The Tenant Exclusive

2011-04-23T12:41:00.007-04:00

To better encapsulate the purpose of this blog, I have changed the name to The Tenant Exclusive. Like with prior articles, the monthly focus of this journal will be to enable facility users to save money, mitigate leasing risk and improve their facilities with proper representation. We've discussed several topics in this changing market over the past 2 years and will continue to address areas of importance including the following:

-Preparing your facility and leases for a merger or acquisition.
-Why an attorney is a supplement, not a replacement.
-What to do when you receive a notice from your landlord.

In the meantime, below is a summary of the critical facility and leasing topics we have covered that may be impacting you now or in the near future.

Overcharges on Operating Expense Passthroughs

Negotiating Directly with the Landlord

Expansion Done Right

Why Landlord Let Space Remain Vacant

The Right Time to Start the Process

Knowing the Types of Landlords

Strategic Decision to do Nothing

Avoid Being Stuck in Your Existing Lease

The Path of Least Resistence vs. Risk Mitigation

Just Want to Renew? It's Not That Easy

The True Cost of Subleasing

2011-02-24T15:54:00.002-05:00

Subleasing space from another tenant (instead of directly from a landlord) can be a cost-saving way to satisfy your facility needs, but if you skirt the tenant representation process, the costs of subleasing could outweigh the benefits.

Here are just a few of the issues that you may encounter:

IT: How is the space wired, and where is it wired to? What access will you have, and what access will the sublandlord have? How secure is it? What happens if either the infrastructure or service fails? Who’s responsible for restoration?

Approval: Don’t forget that you’re not just dealing with the person from whom you’ll be subleasing space; you’re also dealing with their landlord and possibly that landlord’s mortgagee. Do you know the criteria for consent? Even if you meet the criteria, the landlord may still reject the sublease, delay it for weeks/months or burden it with conditions. Many people don’t realize that the building owner is typically predisposed against subtenants, as they usually don’t make the owner any more money, drain building services and don’t stay after the sublease term.

Service Interruption: What happens if a building system or service fails and you can’t use the space? The landlord is not responsible, and you have no protection since you don’t have your own lease. You will need alternative remedies.

Subordination: What if the building owner defaults with its lender or servicer and the building gets taken back? Your sublease, like the prime lease, is subordinate to the lien of that lender or servicer. How are you protected from foreclosure or other termination of the prime lease?

Default: How are you protected against the sublandlord’s default? The landlord does not have to (and usually does not) allow you to continue to occupy the space, irrespective of what a disruption and move may cost you.

As always, the right real estate solution needs to be derived from the tenant representation process. Don’t be fooled by the appeal of ostensibly quick, easy and cheap space. We may end up concluding that subleasing is the best solution; but if we follow the process, we will successfully negotiate the potential risks to ensure that the benefits of subleasing are fully enjoyed.

How do you know that you’re not being overcharged?

2011-01-18T15:55:00.001-05:00

Quick. How much money did you pay in operating expense passthroughs last year?

After most companies sign a lease, it goes in a drawer somewhere for the next several years. In some cases, the lease or renewal was well-negotiated; a tenant representative was engaged to properly determine needs, thoroughly evaluate options, leverage the market and work in concert with your attorney to negotiate every aspect of the lease. Here’s the problem: your lease is only as strong as your ability and willingness to enforce it.

One of the most common ways companies get overcharged by virtue of not enforcing their lease is operating expense passthroughs. A year or so after you sign the lease, you start getting bills from the landlord for projected increases to building operating expenses, such as maintenance, snow removal, landscaping, insurance, utilities and various building repairs. How much time do you spend with those statements? Around the beginning of each subsequent year, you’ll get a reconciliation statement showing the difference between what the landlord budgeted and what the landlord actually spent. Spend a lot of time on that statement? Do you tap into your extensive database of nearby buildings to compare expenses to make sure they are within the arms-length competitive market? Do you compare your operating expense exclusions in your well-negotiated lease with those for which the landlord is charging you? Of course not--you have a business to run.

That’s where we come in. Over the past three years, the Ezra finance team has saved clients (and prospective clients) $11 million in erroneous operating expense passthroughs. The team has been conducting these reviews for over 15 years and discovers errors over 70% of the time. So how do we get the erroneous charges removed/refunded? Sometimes, the landlords will acknowledge the error and cooperate. Other times, our buying power in the market helps; we complete 2 million square feet of transactions each year and have been in business for 30 years. As a landlord, you don’t want us to view you as a landlord that overcharges our clients. Here’s the best part. Of the $11 million our finance team has saved clients in the last 3 years, $11 million was returned to the client; in other words, we don’t charge for the service, because over 90% of companies that use the service engage us to handle their leases when the time is right and we take pride in enforcing the leases that we work hard to negotiate.

So how do you know that you’re not being overcharged? Send me your reconciliation statement when you receive it over the next several weeks along with your lease, if I don’t already have it. Those documents will get us started on our confidential, no-cost and no-obligation review.

CEO Roundtable Reminder

Less than one week away. A few spots remain.

If you're an executive entrepreneur or know of one that should attend this roundtable, just let me know, and I'll take care of registration. Just two weeks left to register and few spots remain. Everyone else can register for the networking reception here: Event Registration

When:
Tuesday, January 25, 2011

CEO Roundtable: 4:00 - 5:30
Networking Reception: 5:00 - 7:00

Where:
Teqcorner
1616 Anderson Road
McLean, VA 22102

Roundtable Discussion:
Are you preparing to renew, renegotiate or enter into a new office/warehouse lease?

If you’re a growing company facing a real estate decision, you’ll want to attend this executive only seminar. Topics will include:

• Stuck in an existing lease?
• Should you rent or buy?
• What type of space fits your business?
• How does pricing work? What are the hidden costs?
• How do you avoid being overcharged?

Whether you have a facility or are contemplating your first, there are several actions you should take to keep your costs low and your risks minimal. In today's economy, you cannot wait until you “need space” or “need to renew” to plan for your next facility lease. Your existing facility, lease and business drivers should be regularly evaluated against the ongoing changes of the landlord, lender and market. Your real estate is a process, not a commodity. This discussion will enable you to properly prepare, while hearing from entrepreneurs who have done it right!

Please contact me at mnorris@ezracompany.com or (240) 497-8210 with any questions.

CEO Roundtable - Real Estate Strategies

2011-01-10T21:33:00.005-05:00

If you're an executive entrepreneur or know of one that should attend this roundtable, just let me know, and I'll take care of registration. Just two weeks left to register and few spots remain. Everyone else can register for the networking reception here: Event Registration

When:
Tuesday, January 25, 2011

CEO Roundtable: 4:00 - 5:30
Networking Reception: 5:00 - 7:00

Where:
Teqcorner
1616 Anderson Road
McLean, VA 22102

Roundtable Discussion:
Are you preparing to renew, renegotiate or enter into a new office/warehouse lease?

If you’re a growing company facing a real estate decision, you’ll want to attend this executive only seminar. Topics will include:

 Stuck in an existing lease?
 Should you rent or buy?
 What type of space fits your business?
 How does pricing work? What are the hidden costs?
 How do you avoid being overcharged?

Whether you have a facility or are contemplating your first, there are several actions you should take to keep your costs low and your risks minimal. In today's economy, you cannot wait until you “need space” or “need to renew” to plan for your next facility lease. Your existing facility, lease and business drivers should be regularly evaluated against the ongoing changes of the landlord, lender and market. Your real estate is a process, not a commodity. This discussion will enable you to properly prepare, while hearing from entrepreneurs who have done it right!

Save on Space

2010-12-22T19:22:00.001-05:00

'Tis the season to spend, but let’s focus on saving.

Whether your space is office, medical, R&D, warehouse or some combination, it is probably your second largest company expense behind your people.

There are many ways to save on space—lowering your rental rate and the amount of space you lease are just the most obvious. Here are just a few additional ways we may be able to save you money on space.

1. Measure the existing space properly. You’re paying rent on a certain square footage – how do you know it’s accurate?

2. Professionally review your operating expense bills annually. Are you benchmarking expenses against the market and comparing those expenses to your lease to make sure you’re not being overcharged?

3. Comply with the new FASB rules. Mitigating long-term liabilities (which leases will soon be treated as) on your balance sheet will enable you to obtain more favorable financing for other parts of your business.

4. Cap or eliminate landlord fees. How much do you have to pay for them to review a sublease, oversee a buildout or manage the building?

5. Appeal your real estate tax bills or compel the landlord to do so. Your ability to do so depends on many factors, but the value of your building has probably dropped and so should your tax bill.

6. Improve alteration rights. Will you have to pay to remove your data cabling when your lease is up? How about any other buildout that you’ve completed? When does the landlord have to tell you whether or not you will have to pay to restore the space? Are your trade fixtures and equipment protected?

7. Protect against legal fees with prevailing party provisions. If the landlord pursues you for any non-payment or other default, but the charges are illegitimate, are you still responsible for their legal fees?

8. Protect against the landlord’s default. If the landlord defaults on its agreement with its lender(s), can the lender change the terms of your lease or terminate your lease? How much would those changes or a forced move cost you?

9. Get up to code. The governmental authority having jurisdiction over your building may require both your space and your building to be in full compliance with building code, including fire & life safety, energy, ADA and even LEED® for you to get a permit to do minor work in your space. Is everything up to code and who pays for it to get up to code?

10. Save time. This is your most valuable asset. It makes you money when it’s devoted to operating your business; you lose money when you’re diverted away to other matters like the ones above.

Next year, give a gift to yourself, your customers and your staff by saving money on your space in the least disruptive ways possible.

Why Healthcare Facilities Are Different

2010-11-29T14:41:00.004-05:00

People have asked me since joining The Ezra Company, in addition to the kind words of congratulations which I sincerely appreciate, ‘Why focus on healthcare?’

Well, in part, I already have; nearly half of the projects I complete each year are for entrepreneurs in the healthcare industry. So why stick with healthcare? Aside from the obvious increasing market opportunity that everyone sees and some personal reasons that I can share with each of you individually, there are a couple of key reasons:

1. Healthcare facilities are different. Whether it’s a general practitioner’s office or a large medical center, a healthcare facility will need to enable compliance with regulations (i.e. HIPAA, joint commissioning and records management), address staff/patient/doctor flow, employ creative cost-mitigation strategies (as the cost will likely be 2-3x that of an office space) and enhance the patient experience as the healthcare delivery model changes.

