Choyce Tips, September/October 2010

Choyce Tips: April 2011: Soft Market Negotiation

As we try to stay abreast with market changes and their impact on lease language, we want to pass along items to help tenants negotiate during this soft economy.

In this issue, we wish to address some nuances about operating expenses. In the past, we have talked about the validity of having operating expenses “grossed up,” whereby the landlord estimates the operating expenses as if the building were fully occupied.  In this way, he fairly determines the increased cost to be passed along to tenants.  We previously recommended both the base year and subsequent lease years should be “grossed up” to 95% occupancy.  However, more recently we learned about two additional factors:

Choyce Tips: Aug. 2010: Every Word Matters

For example, some tenants may use up all their leverage with a credit-conscious landlord just to get a proposal for office space in a building with a large security deposit. Meanwhile, they may also need an option to cancel or expand and a discounted rental rate in subsequent negotiations.

You should know the cost associated with your most critical business terms and, to a lesser extent, your wish list in all negotiations. Examples of some common cost/benefit relationships are provided below.

Choyce Tips: Aug. 2010: Your Landlord's Favorite Tenant

(For access to full html version, please click here.) Even in today’s soft market, landlords only roll out the red carpet for special tenants.  Just as tenants rank the attributes of various buildings, landlords rank the attributes of various tenants.  So how do you become your landlord’s favorite tenant, and in doing so, secure the V.I.P. treatment you deserve? Here are a few pointers.

Credit, Credit, Credit

Lots of time and money is expended in finding the right tenants and getting them to sign on the dotted line. Problems collecting the rent, or even the need to evict a tenant, can become a landlord’s worst nightmare. Strong credit will trump any other attribute of equal-sized tenants. And even a weak company paying its bills may seem one setback away from default to some landlords. Thus, less creditworthy tenants should move fast when given an opportunity to lock up a deal.

Choyce Tips: June 2010: Right-Sizing

(For access to full html version, please click here.) Opinions vary widely regarding “needed” space.  President Obama has 816 square feet in the Oval Office, plus a study down the hall.  Prisoners in Alcatraz were confined to 45 square feet, and that included a bed, table, sink and toilet.  Space density for office tenants averages between three-to-four employees per 1,000 rentable square feet.  Executive areas are less densely populated, and contact centers more so. 

Too often, we observe tenants who believe they got a “great deal” only to find out it was a sub-optimal office layout as their business evolved. While a rental rate may reflect a superb market value, wasted space is wasted money. An extra 1,000 square feet at the “aggressive rental rate” of $40 per square foot translates to losing $40,000 per year.  

We always encourage our clients to evaluate the space first and rent second.  Even when you initially chose a space that’s just right, changes in your company size, budget and corporate culture may eventually make it obsolete.

Choyce Tips: June 2010: Timing is Everything

(For access to full html version, please click here.) Few occasions offer greater financial opportunities for a company than its lease renewal or relocation. Yet many tenants fail to understand the correct timing needed for proper positioning and negotiations. We say it again… real estate is a process not an event. 

By starting too early, you compromise your position by shielding your landlord from competition with others because of a lease start date too far in the future. By starting too late, you may restrict another landlord’s ability to modify alternative spaces in time to best suit your needs. 

At the very least, you should convey the appearance of a process and timing to keep all options open. Since deliberations may become long and difficult, a general timeline will also help you proceed in an organized and efficient manner.