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“How do I measure the value of ‘free rent?’”
(by Tim and Ross Rikkers)
In today’s market, most lease transactions include some level of rental abatement or free rent. Free rent typically occurs during times of high supply and is used by landlords to differentiate their property from the competition.
Most basically, free rent is the number of months during which the tenant is not required to make rental payments; depending upon what you negotiate, free rent can apply only to base rent, or base rent and operating expenses. Generally, speaking, there are three ways to consider the value of free rent:
1. Cost Avoidance – by not paying rent for some period of time, you can apply those dollars straight to our bottom line. Or, you can apply the savings to the costs of a relocation (e.g. cabling, moving, marketing, etc.) or it may be applied to some other necessary business expense.
2. Reducing your Net Effective Lease Rate – the net effective rate is the average dollar amount per square foot that a tenant will pay over the term. Essentially, it is the total rent paid over the term divided by the number of months and then divided again by the tenant’s square footage.
3. Budgeting – Although free rent is typically applied at the beginning of a lease term, it does not have to be applied at that point. Any number of businesses have predictable cash flow fluctuations during a calendar year and thus, it may be valuable to take free rent during a certain month over the term instead of receiving all of it up front.
In addition to being able to obtain free rent in the first place, there are significant economic and accounting ramifications with each of the scenarios listed above. Engaging an expert Tenant advocate to assist you in your lease negotiations will ensure that you receive the best value and are fully informed prior to making any long term real estate commitments.
January 8th, 2013
Tenant Representation - Explained!
(by Tim Rikkers)
Tenant Rep: A leasing specialist whose responsibility, as an advocate for the tenant, is to negotiate the most favorable terms and conditions available in the marketplace without conflict and to align the aspirations and motivations of their client with the final results of the commercial real estate transaction.
An important aspect of this statement is "without conflict". A true Tenant Rep must service the needs of the tenant and only the tenant. If the Tenant Rep's firm also handles properties for landlords, it can create a potential conflict of interest.
If a tenant enters the real estate market without a Tenant Rep, they put themselves at a gross disadvantage. Even if the tenant is a sophisticated firm negotiating multiple leases, they are not on a level playing field with the landlord. Landlords know their product better than anyone - they are familiar with the cost of the basic and upgraded tenant work letter, the impact of overtime charges, relocation expenses, and even often overlooked items like a listing in the directory.
Only a seasoned Tenant Representative, who has completed numerous transactions within a market and/or sub-market, can balance the scales when negotiating with a landlord. A qualified Tenant Rep will create value for his or her client in areas that usually go overlooked. Let's analyze the process in order to substantiate that the aforementioned claims:
1. Most tenants have not properly quantified their space requirements. For many companies, it is not uncommon to experience growth in an unplanned, organic manner, gobbling up space to accommodate headcount. Unfortunately, a by-product of this process is the creation of significant inefficiencies. In order to correct this problem, defining the requirement with a proper "needs assessment" analysis is vital and will identify both the potential cost savings to a tenant as well as the improved operational environment available after a relocation or refurbishment - the sum of which can dramatically improve a company's bottom line.
A Needs Assessment must go beyond space requirements and analyze key adjacencies, infrastructure, technology and intangible aspects, including electrical service, floor loads, back-up power, loss factors (RSF vs. USF), HVAC capacity, data connectivity, zoning, security, parking, a building's look and feel, nearby amenities, neighbors, and more. These items, as well as the business terms, begin to define the structure of the RFP (request for proposal).
2. The RFP is the primary tool used to advertise the opportunity created by the tenant's lease.
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The RFP will market the tenant's requirement in such a manner as to compel landlords to compete for the tenant's occupancy.
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The RFP will expose benefits or deficiencies in a building's infrastructure that may justify or negate additional consideration of the building.
The RFP will also address economic and legal issues critical to the financial and operational health of the tenant.
- How are operating expenses applied?
- How are capital improvements expensed?
- How are property management fees calculated?
- How the annual increases are determined?
- How can a tenant compel the landlord to commence a tax certiorari proceeding?
- How are subleases, expansions and lease termination rights addressed?