2. It enables me to apply my expertise with technical facilities to non-health entrepreneurs. Managing a lab building and a contract manufacturing facility enables me to better evaluate all types of commercial buildings. Certifying LEED facilities helps me negotiate all work letters and reduce buildout costs. Underwriting acquisitions of healthcare facilities allows me to see the transaction from the landlord’s perspective and to professionally negotiate with them.

Here are some basic considerations for healthcare users within the major components of the process:

Definition: The most-often skipped, but critical step of the tenant representation process involves defining the real estate requirement so it aligns to the goals of the business. Given the specialized use, extensive buildout and enhanced risk levels associated with healthcare facilities, significant time needs to be invested to ensure the flexibility of the business, program the facility beyond basic personnel counts and understand patient/staff needs.

Evaluation: Like with any use, we need to evaluate three things: the facility, the landlord and the deal terms. How will we ensure that your TI is funded? What type of security/guaranty will they require given the specialized use and extensive buildout? How will we make them understand your unique business operation? How will we ensure access for your patients as well as rights for your use and the hazardous materials that may be associated with the use? How do we protect against the landlord’s default? How will we build in flexibility?

Implementation: We need to implement both the lease and the buildout (if any). Will the lease encapsulate the LOI or will the landlord view you as captive, particularly in the case of a renewal? What lien rights will the landlord have? How will we hold the landlord accountable during the buildout process, and what responsibilities should it perform?

Ongoing Support: One of the reasons I joined The Ezra Company was the tremendous support for clients after the transaction. One of the topics I’ll expand upon in greater depth next year is our thorough operating expense review to protect against overcharge. This service can be particularly valuable for healthcare clients as certain common expenses are oftentimes netted out for specialized facility users in the lease, but then erroneously included in the operating statements.

Like with any entrepreneur I represent, the process for health-related companies is the same. How I apply it depends on the client’s existing situation (current lease/facility) and specific business drivers. The more technical aspects of health-related facilities combined with the unique lease language that needs to be negotiated makes the tenant representation process indispensible for clients in the healthcare field, while the expertise necessary to execute the process for healthcare users saves other clients money and mitigates their risk.

The Ezra Company forms Healthcare Tenant Representation and LEED® Consulting Group with the acquisition of Mike Norris and Ben Heller

2010-11-01T08:38:00.002-04:00

Bethesda, MD (November 1, 2010) - The Ezra Company, a leading provider of commercial real estate tenant representation services in the Washington, D.C. Metropolitan Area, announces today hiring the team of Mike Norris and Ben Heller to meet the facility needs of healthcare companies and to provide clients with in-house sustainable facility consulting.

The acquisition of this team is part of Ezra's current growth plans to expand its services and continue to broaden Ezra's market share. Norris and Heller will be located at Ezra's headquarters office in Bethesda, Maryland as well as in The Ezra Company's new Virginia office opening early next year.

With over 10 years experience, Norris brings a broad background to Ezra. Prior to joining Ezra, Norris worked at Scheer Partners where he led the company's Virginia office completing more than 250 commercial real estate projects representing tenants and, in addition, he managed lab and contract manufacturing buildings, underwrote acquisitions, and worked with clients to obtain LEED certification for their facilities.

Ben Heller also leaves Scheer to join Ezra, bringing over a decade of local business development experience. In addition to representing clients' transactional needs, Ben maintains an extensive network of clients and regularly formulates collaborative partnerships for clients to assist with their business development goals.

Together, this duo works with clients throughout the region focusing on representing the specialized needs of health care clients, including medical and research facilities. They also address a growing demand amongst their clients to obtain LEED certification for their facilities and to comply with standards of LEED buildings less expensively. "Whether the tenant needs to certify their facility or comply with the requirements of a LEED building, our understanding of the time, cost and feasibility associated with each aspect of the project provides additional value to our clients." Norris comments.

Mark Ezra, Chief Operating Officer of The Ezra Company, commented, "We are thrilled that Mike and Ben have joined us. The acquisition of this team, enables The Ezra Company to broaden its role in representing clients in the healthcare industry. It also enables us to bring valuable expertise in-house -- assisting clients to cost effectively obtain certifications for sustainable facilities, known as LEED Certification. Mike and Ben will fit in well with our company and our platform will provide them the support they need to reach a broader client base."

Have a Good Relationship With Your Landlord?

2010-08-25T15:41:00.001-04:00

Of course you do. Your landlord buys lunch for you and your office now and then. He gives you Redskins tickets (which should be arriving in the mail any day now). He tells you what a smart negotiator you are, how much he tries to take care of his existing tenants first and how he’s giving you discounts and other free services. All of this makes you feel good, but it’s probably costing you money and increasing your risk.

Here are just a couple of barriers that you’re up against in a “negotiation” with your landlord:

-The landlord himself/itself that knows far more about commercial real estate, facilities, lenders, building codes, construction and lease provisions than you do.

-All of the landlord’s service providers: listing agent (in-house or third party), property manager, contractors, architect, engineer, real estate attorney and lender know more about commercial tenant leasing than you do, and you’re negotiating against them whether you realize it or not.

A good landlord that will placate your ego from the second you walk in the door, because they want you to believe that you can successfully negotiate for yourself. They know that you’re successful and are involved in other business negotiations. They also know that real estate has a certain appeal to it, and most people think of all real estate as a commodity, because they have, in their personal lives, rented an apartment and bought a house before. Here are just some of the costly mistakes you will make by treating the commercial tenant representation process as a commodity:

-Waiting until you receive their lease to negotiate (or have your attorney negotiate) legal terms
-Not fully understanding the competitive pressures and drivers of each landlord
-Negotiating when you should be going silent
-Failing to understand the entities comprising each landlord and working for each landlord
-Divulging information about your company at the wrong time
-Failing to understand how landlords make up for the cost of rent discounts and free rent
-Not getting your own space plans done properly
-Not getting your own detailed pricing with all divisions of construction

The list above is very basic. I could have written pages of mistakes I’ve seen over the last decade. The reality is that there’s no text book or Google search or past business experience that will enable you to properly manage the tenant representation process. You need the right experience and the right process to avoid getting burned with undue additional rent, buildout costs, inefficiencies and excess liabilities after you sign the lease. You need someone that the landlord will take seriously and that is not emotionally involved.

Last Week to Register/Sponsor: Special Olympics golf outing

2010-07-20T08:57:00.003-04:00

The annual Special Olympics golf outing is just two weeks away, and once again, I'd like for you to consider joining us as a sponsor. As you may know, my colleague, Nate, and I volunteer as a coaches of the Special Olympics basketball team. The golf outing (on Monday, August 9th at the Montgomery Country Club in Laytonsville, MD) funds the programs that Special Olympics offers throughout the year - at no cost to the athletes – as the organization receives no local, state, federal or United Way funding to meet its growing financial needs.

Levels of sponsorship range from individual golfers ($250) to Legacy Sponsors ($5,000). If you are not a golfer but would still like to support this organization, ad space can be purchased separately in the event program at varying sizes and donation levels. More information about the event and sponsorship levels can be found at http://somdmont.ipower.com/store/index.html.

If you have any questions, please do not hesitate to call or email me. I hope you will consider joining Scheer Partners in supporting this very worthwhile event.

Thanks,
Mike

Special Olympics

2010-06-20T07:29:00.002-04:00

The annual Special Olympics golf outing is right around the corner and, once again, I'd like for you to consider joining us as a sponsor. As you may know, my colleague, Nate, and I volunteer as a coaches of the Special Olympics basketball team. The golf outing (on Monday, August 9th at the Montgomery Country Club in Laytonsville, MD) funds the programs that Special Olympics offers throughout the year - at no cost to the athletes – as the organization receives no local, state, federal or United Way funding to meet its growing financial needs.

Levels of sponsorship range from individual golfers ($250) to Legacy Sponsors ($5,000). If you are not a golfer but would still like to support this organization, ad space can be purchased separately in the event program at varying sizes and donation levels. More information about the event and sponsorship levels can be found at www.SOMDmontgomery.org.

If you have any questions, please do not hesitate to call or email me. I hope you will consider joining Scheer Partners in supporting this very worthwhile event.

Thanks,
Mike

Expansion Done Right

2010-05-27T15:33:00.001-04:00

When some tenants need to expand, the first thing they do is call their landlord and ask for more space. That approach may seem easier, but here is why it will cost you money:

No leverage. The landlord knows when he gets the call from you that you have no intention of moving or being creative. You’re not going to split your operation and open a second office, which is usually inefficient due to the redundancies anyway. You aren’t working with a tenant representative, so you’re not seeing the hidden opportunities in the market such as a lease liability takeover, competitive renegotiation or sublease & move. You’re reviewing whatever the landlord proposes in a vacuum, because you’re not evaluating other deal structures on a parallel track, so the landlord will get away with passing on a lot of hidden costs and an overall inefficient solution to you.

Buildout Costs. Let’s say the space the landlord offers you fits you well without much work, so you accept it when they say they’ll take care of the cosmetic finishes and perhaps the office or two that you need built. A funny thing happens after you sign the lease though. The Landlord’s permit gets rejected because the common area bathrooms are either too small or inaccessible, and the permitting authority requires them to be modified first. Who pays for the modification? Then, you realize the space not only does not have enough outlets in the right places for workstations, equipment, etc, but also it doesn’t have enough power. Who pays for the upgrade? Then, you move in and HVAC isn’t working properly, particularly to the new offices that were just built. Who pays to rebalance/upgrade the system? The answer to all of the above is you do, because you didn’t think to negotiate it. You only “negotiated” what the landlord put in front of you.

Leaving Money on the Table. You’re expanding…in this market. Why leave the terms for your existing space unmodified? It goes beyond the rate. How well are you protected from your landlord’s default? How are passthroughs treated? What rights do you have to expand, contract or renew? What other concessions are available?

Better Options. Nearly all of my clients that want to expand start the process with no intention of moving. Then, we take the requirement to the market (including the remaining lease liability), and we negotiate substantially better and more efficient options elsewhere. Sometimes, my client will still decide to expand in the building, but the leverage we’ve created by actually demonstrating that we’re not captive, but rather willing to pursue all options, results in substantial cost savings and risk mitigation.

So how should you proceed?

1. Engage a good tenant representative to evaluate your current situation, define your requirement, evaluate all options and implement the solution. Doing so will prove you’re willing to move and that you’re seeing the whole market, which will compel your landlord to provide the best terms (not just rate) possible.

2. Be willing to sublease. While pursuing an expansion within your building, one of the most sure-fire ways to show that you’re not captive is to put your space on the market for sublease and pursue alternatives while negotiating with your landlord.

