord in terms of the following:
-Who are they? What type of landlord/ownership?
-When did they acquire the building?
-What type of debt is on the building? Who is the lender? What type of lender? What is their role in transaction approval?
-What capital improvements have been made? When were they made? How were they financed?
-What are the building operating expenses? What is the likelihood of the landlord cutting back on expenses?
-When was the last tax assessment of the building? Has the property value declined since the acquisition? Is the landlord challenging the most recent tax assessment?
-What is the current vacancy and projected rollover in the building? How does the landlord vacancy and churn look over the coming years?
-Has the landlord completed any lease transactions recently? Is the landlord negotiating with anyone else right now?
Negotiate the lease terms to reflect the risks of the current market:
-What is your right of self-help and offset of rent in the event of landlord default of payment of tenant improvement allowances and failure to maintain the building? What specific terms are included?
-What is in your non-disturbance clause? How protected are you?
Stay tuned for Part Two of our blog entry on Friday.
Tags: commercial loan, default, landlord
Posted in Capital Markets | Comments Off
Commercial Leasing: Don’t Fall Into This Trap
Wednesday, July 14th, 2010
By Darren Fleming
Reviewing commercial leases is not for the faint of heart. It is very easy to miss the implication of a seemingly reasonable clause or run into trouble with a combination of clauses if you don’t seek professional advice. Personally, I believe the following combination of three standard leases clauses are the worst:
- The obligation to use the landlord’s contractors.
- The requirement to restore the leased premises to their original condition at the end of the term.
- Giving the landlord the right to apply any kind of blanket supervision cost to your tenant improvement work.
It works something like this:
Landlord: Your Lease is coming up for renewal in a few months, and we’d like to talk about you staying. By the way, the market has changed, and you are going to be looking at a stiff rent increase.
Tenant: Well, I guess we’ll be leaving you.
Landlord: That’s unfortunate, but not unexpected. Just make sure you put the place back the way it was when you first leased it from us ten years ago. (Obligation #1)
Tenant: Huh? What are you talking about?
Landlord: You know you have to rip the walls and doors down, fix the ceiling and tear up the carpets.
Tenant: What?!
Landlord: I’ll be sending our Project Manager down to look at the space and get you a budget next week for the cost of the demolition. (Obligation #2)
Tenant: You mean Gerry? His prices are always so high! I’ll get my own price, thank you very much.
Landlord: Sorry, but you don’t have the right to do that. Read your lease on page 47, paragraph 11, part b., section xv.
Tenant: Huh?
Landlord: Don’t worry. Our fees are very reasonable and we should be able to get this done for $70,000 or so.
Tenant: I think it should be closer to $60,000.
Landlord: Oh! You forgot to include the supervision charges. That’s an extra 15%. (Obligation #3)
Tenant: But he’s your employee! Why do I need to pay for you to supervise him?
Landlord: Did I mention you should really read your lease?
Tenant: But that almost half a year’s rent! I can’t afford that. I guess it doesn’t make very much sense to move out.
Landlord: I had a feeling you might say that. Now about that rent increase…
This is the trap that many tenants miss when agreeing to seemingly reasonable clauses which, on their own, can be onerous but don’t necessarily raise red flags. Unfortunately, used together they can provide an overwhelming obstacle against relocating because you have no right to get your own price or hire your own contractor.
The solution: Spot this trap before signing your lease and tweak the language to enable fair pricing. Get the right to use your own contractor if possible or give the landlord a right of first refusal to match any price you get from a third party.
Never agree to a restoration provision, especially if all you are building is relatively standard office space. And, finally, never agree to a blanket supervision fee. II have had great success using the words, “reasonable, out-of-pocket costs”. This puts the onus on the landlord to a) be reasonable and b) provide some type of justification of a supervision job that often never actually occurs.
How do you avoid traps like this?
Posted in Transaction Management | Comments Off
6 Steps to Help Prevent Oil Spills
Wednesday, July 7th, 2010
By Mike Tobin
A good sustainability blogger cannot ignore one of the largest natural disasters of our generation without using it as a springboard for ideas or a soap box for preaching. In either case, the hope is that people will take note and begin to recognize how their behavior has a direct impact on the oil spill that has dominated headlines for the past two months. With that in mind, let’s just focus on people who own, work in, or work on commercial buildings. That should cover the majority of people in the United States.
Here are 6 steps to help prevent oil spills:
1) Engage your Building Management
Sometimes landlords and building owners are reluctant to take action because they do not believe their tenants/employees will care. Speak up! Ask the building manager/owner for advice on how to reduce your energy costs. Engage them in conversation about their plans for the building and tell them that you are interested in doing your part to improve the operating efficiency. This saves everyone money and it can PREVENT OIL SPILLS.
2) Have your Building Energy Star Rated
The US Environmental Protection Agency (EPA) provides a rating system that can provide a comparison of your building to others around the nation as it relates to its energy efficiency. By running your building through the Energy Star program, the building will not only provide a snapshot of how it is currently performing but also will help to identify areas to improve that rating – helping to save money, reduce carbon emissions, and PREVENT OIL SPILLS.
3) Move to an Energy Efficient Building
If you can, move to an energy efficient building or plan on relocating to one in the future. Demand that it be better than what you are in today. There is no reason why you should settle to pay more to for an inferior building (buildings that aren’t energy efficient cost more to operate). Granted, this is a little harsh because there are many other factors to consider when selecting real estate but operating efficiency is a major financial consideration. We have the technology and there are many incentives to do so (economic, social, personal); now we just need the demand. Demand it! It can PREVENT OIL SPILLS.
4) Design & Construct your Next Space or Building Efficiently
If you are planning to change your commercial real estate in any way, engage professionals who understand how to optimize for energy efficiency, material selection, and waste minimization. There is a big difference between service professionals who understand this type of design and construction and those who just pay it lip service. Look for experienced professionals with suitable accreditations (e.g. LEED AP, Green Advantage, etc.). However, beware as every good salesman will tell you that they can provide what you are looking for – make sure to do your homework. A well designed and constructed facility will save you money upfront and over the lifetime of your building. It can also help prevent the unnecessary disposal of materials, minimize the shipment of materials, and optimize the lifecycle cost of materials used in your building. This will help PREVENT OIL SPILLS.
5) Encourage Alternative Transportation
Lobby the landlord for bike racks. Lobby the city for community bikes (as an example, the City of Minneapolis, MN just introduced a community bike program that supplies pay-per-use bikes conveniently parked in the downtown area). Lobby your management for incentives to carpool, rideshare, and/or bike to work (incentives can be monetary as a savings to offset parking fees, a membership to a fitness center, or free taxi/bus passes). This will help PREVENT OIL SPILLS.
6) Do Not Use Cars
Take a commuter challenge and take alternative transportation to work. Try it to a) see if you can do it and b) if it works for you. You may like it! Purchase or lease a fuel efficient car, hybrid electric vehicle, flex fuel vehicle, or any number of fuel efficient automobile options. Rideshare or carpool. This will PREVENT OIL SPILLS.
As a child I know recently said, “We should have thought about those animals before we drilled for more oil.” Let’s think of those animals and do our part to prevent it from happening again.
What steps are you planning on taking to help prevent oil spills?
Tags: alternative transportation, energy efficient, energy star, oil spill
Posted in Sustainability | Comments Off