3. Tenants must always consider an "exit strategy". The Tenant Rep and the RFP can build in the flexibility to accommodate a company's changing dynamics. As the company grows in size or begins to outsource and requires less space, the need to sublease, expand or terminate the lease can become a major expense if not properly planned for. The Tenant Rep should negotiate fair subleasing/assignment clauses with the assistance of the client's counsel. The Tenant Rep can calculate a fair buyout number allowing the tenant to "walk away" from their lease by paying a predetermined amount.
As a Tenant Advocate, Cresa works tirelessly to comprehensively evaluate the tenant's needs, from operations to economics, and we enlist the services of other experts such as architects, attorneys and accountants to develop and execute every part of the client's requirement. Why not get the representation you deserve and receive all the added benefits a Tenant Rep provides so you can level the playing field on your next lease transaction?
November 30th, 2012
Commercial Real Estate Jargon 101: Subleasing and Assignment
(by Tim and Ross Rikkers)
Strong, tenant-favorable sublease and assignment language in a commercial lease is one of the surest methods of securing flexibility within your lease contract. Because it is such a critical issue, your tenant advocate should include comprehensive sublease and assignment language in the initial proposal process as these are key deal terms that should be agreed to in the early stages of negotiations.
As a point of clarification, although often bundled together, subleasing and assignment are very different tools. A Sublease creates a new sublandlord / subtenant relationship, in which the original tenant enters into a new lease with the replacement tenant (subtenant) and is responsible for playing the role of "landlord" - collecting rent, performing tenant improvements, overseeing the parking situation, etc. An Assignment simply replaces the original tenant with the replacement tenant and the lease remains in full force and effect. There are pros and cons to each method, for example, a sublease provides the ability to generate income in the event the market heats up and the incoming subtenant is willing to pay more than the contract rate; however, in a sublease, the tenant is never actually relieved of its lease liability so if the subtenant defaults, the original tenant is compelled to satisfy the lease requirements. In an assignment, the original tenant is generally relieved of ongoing lease liability, but that also prevents the possibility of upside.
In any event, there are certain elements of any sublease or assignment clause that a tenant must win:
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The tenant must have the right to sublease and the landlord should not be allowed to condition, delay or unreasonably deny the sublease
- In the event the landlord requires a fee to review the sublease, the fee should be reasonable and not usurious
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A tenant must have the right perform an assignment or sublease to a "related entity" (e.g. an entity acquiring all or substantially all of Tenant's assets or equity) without the landlord's consent
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A tenant must be able to profit from the upside from a sublease (tenants certainly bear the risk of subleasing in a down market)
Most landlords are comfortable with these requests as they recognize they are better off empowering the tenant to have control over their destiny. Nonetheless, you get what you negotiate so do not overlook the Assignment & Subleasing clause in the lease because if it's not properly worded, you could have a landlord playing a very significant role in the future of your business!
October 23rd, 2012
How do I measure the value of 'free rent?'
(by Tim and Ross Rikkers)
In today's market, most lease transactions include some level of rental abatement or free rent. Free rent typically occurs during times of high supply and is used by landlords to differentiate their property from the competition.
Most basically, free rent is the number of months during which the tenant is not required to make rental payments; depending upon what you negotiate, free rent can apply only to base rent, or base rent and operating expenses. Generally, speaking, there are three ways to consider the value of free rent:
1. Cost Avoidance - by not paying rent for some period of time, you can apply those dollars straight to our bottom line. Or, you can apply the savings to the costs of a relocation (e.g. cabling, moving, marketing, etc.) or it may be applied to some other necessary business expense.
2. Reducing your Net Effective Lease Rate - the net effective rate is the average dollar amount per square foot that a tenant will pay over the term. Essentially, it is the total rent paid over the term divided by the number of months and then divided again by the tenant's square footage.
3. Budgeting - Although free rent is typically applied at the beginning of a lease term, it does not have to be applied at that point. Any number of businesses have predictable cash flow fluctuations during a calendar year and thus, it may be valuable to take free rent during a certain month over the term instead of receiving all of it up front.
In addition to being able to obtain free rent in the first place, there are significant economic and accounting ramifications with each of the scenarios listed above. Engaging an expert Tenant advocate to assist you in your lease negotiations will ensure that you receive the best value and are fully informed prior to making any long term real estate commitments.