3. Properly evaluate each facility. Engaging the right team to analyze the facilities through evaluations, proposal negotiations and experienced-based research will further demonstrate that you’re taking the process seriously, not just taking what the landlord gives you.

You may want space, but you need a process

2010-04-26T20:06:00.001-04:00

Have a pending lease decision? You have three choices: (i) go it alone, (ii) rely on some realtor or (iii) hire an experienced tenant representative.

Why not go it alone? After all, you’re a successful businessperson and know the “market” is down. Well, whether you’re considering a renewal or focused on another facility, can you answer all of the following most basic questions with certainty?

-How do you plan on protecting yourself against the landlord’s default? Not doing so can cause lease cancellation and/or significant maintenance problems.
-What is appropriate for the landlord to pass through as an operating expense, and what’s the appropriate billing procedure?
-How will you evaluate the MEP systems and negotiate your requirements into the lease to align with your facility needs?
-What should you negotiate in the LOI and what should wait until the lease?
-How much money is the listing agent (in-house or third party) making by you not having representation?

Why not just use some realtor? Because they’re going to try to fit you into one of their listings, and if you don’t fit, they’ll just send you some other listings. Why does that matter? Because once they show you any listing, they’ve made themselves the procuring cause of any resulting transaction, thereby entitling them to a commission irrespective of how well they perform for you. In short, they get paid, and you lose money and take unnecessary risk.

Your first two choices seem easier, but your facility is too important to be treated as a commodity. Whether you’re trying to evaluate and negotiate a different facility, or need to create leverage for a renewal, you need a process and an experienced tenant representative to implement that process. With me involved, your current landlord will know that you’re not a captive tenant, that you’re seeing the whole market and will have the leverage to improve upon several aspects of your existing lease and facility. All other landlords will know that I’ve taken the time to properly define your requirement, effectively evaluate each facility and optimally negotiate the solution.

The process starts with properly defining your requirement and forming a strategy to make the real estate market align with your requirement and business. Just call or email me to get started.

Why Do Landlords Let Spaces Remain Vacant?

2010-03-29T16:26:00.003-04:00

"There’s so much vacant space out there. Why doesn’t the landlord just drop the rate and lease it?"

That’s a question I get a lot from clients, particularly in this economy. As a tenant representative, part of my job is to answer it. Below are a few reasons, which demonstrate why each market, landlord and building requires a different approach.

Financing – Keep in mind that most commercial loans have a term of 2-7 years, and obviously financing has gotten a lot harder and more expensive to maintain. Also, keep in mind that it’s not just new buildings and recent sales that were overleveraged and financed inexpensively during the last decade; many long-time landlords refinanced their buildings during this period as well. A majority of landlords (even in this region) that bought, built or refinanced last decade have at least one of two problems:

1. Their loan is about to expire and they can’t renew it without injecting more equity, escrow or deposits…or they may not be able to renew it at all.
2. They’re in technical default. In this case, they’re paying their debt service, but have exceeded their Loan-to-Value threshold (the value has dropped) or fallen below their Debt Coverage Ratio (not bringing in enough rent to cover the debt payments).

In either case, renewing a tenant or signing a new tenant below market turns a theoretical loss in property value into an actual loss, as they’d be locking in lower cash flows and a lower than originally expected sale price.

Equity Partners – Most landlords (whether a REIT, insurance company or private equity firm) are some form of partnership. In any case, decisions involving whether or not to enter into a transaction are rarely made by a single individual. In addition to the vast majority of owners needing their lenders’ approval, they also need approval from their equity partners. Are the partners willing to lock themselves into a loss, or would they rather take their chances on market recovery? If a transaction will trigger a lender requiring them to infuse more equity, that could also be a reason to wait.

Near Term Sale – Just as an owner doesn’t want to show a loss to his lender, he doesn’t want to lock himself in to a lower sale price by signing a lease that will yield him (and a future owner) to a lower net operating income. Many people don’t realize that most of the investment return is not made from rent—it’s made from capitalizing the net operating income upon disposition.

Bad Precedent – Cutting one inexpensive deal with a tenant could lead to several more inexpensive deals with both existing and prospective tenants in the future, especially when tenant representatives like me get a hold of the information.

Bad Advice – Most of landlord representatives list multiple buildings, usually in the same market. They not only sometimes believe their market is worth more than it is, but also have an incentive to not inform particular landlords they’re representing of where the market really is, so other listings are not discounted by less expensive transactions.

So, the next time you wonder why there’s vacancy in your building or another in which you may be interested, let me know. The answers may surprise you.

When Is the Right Time to Start?

2010-02-17T17:14:00.002-05:00

“When do I need to get started?” It’s probably the most frequent question I hear from entrepreneurs facing some type of real estate decision. This questioned is answered following (i) an evaluation of your existing facility and lease and (ii) an understanding of your business drivers.

Here are a couple of scenarios:

1. You just received funding or a new contract and you “need space” right away.

No, you don’t. You don’t need space. You need a process, and that process is what “needs to get started” right away.

A good commercial tenant representative will guide you through the right process, from (i) aligning your facility program to match your business goals to (ii) evaluating facilities, landlords and deal structures to (iii) negotiating the lease and implementing the facility.

While we work together to secure the right lease and facility, we may need to explore temporary swing space options to accommodate your contract/funding and people requirements, such as executive suites, furniture redesign, short-term subleasing and telecommuting/hoteling. This may seem like an extra step, but it will cost you a lot more (in terms of both dollars and flexibility) over your lease term if you rush the process, rather than follow it.

2. Your lease doesn’t expire for a year and the business may change, so you have time.

Not as much time as you think. You should start the first phase of the process very soon. The first phase involves an analysis of your current lease and facility as we as an alignment of your real estate plan to your business goals. Any good commercial tenant representative will take you through this first phase. Why start so soon? In this market, we may be able to structure an early lease renegotiation that not only reduces your short and long term costs, but also accommodates some current and future facility changes that you may need. Or, we may be able to structure a lease liability takeover with another landlord that accomplishes the same cost reduction and facility improvement goals. At the very least, starting the first phase now helps us put a plan in place for later in the year to prepare for milestones such as renewal option deadlines and restoration provisions, while signaling to your landlord that they will need to compete with the market to keep you as a tenant.

A good commercial tenant representative is not an order-taker or a glorified taxi cab driver, but rather someone that will utilize his experience and efforts to guide you through and execute the process. This process is what I execute over 20 times a year through recessions, expansions and recoveries over the past decade. The process and the experience necessary to execute it is just as critical now as it ever has been, and it’s important to start the first phase of the process long before you need to make a decision.

Only The Strong Survive

2009-12-28T10:00:00.002-05:00

Those of you on my regular paper mailing list will receive an announcement this week thanking clients for trusting me once again with their lease negotiations this year. The funny thing about the announcement is that the list is the same size that it was last year, the year before that and the year before that. For those of you that know me, the fact that 2009 was as strong as (or stronger than) any of my prior 9 years in this business does not surprise you at all. You know that neither growth nor contraction drives my tenant representation business--change does. You know that, as an entrepreneur, your real estate is a process, not a commodity, and that process enables you to best position your lease and your facility to adjust to changes in your business.

In part due to our success together, next year, I will be switching to a monthly (rather than biweekly) blog format. I will continue to keep you updated on how the credit markets, commercial real estate markets and public policies will impact your lease and facility, as well as offer strategies to help you prepare for our future work together in aligning your real estate to meet your business goals.

Happy New Year,
Mike

Come See Me Speak on How to Protect Your Facility and Lease From a Changing Economy

2009-11-23T10:37:00.003-05:00

Friday, December 11th
12:30 to 1:30 pm

Fairfax Innovation Center
Room 106 - The Conference Center
4031 University Drive
Fairfax, VA 22030

This program will cover how the current commercial real estate market can impact your business and how to prepare your facility, whether you have an existing facility or are planning your first facility.

Free event. Lunch will be provided. Registration required. Let me know if you'd like to attend.

For more information on the Fairfax Innovation Center, please visit: http://www.fairfaxinnovationcenter.org

How Well Do You Know Your Landlord?

2009-11-07T18:27:00.002-05:00

One of the reasons that commercial real estate is a process--not a commodity--for end-users like you is that one of the key steps to the process is: understanding the landlord. Who is the landlord? It could be a single individual that’s owned the property outright for a long time. More likely, it’s an entity, as small as an LLC consisting of local partners or as large as a public real estate investment trust; moreover, the landlord is also its listing agent, asset manager, property manager and lender(s). Each of these individuals has a particular role in protecting the landlord’s interests, and not only is each landlord different, but also each type of landlord has unique pressure upon them that you need to understand.

Here are some basic things to keep in mind regarding a few of the most common landlord types:

Pension Funds:

Many people don’t know that school teachers and other state government employees own much of the commercial real estate in America. Their ownership comes in the form of tax-exempt pension funds administered by each state to pay benefits for retirees. Commercial real estate had long been considered a long-term stable asset for these portfolios to grow and make payments to retirees. You may have heard that many states have had their funds significantly eroded (by about 20% in the cases of Maryland, Virginia and the District). The problem is so severe that the federal Pension Benefit Guaranty Corporation (PBGC) may be compelled to takeover payments. In some cases, funds are “oversubscribed” to real estate; in other words, the value of other investments have collapsed, so while their real estate has actually held up relatively okay, they’re forced to sell off portions of their real estate portfolio to reduce the percentage of investments tied to real estate to comply with their own rules. What does this mean for you as an existing or prospective tenant? Stable cash flow is critical for both fund stability and disposition values of the assets, so you have unprecedented leverage to reduce costs, improve your facility and mitigate risk in your lease.

Real Estate Investment Trusts (REITs):

These public entities have probably received the most attention due to their declines both during the early part of the decade as well as now toward the end of it. REITs have their own requirements, most especially debt-to-equity thresholds and Generally Accepted Accounting Principles (GAAP) rules. The tighter credit market (increased deposit requirements, lower loan-to-value ratios and expiring debt that’s much harder to refinance) has forced some REITs into disposition to raise money and to comply with their own ratios. The GAAP rules have a couple of important implications—willingness to accept a lower base rent and less willingness to agree to rental abatement. REITs report average rental rates (straight-lined over the term of the lease), so accepting a lower initial rental rate doesn’t impact them as much, if they can make it up with the escalation. For the same reason, free rent brings the average rent down, so it’s better for the REIT to wait for the next deal, lower the initial base rent or offer other concessions (such as tenant improvements). Additionally, another requirement is looming for REITs that may reduce the value of their portfolios. The Federal Accounting Standards Board (FASB) is considering changes that would, among other things, more strictly require REITs to mark-to-market their assets. The changes, given the current market, could create more urgency for REITs to secure new leases to avoid having to take write-downs on properties that have technically declined in value, even though the REIT may have no intention of selling in the current down market.

