Tenant Improvement Allowance -- It's Not Just How Big, It's How Long

So tell me, how does it feel when you negotiate $100,000 of landlord-funded tenant improvements in your lease, you use $75,000 to get the premises ready for your occupancy, and then find out there isn’t any allowance left a year later to replace the broken down air conditioning unit on the roof?  You just got the shaft, dear tenant…twice!

That is a common retail refrain, but it happens a lot in the worlds of industrial and office real estate as well.  Most leases – especially the commonly used “industry standard” ones such as those published by AIR Commercial Real Estate Association – are skewed heavily in the landlord’s favor.  Language in these leases often state that the landlord allowance is for construction and improvements to the premises that relate to the initial space plan and that are performed prior to the lease commencement date; in other words, “use it” for only this work and within this time frame “or lose it”.  Most tenants and many inexperienced or oblivious real estate brokers don’t give this much thought.  The tragedy is that most landlords don’t even pay close attention to this detail; that is, until the tenant surprises them down the road with a request for funding for subsequent improvements, and then they turn the tenant down flat.

I’m giving away a valuable trade secret here, so pay attention!  Delete the language that puts time restraints – direct or implied – on the use of tenant improvement dollars provided by the landlord.  It is amazing how infrequently I find landlords accepting this change to the lease.  The poor soul at the top of this blog could have been $25,000 to the better if his broker had done this for him!

 

What I can't tell you is the secret to getting the landlord to allow you to use your tenant improvement allowance for fixtures and telecom systems that are typically disallowed by the standard form leases.  For that one, you will have to pick me to represent you.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com

 

Corporate Image: Inside vs. Outside -- Does Your Broker Get It...Or Even Care?

Did you sign a lease for a beautiful new building only to watch employee morale disintegrate after you moved?  What the heck just happened?

Your corporate image is reflected in many ways, including your branding and marketing materials, but perhaps in no way more dramatically than in your place of business.  Tenants, be they retail, office, or industrial in nature, choose buildings based on their outside appearance  or “curb appeal”.  While there is no discounting the way a building looks from the street, experienced and knowledgeable real estate brokers know that what you see isn’t always what you get.  Poor brokers and naïve tenants overlook the fact that there are two distinct audiences for their corporate image:  the outside world (their clients and the public at large) and, no less important, their employees. 

On the outside is the architecture, the building skin of granite or glass, the expansive lobby and the corporate identity (not necessarily theirs) on the top of the building.  But what is important to your valuable employees?  Think ease of parking, the speed of the elevators, the smell of the bathrooms, and the comfort of the suite.  What do you think it does to productivity to have your employees chronically complaining that they are too hot or too cold in their work area, or worse, going home feeling sick because they are hypersensitive to these temperature extremes?  Or when they take longer lunch breaks because the food amenities located in or nearby the building are lousy?

How else does a building impact your business operations?  Is that impressive grand lobby in your three story suburban building inflating your rentable square footage and costing you more relative to other alternative buildings?  Are you setting yourself up for surprise billings from the landlord because they are doing a poor job managing building operating expenses?  It might surprise you to learn that these are all things a good real estate broker can identify before you sign your lease.

Think about it: those companies rated as “the best places to work” in your local business journal never cite the exterior appearance of the building.  It’s all about happy employees.  And happy employees make for happy clients.

Aaron Weiner, CCIM, CPM, LEED AP
aaron.weiner@weinerproperty.com

The Myth of "No Free Rent"

Did you ever sign a lease only to feel your stomach turn when find out that you left two months of free rent on the table?

Tenants are understandably intimidated by improving market conditions.  Space is actually getting leased up again.  Rents are slowly climbing out of the doldrums of the recent deep recession.   In some  submarkets they are rocketing up.  Tenants succumb to pronouncements of landlord rep brokers that “the space won’t last long”, “the premises are being leased ‘as-is’”, and that “the landlord is not offering any rent concessions.”

Those pesky brokers – are they lying?  No – they are just doing their job; that is, to gain the best advantage of improving market conditions for their clients, the building owners.  They are professional salespeople.  And the best ones are great salespeople.  Most tenants are blinded to the fact that they need an advocate who understands the landlord’s position in the market and who isn’t cowed by the pronouncements of their brokers.  Consider: When two professional brokers get down to negotiating a lease, the sales-y rhetoric evaporates and is replaced with the language of the deal.

Let me tell you: in all but the most in-demand micro-markets and neighborhoods, rent concessions are still on the table.  It helps to have an agent who knows whether that building you really like is really as hot as the owner’s broker would like you to believe it is.  Quality tenants are highly valued.  There are flex points in the economics of the lease that will allow a good agent to tailor the deal to your specific needs.  Believe me. 

Aaron Weiner, CCIM, CPM, LEED AP
aaron.weiner@weinerproperty.com

Vanessa's Tale of Woe

Have you ever signed a lease for a location you loved that turned out to be a ulcer-inducing money pit?