Private Equity:

During the real estate boom, real estate had a certain appeal, and “knowing” your landlord was something people actually used to brag about at cocktail parties. Back to reality. Your landlord (or the person managing the asset on behalf of an equity partnership comprising your landlord) is just another investor, and the way in which that landlord has financed the property, structured their equity and managed the asset may expose some weaknesses that, with the right due diligence and experience, you can leverage to not only save money, but also strengthen an otherwise unfavorable lease well into the future.

Whether you’re considering a renewal, renegotiation, relocation, lease liability takeover or expansion, the importance of understanding the landlord, the type of landlord and the people working for the landlord is critical to the success of the project. It takes the right process coupled with experience.

Mentoring in the 21st Century Economy

2009-10-15T20:38:00.002-04:00

On Tuesday, October 27th, I will have the pleasure of speaking on a panel about mentoring in the 21st century economy. Please see the details below and let me know if you have any questions or would like to attend.

Host:
ALPFA-DC

Location:
Sheraton Premier at Tysons Corner
8661 Leesburg Pike
Vienna, VA 22182

When:
Tuesday, October 27, 6:00PM to 8:30PM

Phone:
703-448-1234

Is having a mentor still important in a "digital economy?" Yes!

Learn how successful people are now using mentors (and working with mentees) while navigating the new realities of the 21st Century. We have requested professionals from various backgrounds to join us.

We now request that you RSVP early as seats are limited.

Distinguished Panelists include:

Yelinne Megally, Manager, Beers & Cutler
Everett Vance, Director, PricewaterhouseCoopers
Mike Norris, VP, Scheer Partners
Amar Greene, Business Developer, Accountants International
Chip Jordan, SVP and Head of Corp. Tax @ Marriott International, Inc.

Networking: 6:00 to 6:30
Presentation: 6:30 - 7:30
Q&A/Networking: 7:30 - 8:30

Sponsored by Beers & Cutler and brought to you jointly by the National Association of Black Accountants and ALPFA.

What Makes a Good Referral?

2009-10-04T12:29:00.001-04:00

“I’ll let you know when I hear of someone looking for space.”

I hear that now and then from people I first meet, and while it’s nice and can be helpful, I usually have to explain to the person that real estate—as I practice it—is a process, not a commodity. As many of you know, physical property tours (a.k.a. looking for space) is the 4th step to the process; therefore, if I meet someone shopping around, we usually need to take a step back before we take a step forward, which is fine, but some people aren’t willing. Seeing spaces (or shopping) is the fun part; going back to actually make sure that your program is accurate, your timeline is feasible and your facility requirement aligns well with your business plan is akin to setting aside the chocolate cake to eat your broccoli.

So what are the other less obvious but just as important signs that someone should be talking with me? After all, saying you know a great guy in real estate probably won’t resonate, since they may have cold callers and listing agents pushing spaces on them daily. Here are a few signs:
Pending merger:

Whether the business owner wants to eat or be eaten, the facility and lease is often overlooked, but it’s very important to consider how each could be impacted, including:
-program change
-Default risk
-lease rights forfeiture
-assignment procedures

Government contracting:

What are the real costs and timeline involved in securing a facility to meet the obligations of a contract, whether it be a SCIF, data center or general office space? Will those costs be properly illustrated in the RFP response when you bid on the contract? Consulting companies on proper project estimating is an important role that I play for contract bidders.

Hiring/laying off:

These are more obvious, but not always to companies because, when there’s any type of business change, they think about funding/revenue first, their people second and their facility third. Hiring doesn’t always mean expanding space, and laying off doesn’t always mean subleasing part of it. It can mean reconfigurations, lease liability takeovers and renegotiations, each of which are outcomes derived from the process.

Going green:

Whether by choice or by force, more renovations are adhering to LEED standards. Some for marketing purposes, employee retention or personal desires. Most because LEED being incorporated into the building code or the tenant is being required by government contracts. Either way, they’ll need a LEED AP involved throughout the process including their negotiation and commissioning process.

A process, not a commodity

2009-09-17T22:02:00.004-04:00

Commercial real estate is a process--one that business owners need to understand in order to avoid undue risks and excessive costs. On September 15th, I presented to the Mason Enterprise Center at George Mason University's Prince William campus on how to properly execute the process for a first facility, renewal, renegotiation, sublease, lease liability takeover or relocation. The video below is broken up into segments, so you can watch the presentation in its entirety or just the portions in which you're interested on my CRE4Entrepreneurs channel on YouTube.

Introduction to the Process (3 min): http://www.youtube.com/watch?v=CsE1tmoCI0w

Phase 1 – Identification (9 min): http://www.youtube.com/watch?v=sjKuzMbk7vY&feature=channel

Phase 2 – Evaluation (7 min): http://www.youtube.com/watch?v=75gZ21E9ZDg&feature=channel

Phase 3 – Implementation (4 min): http://www.youtube.com/watch?v=z6DouctEP_w&feature=channel

Q&A:

Tenant Representation (2 min): http://www.youtube.com/watch?v=KcoLl4i2twg&feature=channel

Compensation (3 min): http://www.youtube.com/watch?v=lPXxA_Y5xx0&feature=channel

Evaluation (2 min): http://www.youtube.com/watch?v=a7UxWCyg1uo&feature=channel

Timeline (6 min): http://www.youtube.com/watch?v=g_txsyAwKtc&feature=channel

Moving Costs (3 min): http://www.youtube.com/watch?v=UmLwsF-Pm9I&feature=channel

How’s Business? (3 min): http://www.youtube.com/watch?v=WBLtDt-3eek&feature=channel

A Strategic Decision To Do Nothing

2009-08-22T12:23:00.004-04:00

If you currently have a lease, chances are (unless your facility was very expensive to build), it expires within the next few years.

So why are you even bothering to read this article if you have years left? Hopefully, it’s because you realize that, even though the economy and market have changed dramatically, you haven’t analyzed the impact those changes may have on your lease. In short, you’ve done nothing. It’s certainly logical not to look at your lease when you’re at least a couple of years from having to decide whether to renew or relocate, but in this changing environment, it’s neither safe nor cost effective.

In many cases, your landlord (whether it’s a REIT, pension fund or private investor) has lost most if not all of its equity and is trying to figure out how to hold onto the building. In the short term, the landlord has probably exceeded its loan-to-value threshold or fell short of its debt coverage ratio; in other words, it’s in default with its lender. The lender doesn’t want to recognize the loss, so the lender isn’t enforcing the terms of the loan, as long as the landlord continues to make its payments. But another problem is coming; the loan is expiring soon. Commercial real estate loans are generally for short terms (2-7 years), and landlord will probably be unable to renew or replace the loan at the current level. If that happens, the landlord will need to infuse more equity or add expensive mezzanine debt, but a more likely scenario is the landlord deciding to stop putting good money after bad and allowing the bank to take back the building. Why should you care? Because your lease is subordinate to the lien of the mortgagee. What does that mean? It means you have no lease, unless you have the right protections.

There are two things you should do soon.

1. Have a trained and experienced commercial tenant representative analyze your current lease and existing landlord
2. Have the same commercial tenant representative benchmark your current facility with the market

As I’ve written in prior articles (How To Protect Against Your Landlord’s Default and What the Commercial Real Estate Bailout Means For Entrepreneurs), all of the changes you’re hearing and reading about can and will impact you as a tenant. We may come to the conclusion, after the analysis and benchmarking, that your current situation is optimal and no renegotiation, relocation or lease liability takeover is necessary. But at least that’s a well-informed, strategic decision to do nothing as opposed to doing nothing because it seems easier. At a minimum, the process will be worth the peace of mind, but it could also mean a lot of cost savings and risk mitigation.

For a free initial analysis, contact Mike Norris.

Case Studies: Relocation vs. Renegotiation

2009-08-08T20:29:00.002-04:00

As I’ve written before, making facility decisions or not making facility decisions based on what you’re hearing in the news about the market is unwise. Some tenants are choosing the path of least resistance by “just renewing” their inadequate lease, while others are making decisions without fully leveraging a renegotiation with their current landlord. Real estate is a process, not a commodity, and below are two examples of the process done right—each with a different result.

Relocation

Follow the process

Eaton Corporation is a Fortune 200 electrical systems company that had two local locations about 15 minutes a part; one was predominantly office and the other warehouse and assembly. The facilities don’t necessarily need to be together, moving is costly and a hassle and who knows what where the economy will be, so why not “just renew” both leases? Because the elusive credit market has made certain landlords (and their lenders) eager to secure cash flow to hang on to their buildings (or avoid having to take them back, in the case of the lender).

Don’t believe everything you hear

Eaton’s combination requirement was approximately 50,000 square feet, and anyone with an internet connection can see that there were about 35 available blocks of flex (office/warehouse) space available that could fit. Properly evaluating the requirement and the potentially available buildings was another story. Once we factored in loading specifications, power requirements and dimensional criteria, we were down to 4.

There’s no such thing as a standard lease

In most form leases, you won’t find the words “non-disturbance.” You won’t have any of the provisions necessary to pursue LEED certification (which is an important consideration for public companies, as well as government contractors and universities). You won’t have any remedies if the facility buildout or operation goes wrong. Eaton’s new lease and facility aligns with their specific corporate objectives, because we treated real estate as a process and negotiated the outcome.

Press release: http://www.scheerpartners.com/press/releases/Scheer%20Partners%20Release_MIKE%20NORRIS.pdf

Renegotiation

Evaluating instead of procrastinating

What do you do when you have a couple of years left on your lease, your space isn’t efficient anymore and your rent has escalated above market? You can duck and cover, or you can make your own solution. Self Storage Association chose the latter.

Making progress

The renegotiation process starts once the landlord realizes that you’re not a captive tenant. When we evaluated SSA’s current facility and lease and then compared it with their program and the market, we knew that we were either going to successfully renegotiate the lease or negotiate with another landlord to mitigate their lease liability as part of a relocation. When SSA hired us to start seriously negotiating with other landlords, the existing landlord responded.

Creating your own solution

Despite being locked into a lease nowhere near expiration and operating in a very weak sublease market, SSA saved 30% on their real estate costs immediately and will move (at the landlord’s cost) to a more efficient facility within the park. It happened because the landlord realized that SSA was not a captive tenant; it happened because we implemented the process.

Updates -- Facility Preparation Seminar & Special Olympics Golf Outing

2009-07-26T15:13:00.005-04:00

Facility Preparation Seminar RESCHEDULED:

September 15, 2009

Noon - 1 pm

Occoquan Building, Room 110A
Mason Enterprise Center, Manassas, VA

I will be speaking to tenants from the Mason Enterprise Center about how to prepare for setting up their own facility/space upon graduating from the MEC incubator. Many of the topics I have covered in the first half of this year in this biweekly blog will be covered, and all companies can benefit--from startups to established companies.

It will be informative, complete with Q & A and lunch will be provided. The event is free, but there is a 35-person limit.

For those of you that are not familar with the Mason Enterprise Center, the MEC provides business owners throughout the region with access to faculty, students, alumni, researchers, information sources, inventions, and other resources required to help them expand their businesses, improve their organizations, and strengthen the regional economy.

Special Olympics Golf Outing--August 10th

Also, as some of you know, I joined my colleague, Nate Crowe, in volunteering as a coach of the Special Olympics basketball and softball teams this year. It was truly a pleasure working with these athletes and witnessing their excitement during the entire experience. In support of these efforts, the annual Montgomery County Masters golf outing will be held Monday, August 10th at the Montgomery Country Club in Laytonsville, MD, and we are looking for sponsors. This outing is vitally important to the success of the many programs the Special Olympics offers throughout the year - at no cost to the athletes.

Levels of sponsorship range from individual golfers ($250) to Legacy Sponsors ($5,000), or you can make a donation of any amount. More information about the event and sponsorship levels can be found at http://www.somdmontgomery.org/2009%20Masters%20Brochure.pdf.

If you have any questions, please do not hesitate to call me. I hope you will consider joining Scheer Partners in supporting this very worthwhile event.

You're Not Shopping -- You're Dating

2009-07-11T10:10:00.003-04:00

Did you hear the news? Real estate is down. This remarkably incomplete yet reoccurring media story is causing some tenants to believe that they can simply shop their facility requirement (whether it’s a relocation, expansion or consolidation) to area landlords (including their current landlord) and end up with a “great deal.” After all, many landlords are just sitting on vacant inventory; surely, they’re desperate for a tenant to come along and take some of it off of their hands.

As someone who represents about 20 tenants per year—in good times and in bad—here’s something to keep in mind before you hit the sales—the landlord still has to want you, and if you take the wrong approach, the landlord would rather be alone than be with you. Yes, I know, the tenant-landlord ratio is in your favor and the landlord’s friends (the lender, the equity investor and listing agent) are really encouraging the landlord to find someone. However, landlords aren’t as young and naïve as you may think; they’re going to make sure that they’re going to get something out of their relationship with you, or they’re going to move on.

Most landlords can sense when you’re just looking for a deal, rather than a serious landlord-tenant relationship. For example, does your current landlord know that it’s not working out? Maybe your current landlord will change its ways (and terms) if it knows that you’re willing and able to break it off. Even if you are the more attractive tenant (in terms of your financials and the economics of your deal, of course), how you handle the process can drive the landlord away; after all, the landlord’s been hurt before, and the landlord’s friends don’t want to see that happen again.

Having a good wingman (aka commercial tenant representative) is key. Someone that’s not emotionally involved that can explain to the landlord and friends what a good tenant you are, find out some critical information for you and, of course, negotiate with those friends to influence the landlord’s decision-making. Get the wingman involved too late, and the landlord’s friends may form their own opinions of you, relay them to the landlord, and you may end up wondering why the landlord’s just not that into you anymore.

Keep in mind that every landlord is different—and so are their friends. Treat them all the same at your own risk. Each has their own unique motivations, pressures and needs, and each of which need to be carefully understood throughout the process, especially since landlords do have a way of changing their minds.

Real estate is a process, not a commodity. No matter what the requirement, think of real estate as dating, not shopping, and you’ll be a lot better off.

Special Olympics

2009-06-26T22:37:00.003-04:00

As some of you know, I joined my colleague, Nate Crowe, in volunteering as a coach of the Special Olympics basketball and softball teams this year. It was truly a pleasure working with these athletes and witnessing their excitement during the entire experience. In support of these efforts, the annual Montgomery County Masters golf outing will be held Monday, August 10th at the Montgomery Country Club in Laytonsville, MD, and we are looking for sponsors. This outing is vitally important to the success of the many programs the Special Olympics offers throughout the year - at no cost to the athletes.

Levels of sponsorship range from individual golfers ($250) to Legacy Sponsors ($5,000). More information about the event and sponsorship levels can be found at http://www.somdmontgomery.org/2009%20Masters%20Brochure.pdf.

If you have any questions, please do not hesitate to call me. I hope you will consider joining Scheer Partners in supporting this very worthwhile event.

(Note: My regularly scheduled blog will pick back up in two weeks. In the meantime, have a great Fourth and please let me know if you will support this important event.)

Mason Enterprise Center presentation - From Incubator to Commercial Space

2009-06-14T18:00:00.004-04:00

UPDATED information below; just let me know if you'd like to attend or know someone who should.

September 15, 2009

Noon - 1 pm

Occoquan Building, Room 110A
Mason Enterprise Center, Manassas, VA

I will be speaking to tenants from the Mason Enterprise Center about how to prepare for setting up their own facility/space upon graduating from the MEC incubator. Many of the topics I have covered in the first half of this year in this biweekly blog will be covered.

Non-MEC members are welcome, so please let me know if you or someone you know would like to attend. It will be informative, complete with Q & A and lunch will be provided. The event is free, but there is a 35-person limit.

For those of you that are not familar with the Mason Enterprise Center, the MEC provides business owners throughout the region with access to faculty, students, alumni, researchers, information sources, inventions, and other resources required to help them expand their businesses, improve their organizations, and strengthen the regional economy.

Stuck in Your Existing Lease?

2009-05-29T22:40:00.001-04:00

Your facility doesn’t fit well anymore. You had to cut back and now have additional space. Perhaps the actual layout isn’t working, or maybe the location isn’t ideal. Subleasing is a long shot; the market is too weak. Your landlord isn’t going to help you; you’ll have to find a replacement tenant (same problem as subleasing) or pay a termination fee. So what can you do about it? Well, even if you have 1-2 years left on your lease (or perhaps more, if you’re a larger user), the answer could be “a lot.”

For area landlords, the disastrous combination of weak demand, oversupply and tight capital is driving these building owners to give away 1 year or more of free rent or buyout existing lease liabilities just to secure a tenant. This isn’t new. It happened 7 years ago, but not to this extent. Some of you asked me back then, “Why don’t landlords just drop the rate to fill the space?” The reason was that landlords that bought or built during the bubble did so based on achieving a certain return, and the cost to carry vacant space for a few years usually pales in comparison to the hit your return takes when you capitalize a weaker rent roll upon selling the asset; other landlords with a lower basis could wait it out. Today, landlords cannot survive off of refinancing like they could during the early part of the decade; many are desperately trying to maintain the financing they have and hang on to their buildings.

Here’s how it can work for you. We figure out how your facility would be different (size, layout, location, infrastructure, cost, etc) in an ideal scenario. I analyze your lease to see what possibilities exist. I still call your landlord and place your space on the sublease market at terms that align with the analysis. Then, I evaluate alternative landlords to determine who can and will accommodate your new requirement. This process not only opens up opportunities for you to achieve the right facility design with new landlord paying for all of your moving costs, covering your lease liability and securing a better lease for you, but also it builds leverage with your existing landlord for a possible lease renegotiation.

Just like we’re all finding ways to take advantage of other discounts out there to improve our businesses and personal lives, there are opportunities out there to better align your facility with your business. We may determine, after some analysis, that the best thing to do right now is nothing; but at least it’s a strategic decision to do nothing, rather than doing nothing because it’s convenient while settling for a facility that doesn’t fit and a lease that leaves you overexposed to costs and liabilities.

The Path of Least Resistance ≠ Risk Mitigation

2009-05-16T16:09:00.003-04:00

You’re bogged down with managing customers, employees and funding. Then you realize it; your facility needs are changing and you need to deal with it. Maybe you’re growing out of an incubator or a shared space or other existing facility. Perhaps your existing lease is coming up, and you need to move, shrink or expand. The problem is that there are still business owners out there that actually believe that office space is a commodity. So, they end up driving around, calling off of leasing signs and touring space. They approach leasing a facility or space the way they would leasing a car; ‘as long as I make my payments, everything will be fine.’ They don’t understand how an office or facility lease can dramatically increase their costs and liabilities, and that’s where they get their business, and sometimes themselves, in a lot of trouble.

It may be easier to shop for space, but without a clear understanding of how to align your real estate to match your business needs, quantifiable experience to properly evaluate facilities and up-to-date knowledge to negotiate a lease, you are exposing your company to a lot of risk without even knowing it.

Here are just some of the ways in which the landlord is increasing your costs and liabilities:

- Insufficient operating expense exclusions & billing process
- Inadequate audit rights
- Lack of security deposit protection
- No verifiable standard of space measurement
- Liability for ADA, hazardous materials and other changing codes
- Insufficient tenant improvement allowance or work letter

So why not just have your attorney review the lease? First, most of the key financial and legal framework that goes into a lease is negotiated (or should be negotiated) at the proposal stage--before you even get to a lease. By doing it this way, you make the landlord work (have some skin in the game) and save some time (and legal fees) for when the lease arrives. Second, while your attorney may have been doing legal work for the past 20 years, his focus is probably not tenant representation leasing; attorneys, if they have real estate experience, for the most part focus on rezoning/development, corporate law and litigation. He’s not actively negotiating 20 leases per year in this current and changing market. Don’t get me wrong; I advise every client to review every lease with their attorney, but it’s a supplement to my efforts to ensure that the client’s business issues are addressed from a legal perspective, not a replacement to my specific expertise.

There’s also the misconception that the landlord will save you money if you don’t engage a commercial tenant representative to work on your behalf. Let’s ignore for a moment that the landlord (either with a third party company or in-house) has a leasing agent working on his behalf that usually takes a higher fee if the tenant doesn’t have a representative (wiping out half of your “savings”). The reality is that landlords salivate when tenants negotiate on their own behalf, because they know they have the upper hand. The landlord playbook is simple: Act accommodating at the beginning of the process to make everything seem easy; Placate your ego by telling you what a good deal you’re “negotiating;” Leave all of the hidden costs and liabilities out of sight and out of mind.