Retail business owners are constantly taking on the burden of searching for their new locations.  No sooner do they identify the perfect spot than they find themselves in lease negotiations with the landlord.  Even if they have signed leases in the past, they are intimidated by the process because the landlord’s agent and the landlord obviously have far more experience with leases.  They feel presumptuous questioning the language of the lease; they rationalize that if it has the AIR label at the top, it must be the standard form that everyone else signs and so they sign it.  My friend Vanessa did.  Poor thing…

Vanessa has a big idea for a casual take-out restaurant in downtown Los Angeles.  The agent that showed her this former restaurant space answered only the questions she asked about the condition of the premises.  She did not have an experienced advocate to dig any deeper.  She signed the lease and took possession, only to find that the electrical service was woefully inadequate for her operation.  Right after she spent $10,000 for the necessary upgrades, she learned that the premises had no air conditioning!  That will cost her another $7,500.  Are we having fun yet?

Could an agent negotiating on Vanessa’s behalf have gotten the landlord to spend the $17,500?  Maybe not.  But with a lease hanging like a carrot on a stick in front of the landlord, some rent concessions might have been negotiated using the argument that the tenant was about to perform improvements that would add lasting value to the landlord’s building.   But at this juncture, Vanessa has zero leverage.   She’s coughing up the dough and it’s coming right out of her marketing budget.

A good tenant rep broker could have probably saved her half of those outlays and at no cost, because commissions to all brokers in the deal are paid by the landlord.  And you can take that to the bank.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com

DID THE LANDLORD SWEEP AWAY THE GOLD DUST LOUNGE UNFAIRLY?

In my last blog, I addressed the age-old face-off between neighborhood traditions and the legal
principal of property rights in the pending eviction of the fifty year old Gold Dust Lounge from its Union Square perch in San Francisco. But there is more to this story…

The tenants, two elderly brothers both in their advanced 80s, claim the landlord snuck
subtle changes into the termination clause in their annual lease renewal agreements. What started out to be a right to terminate with 18 months written notice if the building was slated for
demolition evolved into a 90 day notice to terminate the lease for any reason at all. The tenants, desperate for a case to sue the landlord over this apparent chicanery, are claiming “elder financial abuse”. They say the landlord induced them to sign the annual renewals assuring them that “nothing material had changed” [quote from Los Angeles Times reporting].

The tenants could have a case here, but if they were competent enough to operate their business successful from day to day, they were ostensibly competent enough to read and understand the short renewal document they signed each year. There is no better illustration of a tenant’s responsibility to know what is in their lease and understand the impact of each and every lease clause, or at least to utilize experienced resources like a good tenant rep broker to look out for their best interests.

Is there really any argument here?

GOLD DUST DISAPPEARS IN A PUFF OF HOT AIR

The news that the ostensibly famous San Francisco saloon The Gold Dust Lounge is being
booted out by their landlord after 50 years near Union Square in favor of The
Limited has made headlines. Events like this underscore the juxtaposition of neighborhood culture and market opportunity, forces that often find themselves at cross purposes. Arguments on both sides have merit. But movements to have city planners or elected officials step in are simply wrong. Very wrong.

The law of the land is clear enough on private property rights. The marketplace will dictate what business goes in a given location. Miscalculations and bad judgment often intervene, but in the end, the market – which includes landlords, business tenants, and consumers – ultimately decides the future of the neighborhood. Free market forces do not always move in a straight, true line.

There is another side of this story that will be addressed in my next blog and has to do with paying close attention to lease terms. Did the landlord take advantage of the tenant’s naiveté to get them out of the space? We shall examine the facts.

THE WALMART CONUNDRUM

I attended a
very informative presentation recently by a senior regional Walmart
representative seeking the endorsement of the Central City Association of Los
Angeles, a citywide business advocacy group. Walmart has been rolling out their small-format Neighborhood Market concept (+/-35,000 s.f.) and their recently announced plan to put one in on the fringes of Chinatown in downtown Los Angeles was met with howls of protest. The representative put up a PowerPoint presentation chock full of dazzling statistics about Walmart’s incredibly diverse employee population, their better-than-average pay scale, and the
fantastic value they bring to their customers. The presentation felt like a defensive move in the face of “NIMBY” resistance they seem to get from so many cities. They are eager to prove they are a responsible, good neighbor dedicated to serving the needs and desires of the shopping population.

The presentation left me with the distinct impression that the world’s largest retailer sees the entire population of the world as either as employees, customers, or suppliers. The conundrum
is that while they pursue their noble goal of bringing their customers good products at the lowest prices, there are many ordinary people in these communities who chose to be business owners instead. And they just can’t survive when Walmart comes to town.

I am sure this grocery-deficient neighborhood will gobble up what Walmart has to offer. And a few family-owned shops and markets will close.