Don’t mistake the path of least resistance for risk mitigation. You have to work to mitigate risk, and you need the right people working on your behalf.

Improve Your Facility's Air Quality

2009-05-02T10:37:00.002-04:00

Given the current concerns over the flu outbreak and discussion about the threats associated with being in an enclosed area with other people, the topic of improving indoor air quality is a timely one. As I mentioned in a recent article (“Preparing for the Government’s Green Building Mandates”), the requirement of office and facility users doing business with the government (tenants, not just landlords) to renovate their project spaces to comply with LEED® is starting to surface. But that’s not all. All companies and organizations will need to accept more responsibility to ensure that the spaces occupied by their employees adhere to Indoor Environmental Quality standards to not only comply with best practices, but also to avoid potential liability.

Sick Building Syndrome refers to impact of inadequate fresh air intake and ventilation as well as inhalation of contaminants. It’s a real problem (WHO estimates that 30% of all buildings are sick), and the best solution for companies seeking a safe work environment and less liability is to adopt Indoor Environmental Quality standards. Given the costs and disruption associated with any renovation, the most efficient time to implement these air quality best practices is in conjunction with a lease expiration (renewal or relocation) or an expansion.

Here are a few considerations for your next renovation project:

- Sequencing construction activities to prevent contamination
- Increasing filtration, air volume and ventilation
- Monitoring CO2 and controlling your HVAC system
- Protecting HVAC equipment during construction
- Distancing air intakes from outdoor contamination sources
- Scheduling high polluting activities after-hours and employing flush-out procedures
- Installing materials (such as paint and carpet) with low toxicity levels
- Purchasing furniture with low Volatile Organic Compounds
- Isolating indoor chemical sources such as printers and copy machines

The first step is to have someone who understands the process evaluate your current facility. At which point, whether you plan to stay or move, we (ideally with an architect, depending on the size of your space requirement) can effectively incorporate the necessary changes into your space program. From there, we will need to effectively negotiate these standards into your existing or new lease (ideally before the lease during the proposal negotiation). If you’re considering this product during your existing lease term, make sure you understand the Alterations provision of your lease. Finally, it’s important to manage the buildout properly to ensure that the right materials are ordered and the equipment is installed properly to achieve your objectives; it’s not enough to leave it to the landlord and hope that everything works out.

While the swine flu scare may (hopefully) soon fade, it does bring to our attention the importance of enhancing the indoor air quality of our commercial facilities. Like with other changes, the improvements will come from some combination of stricter building codes over time and market demand from companies seeking to limit liability and provide a healthy work environment for employees. While it can be cost-prohibitive and disruptive to perform the renovations during the term of a lease, employing at least some of the indoor air quality techniques (particularly the less expensive measures) can demonstrate your commitment to new best practices while creating a better workplace for your employees.

It Is Not a Good Time to Buy

2009-04-19T18:44:00.003-04:00

So interest rates are low, prices are dropping and you’re thinking about buying a commercial building or space for your business (or perhaps as a side investment for yourself). There are a lot of people telling you what a great time it is to buy, so what’s the problem? You will need to carefully analyze the opportunity to ensure that you’re not only buying at the right price, but also acquiring an asset that will not adversely impact you in the future. In other words, your success doesn’t hinge on your timing; it depends on how well you can evaluate the property.

Here are a few considerations before we start looking for a property:

Is It Really For Sale?
Is the owner really selling or using you to effectively appraise the property for the lender? Professional appraisals provide lenders with a precise estimate of value, but not always an accurate one. If you are not actively negotiating transactions in this market, how could you possibly know what a building is worth (based on the replacement cost, income or comparison approaches)? Replacement costs are falling, income will be driven down by a combination of aggressive tenants and distressed and replacement owners and comps are very quickly outdated. The only true test for some lenders is what bona fide third party offers the owner can obtain through marketing the property for sale. Those offers may end up merely enabling the owner to refinance their expiring or defaulted debt, not creating a transaction.

Is It Really Not For Sale?
A far better method for acquiring an asset (once we’ve determined that owning an asset is ideal) is to determine the ideal property based on your business needs. This goes deeper than budget and location; it explores related infrastructure, sustainability and changes to your business. From there, let’s identify potential fits that are not “on the market” and then research the owner’s situation and building’s true value. This process will yield stronger options at better values.

Replacement Costs
Developers aren’t building, in part, because buyers can purchase an existing asset at a much lower price than the cost to build one. Two years ago, this was not the case; both users and investors bought, in most cases, at prices substantially higher than the cost to build, which drove up land prices as the focus shifted to new development further out in the suburbs. You need to evaluate the true replacements costs of the property and justify to yourself and your lender that the particular asset is worth the price.

Pro forma
What could you lease or sell the property for if your business was no longer a good fit for it (or if you’re not the only occupant)? How long would it take and how much would it cost? Among other costs, count on tenant improvements, abatement, operating costs and brokerage & legal fees. Given those costs, at what price should you pay for the building?

Availability of Debt
Can you get a loan and what are the terms? Count on somewhere between 55-65% Loan-to-Value (in other words, having to put 35-45% down), and that’s if the lender believes the story (both yours and the building’s). You’re probably looking at a 5-10-year term (amortized over 25 years with a balloon payment at the end of the term) at a rate above 6%.

Viability of tenants and market
If there are other tenants, what is the default risk? Looking at prior year’s financials isn’t good enough anymore. How viable is their business model going forward?

Ownership Structure
What pressure is on the owner to sell? What debt is on the property and how much control does the owner have (not much, if he’s in default)? What type of owner is it? Is it a REIT that needs to free up cash or pension fund that is oversubscribed to real estate in their portfolio?

Alternative Ways to Invest
As an investor, perhaps there’s a better return in providing equity or buying the loan from the lender? Distressed owners are willing to offer 20%+ returns to investors, and lenders wanting to get bad loans off of their books will sell the debt for a substantial discount in some cases.

Building Due Diligence
There are also the more obvious due diligence items like is the building structurally sound, are the mechanical, electrical and plumbing systems in good repair, is the building ADA compliant, is the property devoid of hazardous materials, are the utilities serving the building adequate, what easements and other encroachments may impact the property and how well will the building accommodate your specific buildout?

Don’t buy the hype when it comes to real estate. Some buyers (both users and investors) made good investment decisions a few years ago, and some buyers are making ruinous purchases today. Buyers of a few years ago that planned long-term, built out or maintained the building properly to add value and aligned their real estate to their sound business model are largely going to do very well. Purchasers jumping at lower prices without looking beyond their initial requirements may have a rougher go of it in the coming years. There’s not a “good time” or “bad time” to buy, just an ongoing need for thorough evaluation.

Just Want to Renew? It’s Not That Easy.

2009-04-04T21:03:00.005-04:00

Your landlord just left you a message—your lease is up soon.
It’s the last thing on your mind. You don’t know what your business is going to look like over the next couple of years and the last thing you want to deal with is an office/facility move.
The good news is that the landlord says he’s going to give you a “great deal,” so you ask him to send over the terms. He sends a proposal with a lower rental rate than what you’re currently paying, and you feel good about it.

That’s where your trouble begins.

What most tenants don’t realize is that a mere 20% swing in the rental rate is not the biggest determinate of the actual costs you will incur under your lease; in fact, in many cases, it’s not even in the top ten.

Here are just a few things the landlord may not be telling you.

- He can do better. Most landlords (and lenders) assume they can keep a tenant at more expensive terms than they can acquire a new one (particularly in this market). However, you should be getting the better deal. Your buildout (if any) is less, you have a proven track record of paying your rent (really important these days) and you’ve abided by the terms of the lease.

- Is the space even measured correctly? BOMA, WDCAR or any standard at all? Afterall, your base monthly rent is Rental Rate X Square Feet.

- Are you getting a new base year on your operating expenses and real estate taxes? These are the hidden costs of a renewal. Also, if you’re in the Dulles Corridor, will you be paying the additional taxes associated with the Metro? Why should you if you’re signing a short-term lease today—you won’t be around to use it.

- Is the landlord in (or close to) default with his lender? As I wrote in a prior article (“Are you protected from your landlord’s default?”), the value of your building may have gone down; is the landlord above his Loan to Value threshold? What’s the landlord’s debt coverage ratio, and will the building’s rent roll support it? Unlike owning a house, it’s not enough for a landlord to simply make their payments to the lender on time; they must show that the investment is performing or they risk losing it, and you can, in turn, risk losing your right to lease and occupy the space without a firm SNDA provision.

- What renewal/expansion/contraction options will you have during and after your renewal term?

- Parking can be free, both now and during your renewal. Areas like Tysons Corner fluctuate between free and paid parking depending on the market. Parking costs can add another $2 per square foot per year (double that downtown), unless you pass that burden onto the employees.

- What’s the remedy if the landlord defaults on his management, buildout and transaction cost obligations?

- What audit rights do you have to protect against being overcharged on operating expenses?

- Are your rights to make alterations and remove trade fixtures and equipment protected, or does he or the lender have a lien on them?

- Is the landlord contesting his real estate taxes? He should be (it may not be worth what it’s assessed anymore), but he may not care, particularly is the building is fully leased.

- If you are getting a buildout or space renovation, how secure is the landlord’s ability to fund it, and what’s the remedy if he doesn’t?

Any of these deficiencies in the lease you’re about to renew can cost you substantially more than the little base rental rate “discount.”

When you get the call (or, better yet, before you get the call), call me and send me your lease (if I don’t have it already) to review. Even if you have no intention of moving, the landlord can’t view you as a captive tenant, if you are to not only secure the best economic terms possible, but also maximize your protection under the lease. With me involved, the landlord will take seriously the possibility that you will vacate their building. Yes, distance makes the heart grow fonder.

If you have a renewal coming up in the next several months to a year or are about to experience any type of change in your business that may impact your facility needs, get in touch with me soon. For those of you that haven’t worked with me before, my job is to understand your needs and implement the best real estate solution to match those needs; the landlord’s job is to protect his portfolio. Landlords may have gotten away with adhering to certain “form lease” provisions in the past, but in today’s market, we have the leverage in most cases to better protect your company in addition to reducing your facility costs.

How to prepare for the government’s green building mandates

2009-03-20T22:12:00.002-04:00

This is not another article about what you can do to make your office “greener.”

The new administration is initiating policies that will directly and indirectly result in mandates for government contractors (and potentially private enterprises) to operate in certified green facilities.

The General Services Administration (GSA), which handles nearly all of the real estate (owned and leased) for federal agencies, requires that all new construction projects and substantial renovations be LEED (the federal green building standard, Leadership in Energy and Environmental Design) certified, and all federal agencies are required to reduce their energy consumption 15% by 2015. Unlike other GSA requirements for government contractors (particularly those cohabitating with government employees) to operate in facilities meeting other government facility requirements (such as document storage, information protection and security), the government, under the Bush Administration, did not require government contractors to adhere to the same LEED requirements. Conversely, we know that the Obama Administration is pushing agencies toward more fixed-priced, competitive contracts (see my prior article entitled “Change is coming for government contractors and their facilities”). The increased competition coupled with the pressure to provide fixed, low bids will give government contractors with energy efficient facilities both a competitive advantage and a marketing advantage over other government contractors. More directly, the federal agencies will not be able to meet their energy reduction goals if their functions (many of which are at least in part performed by government contractors) if they do not require government contractors to reduce their own energy consumption. For example, agencies are already using DC Pro Tool (a data center energy use measurement) in procurement.

It’s not enough to simply locate in a LEED building. Doing so will get you just 3 point of the requisite 21 points needed to obtain the LEED Certified level for a project space (27 points are required for Silver, 32 points are required for Gold and 42 points are required for Platinum out of a total 57 points possible). There are relatively few LEED certified buildings in the region (approximately 10% of all area buildings are LEED), but the right preparation and implementation can enable you to achieve LEED certification for your facility in a non-LEED building. This is particularly important given that the current real estate and credit market conditions will preclude the vast majority of planned projects from breaking ground (let alone delivering) for at least the next three years.

A common misnomer is that you can simply rely on the building owner or architect to obtain certification for your facility after you’ve selected the building. On the contrary, it is your commercial tenant representative's responsibility to properly evaluate each potential option and negotiate the requirements of all parties to achieve LEED certification as early as the proposal and letter of intent stage. If you wait until the lease or design phase of the project, you won’t have the leverage to bind the landlord to the responsibilities it will need to assume for the project to be successful, and if properties are not evaluated early in the process, you waste a lot of time and risk project failure.

One of the positives of the market downturn is the increased leverage tenants have, when properly represented, with landlords. Not only is this leverage valuable for achieving more favorable monetary lease terms and lease protections (like protecting yourself from your landlord’s default), but also landlords are more willing to bind themselves further with respect to a tenant’s buildout and their own management of the property.

A few very basic examples of the LEED-enabling terms that should be negotiated during the proposal stage (and subsequently incorporated in your new lease or renewal) are:

-The building owner must register the project and coordinate with the Commissioning Authority.
-The landlord must maintain the property in specific accordance with LEED requirements, or the project can lose certification during either the 8-month review or a subsequent audit.
-The benefits of the local tax incentives need to be assigned to the tenant, or they will be exclusively enjoyed by the landlord.

The new administration’s priorities for sustainable buildings and more stringent government contracting requirements will make operating in LEED facilities advantageous (and, in some cases, essential) for government contractors. Simply locating in a LEED certified building is not enough; the project space itself needs to be LEED certified. Merely writing in a general provision into the lease requiring the landlord to make the buildout LEED certified is insufficient. You need to have your current (in the case of a renewal or expansion) and alternative options properly evaluated at the beginning of the process, specific LEED criteria negotiated by a trained commercial tenant representative beginning with the proposal stage and the project properly implemented.

Are You Being Overcharged?

2009-03-01T09:13:00.001-05:00

Have you taken a close look at your rent invoice lately? Chances are, if you’re a year or more into your lease (or sublease), you’re being charged “passthroughs” or “additional rent” in addition to a “base rent,” which by itself escalates by a certain percentage (usually 2-4%) each year. While certain charges are typical and basically legitimate, companies oftentimes become so focused on their core business operations that they don’t realize not only that they may be getting overcharged, but also that there may be a remedy.

The starting point to determine whether or not the charges are accurate is the lease. Companies that view their real estate as a commodity generally do not have the best negotiated leases; instead, they focus on the location, look & feel of the building and “negotiating” the best base rental rate. More strategic companies realize that their real estate—usually their second largest expense—is an integral part of their business plan, and they ensure that the less obvious provisions of their contracts are properly negotiated. Somewhere buried in the middle of the lease (and referenced elsewhere) is a section on operating expenses. The section sets the framework for the items that can be charged to the tenant, the timing of tenant’s payment for such items and (ideally) the mechanisms through which the tenant may ensure that such costs are legitimate.

Items that landlords include consist of costs to operate, maintain, repair, replace and manage the building or project. The problem is, without specific exclusions and clarifications, such rights allow the landlord to pass through costs that are not directly related to the building and that are not necessarily improving the building for the tenant’s use. Such costs that should be excluded include:

- capital improvements (enhancements that add value to the building as an asset but don’t directly increase the building’s operational efficiency or that aren’t spread over the enhancement’s useful life) and reserves
- costs (including utilities) relating to retail/restaurant space of the building (which are in excess of a office user)
- monies paid to anyone for services not directly related to building operations (i.e. shareholder or partner of the ownership entity)
- penalties assessed to the landlord or any item for which the landlord is to be reimbursed
- marketing costs, including renovations
- any expense that exceeds arms-length competitive prices in the marketplace

Some of these exclusions seem obvious when you read them, but if you don’t actively negotiate them in your lease and read your operating expense statements with a trained eye to ensure that you’re getting what you negotiated, the landlord can charge you for them.

Just as negotiating the proper exclusions can prevent unnecessary costs, structuring the proper timelines can improve a company’s bottom line. As a tenant, a company should not pay any increased operating costs until the second year of the lease term, and then only to the extent that the company’s pro rata share of such costs increase beyond a base year (typically the year in which the lease commenced, but ideally the year after). Further, it is important for such costs to be “grossed up” to reflect a fully-leased (or as close as possible to a fully-leased) building in each year, including the base year. Such a protection will prevent the company from experiencing extraordinary charges later on in the lease term that are more related to fluctuations in building occupancy than operational issues. While negotiating proper timeframes and exclusions is important, the protections aren’t worth the paper they’re printed on without a remedy and willingness to enforce them. In a lease, the remedy should take the form of audit rights, which give the tenant the right to examine the landlord’s books and contest any ostensibly excessive charges. However, there is a direct cost to performing such an audit (most provisions do not allow for the auditor to work on a contingency basis) and an indirect cost paid to the landlord, in the event that the overcharge turns out to be nominal. For this reason, clients turn to me to not only negotiate the lease as part of their renewal, renegotiation or relocation process, but also to perform initial benchmarking of the charges to the marketplace prior to taking the risk of an audit and instead of automatically paying the bill.

What the Commercial Real Estate Bailout Means for Entrepreneurs

2009-02-15T07:55:00.001-05:00

On Tuesday, Treasury Secretary Geithner announced that one of the industries eligible for the financial recovery package would be commercial real estate. Why? According to industry trade groups, the problem of nearly $530 billion of commercial mortgages coming due between now and the end of 2011 (an estimated $160 billion this year alone) will create a systemic problem, since lenders are not renewing the heavily leveraged debt, landlords and developers are finding it difficult (if not impossible) to replace the debt and many of these mortgages were sold off as securities in the Commercial Mortgage-Backed Securities (CMBS) market. The value of these securities is unknown, so according to industry trade groups, we need for the government to finance the banks, insurance companies and other investors that buy them (using up to $100 billion from the U.S. Treasury for the CMBS and other Asset Backed Securities like auto loans, credit card debt and student loans) so we can value the underlying assets and encourage lending on properties again. The credit crunch, over-building and the economic slowdown has precipitated a rise in commercial mortgage delinquencies--from 0.6% to 0.96% last year--and delinquencies may double this year. To put this in perspective, delinquencies rose to approximately 10% during the S&L crisis.

Unlike home mortgages (the primary focus of the Financial Recovery Plan), commercial mortgages (which make up a majority of the nearly $3.5 trillion commercial mortgage market) are easier to value. In a rational investment environment, the price of assets is based the discounted value of future cash flows.

-What net rents can you reasonably expect to obtain and what can you expect to sell the asset for after a particular holding period?
-What are your projected costs (capital expenses, facility buildouts, operating costs, taxes and debt service)?
-What is your targeted return (say, 12-18% for a property with some good leases in place, 20-30% for a more speculative project) for your equity?

Answer these questions, run the analysis and there’s your price. Yes, there’s a bit more due diligence than that, but basically, that’s the financial process.

So what went wrong?

Like with home mortgages, banks extended to make loans, partially because they could easily sell the loans on the CMBS market. It wasn’t quite as bad as the sub-prime, stated-income, no-money-down home loans, but commercial mortgages for riskier investment properties that rely on tenants, loans for speculative (minimal or no leases in place) buildings or loans for existing buildings with shaky rent rolls made at 80%+ loan-to-value ratios with superficial market analyses in lieu of more careful due diligence processes allowed buyers to bid up prices. The resulting increased demand forced buyers to bid up prices to make acquisitions. While not to the same extent as with home loans, commercial banks extended debt to individuals, insurance companies, businesses, pension funds, REITs and other investors that either shouldn’t have been buying commercial real estate, shouldn’t have been buying that particular product type or shouldn’t have been buying product outside of their core market(s). The increased number of buyers coupled with the cheaper and easily obtainable debt bid up the prices well beyond what reasonable estimates of rent (even in a good economy) could support. Investors and developers kept stretching their proformas to invest their equity and build while they could.

Now that lenders are tightening standards, owners aren’t able to replace or refinance the debt as their short term loans (under 7 years in most cases) at 90% loan-to-value; they’re replacing (sometimes with multiple lenders) at 60% loan-to-value, and the rest is made up with mezzanine financing or additional equity. If that doesn’t work, the owner has to sell or either work out the loan with the bank or lose the property (and all of their equity).

Rather than letting the market determine the real values of these properties, commercial real estate lobbying groups were able to persuade the new administration to commit a portion of $100 billion from the Federal Reserve's Term Asset Backed Securities Loan Facility (TALF) to buy the securities containing the distressed properties, place a value on them and resell them to investors. Like with other articles, I’ll resist my urge to engage in political debate (like will the assets be valued at the right levels and will the taxpayers get their money back) and just focus on what entrepreneurs, as tenants and prospective tenants of these properties, should be on the lookout for.

Estoppel. If you receive an estoppel (a document from a landlord or mortgagee requiring you to verify information about your lease and the landlord), immediate and careful action is critical. This document, which you generally have a very limited time (usually specified in your lease) to fill out and return, can prevent you from making a claim against any landlord or mortgagee (present or future) for any breach that may have occurred, and if you get something wrong on the form, you can be bound by it. Also, this document is an indicator that there is about to be some change with respect to the ownership of the building that should be investigated.

Subordination. Your lease probably states that your rights are subordinate to the lien of any current or future mortgagee. It also probably states that you may have to certify this fact in writing. Like I wrote in last month’s article, ideally, there’s some non-disturbance language to protect you, but if you receive such a document, you’ll again have to respond quickly and carefully. Again, it’s a sign that a change may be in the works, and its implication can be, without proper protection, that you lose certain (or all) rights under your lease.

Term Asset Backed Securities Loan Facility (TALF) terms and conditions. Under what restrictions will the government lend money that will serve as debt to investors and property owners (if TALF is used as a direct lending source to properties, which has been discussed)? What terms and conditions will lenders (those supplementing or replacing the expiring debt) put on property owners, and how will it affect your rights as a tenant with respect to financial requirements, expansion, contraction and renewal rights, unpaid tenant improvements and rental abatement? One thing is for certain, the various lenders replacing the easy debt soon to expire will not be as forgiving as landlords and tenants default, nor will they be as passive during the lease negotiation (or renegotiation) process with tenants.

While the CMBS market is not as exposed to our region and our metropolitan area is still the strongest in the nation, there will be some impact for entrepreneurs, as tenants leasing office space and facilities. The impact may come with warning signs as subtle as I described above or with no warning at all. The key is to understand your lease; in some cases, you may have the leverage to renegotiate it to make it stronger (not to mention secure more favorable rates). In other cases, being prepared and staying informed as market conditions change can be critical to maintaining your occupancy and lease rights.

Change is coming for government contractors and their facilities

2009-02-01T11:01:00.002-05:00

H.R.1. The American Recovery and Reinvestment Act of 2009 has been passed by the House and the Senate version will be debated in the coming weeks. Hundreds of billions in new government spending will start making its way into federal and state agencies, which will largely look to the contracting community for solutions over the next two years. I’m going to avoid making predictions like will it stimulate the economy, will the money be properly allocated and just focus on how the money that is contracted out will impact area entrepreneurs, particularly those providing products and services to the federal government.

The new administration has stated its priority to move toward more competitive, fixed-price contracts. The bill passed by the House echoes this charge. The contracting officers will be permitted to use existing contracts to accomplish some of bill’s mandates, but using existing contracts, issuing no-bid contracts and cost-plus contracts will come under scrutiny. This scrutiny will ultimately lead to government contractors needing to be more careful estimating the costs of and implementing their facilities. The short time period for spending the money (September 2010 in most cases) and the understaffed agencies will pose a challenge for contracting officers to keep the process competitive and to award fixed-price contracts; however, the agencies will have to post any non-competitive or cost-plus contract on a special section of http://www.recovery.gov/ and avail themselves to public and government scrutiny from the Inspector General, General Accounting Office (GAO) and Accountability Transparency Board.

This is all a larger part of a shift toward greater transparency, which may require (among other things) contracts to be posted online (something President Obama proposed as a Senator). It’s also very likely that the goals for small, disadvantaged businesses will be enforced. Most of the contracts from the stimulus plan (like with other emergency spending) will be for just one year, unless approved by the agency head. There will also be a push for a public “offender” database where contractors that fail to perform are listed.

All of these changes mean government contractors need to be more diligent in soliciting and performing work from the government. Fixed-price, competitive contracts require upfront facility due diligence. How much space will you really need if you win the contract initially and over time? How much will it really cost including passthroughs, amortized rent, escalations and construction? What are the costs associated with expanding, contracting or terminating the lease if the contract is canceled by the agency? Guessing the answer to these questions can result in not winning a contract, having to eat unexpected costs or not performing to expectations.

Once the contract is won, proper facility and landlord due diligence and a well-negotiated lease is essential to ensuring contract performance and mitigating losses. It all starts with the initial proposal writing, however. We have to both estimate and implement properly.

Breaking News: Scheer Partners opens Northern Virginia office

2009-01-23T10:13:00.001-05:00

http://washington.bizjournals.com/washington/stories/2009/01/19/daily68.html

The office will serve local entrepreneurs from their first facility through every real estate need thereafter, and seek to expand the lab space market in Northern Virginia.

Impact of President Obama’s Public Building Modernization on the Washington Area and Tenant Improvement Costs

2009-01-16T14:31:00.001-05:00

President Obama’s estimated $800 billion stimulus bill (currently being debated in Congress as the American Recovery and Reinvestment Plan) calls for government to “lead the way” on energy efficiency by renovating 75% of the nearly 352 million square feet (8,600 buildings) of GSA owned and leased space (83% of which is leased). It is unclear at this point how quickly renovations will begin, how much money will be devoted to this aspect of the public works plan, which buildings will be included and what standards will be used to make the renovations. Therefore, let’s just look at the likely impacts, in general, of the renovations on entrepreneurs that are considering relocations, in-place renovations or expansions to their current facilities.

The GSA owns or leases over 106 million square feet in Greater Washington (the National Capital Region)—30% of its space nationwide. If 30% of the renovations occur locally, 80 million square feet—15-20% of the area’s total commercial real estate market—will undergo some sort of modernization.

Many of you are familiar with the elements that comprise “green buildings” or those that help you obtain LEED certification such as solar panels, natural lighting, public transportation, recycled materials and rooptop green space. However, in this case, and the case of most energy efficient construction in the next 3-5 years, we’re only talking about renovating existing building systems and not developing new buildings, so the extent of energy efficiency is limited. The likely focus will be to replace conventional switches to upgrade to motion sensor lighting, replace fluorescent lights with recessed LED lights, use recycled materials for tenant buildouts, install Variable Air Volume (VAV) boxes (thermostats) that measure carbon dioxide levels in the air to determine operation and (primarily) to simply alleviate the GSA’s backlog of repairs.

The impact of this plan for the government (and taxpayers) is lower operating costs over time. The impact for a certain number of architectural firms, MEP engineers and general contractors is new work to compensate for some of the work lost due to the recession. But, the impact for companies contemplating a move, in-place renovation or expansion may be a continuation of high construction costs.

The two biggest components of the space or facility buildouts that tenants see (either directly or from their landlord) are the cost of materials and availability of labor. Construction prices, which rose to record levels during the residential and commercial construction boom, didn’t fall much last year because of high energy prices (materials) and projects that were started in 2005-2007 still being completed (labor). The availability of labor, lower energy costs and general lack of construction demand should slightly reduce tenant improvement costs in 2009, but don’t expect anything dramatic. The cost of materials are often locked in long before a buildout’s inception and finding a contractor that will take the time to bid the trades for the best pricing is an important (and often time-consuming) step. Whatever savings may be available in the short-term will likely be eroded (or eclipsed) by the increased demand for labor and materials that will result from the public building renovation projects.

On a macro level, one could certainly recognize the modernization plan as a positive way to create jobs and lower government operating costs over time (not to mention the environmental benefits). For local entrepreneurs, it means that we need to continue to plan ahead and budget properly for potential moves, in-place renovations and expansions. It means that the economic slowdown will not necessarily make space and facility improvements cheaper; we need to continue to do more with less. Even in the cases in which we negotiate for the landlord to perform the work, it’s important to understand the true costs of these projects to better structure the transactions and to prevent overpayment. We need to make sure that we’re building efficiently.

Are You Protected From Your Landlord’s Default?

2009-01-05T15:57:00.002-05:00

How do you know if your landlord is in trouble and what can you do about it?

In 2006, I wrote an article for the Northern Virginia Technology Council’s Business to Government Committee entitled “Interpreting Market Trends.” Below was my gloomy forecast 2 years ago:

"In interpreting this data, the Dulles Corridor’s current and prospective tenants facing near-term real estate decisions should surmise that if they don’t believe that we’ll achieve the required growth described, signing a 2-3 year lease is a better market strategy then signing for a longer term (say 5 years), notwithstanding any overriding business objectives that need to be met. Companies whose decisions are further out (1-2 years) should not rush into any real estate long-term real estate transactions either; rather, they should assemble a real estate team to relate their business priorities to current and projected future opportunities to determine the appropriate short and long term paths. They should not simply assume that market rents will continue to rise. Market rates are likely to increase as space is absorbed over the next two years, but at some point soon thereafter, we may be headed toward more of a 'tenant’s market' in the Dulles Corridor."

It’s happened. Rents rose for about a year and a half, but now some landlords are making deals. In general, it’s a tenant’s market for both renewing and relocating tenants. Sublease space is starting to increase as well which, as it did in 2002-2003, will create some low cost opportunities for companies like yours. However, what is missed when tenants go bargain shopping are the less obvious protections that can be significantly more valuable than rent savings.

One key protection is an SNDA. Those of you that have worked with me know that we spend a fair amount of time negotiating your lease, including often overlooked, but very important provisions such as the Subordination Non-Disturbance and Attornment Agreement. A subordination provision is in nearly every lease; it basically means that the lender’s rights under the mortgage or deed of trust with the landlord are superior to the lease between you and the landlord. You’ll usually find an attornment provision as well; it generally states that if there’s a change in ownership (either to a seller or the lender, in the case of a foreclosure), you, as tenant, will recognize the new owner as your landlord. The non-disturbance language is one of the things that can protect you, if the landlord cannot perform its obligations; the provision essentially states that the lender cannot materially alter your rights and obligations, both monetary and non-monetary, under the lease.

A few other key provisions to look for in your lease, and to check with me about before starting the process for any changes to it (i.e. renewal, expansion, contraction, relocation, sublease, etc) are:

- Landlord default under the lease. What’s the cure period, what are the notification requirements and what’s your remedy?
- If you’re subleasing, what happens if the landlord (not just sublandlord) defaults?
- How is your buildout allowance (both initial and future) protected, and what’s your remedy if the landlord can no longer fund it?

Other than the gloomy articles we all read about the bad economy, how do you tell if your landlord (or prospective landlord) is in trouble. A few indicators are:

- What are the terms of their financing? Many landlords signed up for construction loans or term loans at up to 90% loan to value. When they go to renew these loans, they’re getting 60% loan to value (and the value is now lower). The additional money usually has to come from mezzanine financing (significantly more expensive), or they may not be able to replace the debt at all.
- How has the landlord performed with respect to the rest of its portfolio?
- Is the landlord paying its other obligations, such as vendors?

These times call for us to be even more careful than we have in the past. Please contact me with any questions or for more information.