Why Building Operating Hours Matter – What You Don’t Know Can Hurt You

When it comes to normal operating hours, all buildings are not created equal.  But most buildings provide reasonably convenient access to their tenants 24 hours a day, seven days a week.  So why does this even matter?  Well, if you’re just a plain old 9-5 business, it doesn’t, really.  But is any post-recession business these days  plain or old?

Electricity, telecommunications, and HVAC (heating and air conditioning) are three of the most mission critical services a building provides to its business tenants.  And all three  – and their cost to the tenant – are impacted by the building hours; more specifically, the hours outside of the normal hours of operation. 

With their focus on fundamental lease provisions like base rent, free rent, term, and options to renew, many corporate tenants don’t pay attention to the provision stipulating how much the tenant is charged for using the building after hours.  In some buildings, this can run upwards of $100 per hour!  Leases also state that if a tenant is deemed to use more than what the landlord deems a reasonably  proportionate amount of electricity, they can be surcharged by the kilowatt.  If you are a seasonal business that burns the midnight oil or works seven days a week during certain periods of the year, this can really add up! 

There are myriad ways a good tenant representation broker can negotiate these conditions in the lease document and save a large tenant hundreds of thousands of dollars over the course of the lease. 

Burning the midnight oil doesn’t need to singe your bottom line. 

Where To Find The Guts To Negotiate Tenant Default Language

Of all the lease clauses under the sun, none are more awkward for a tenant to negotiate than the language defining their defaults and the associated penalties.  It feels so self-incriminating for a tenant to ask for more flexibility in how late they can pay the rent or more time to cure if they neglect to pay on time. 

No question, tenants enter into lease agreements with optimism and high hopes for the future.  What a drag it is to ponder their own failure!  But there is always some probability for administrative mistakes or failure and the need for the tenant to protect their interests is as important here as with any other  clause of the lease that has financial ramifications to the tenant.  Some leases are drafted by the landlord with draconian terms that penalize the tenant severely for minor slip ups.  An experienced broker is knowledgeable of fair and reasonable terms that most landlords will agree to and can help the tenant to save face by going to the mat on these issues on their behalf.

A good tenant representation broker will insure that all terms of the lease are fair and equitable no matter how unpleasant they are to ponder!

Traffic Counts -- When More Is Not Necessarily Better

One of the most closely watched metrics in measuring the relative desirability of a business location is traffic count.  Having a real estate broker that can access this information in real time is highly valued by tenants who consider this critical information.

But consider this: One of the most heavily traveled roads in Southern California is Pacific Coast Highway.  For the affluent population residing near the Pacific Ocean, this road connects all of the communities up and down the coast.  Most of the highway is wide and carries a large volume of traffic efficiently.   But many of the retail shops that line the highway are struggling or empty.  This may have you scratching your head, but stay with me here…there is a very sensible explanation.  In some locations along the highway, convenient ingress and egress are sacrificed due to high volume, high speed traffic flow – people are zooming by and don’t slow down long enough to identify the businesses in the area.  The rent premium paid for high traffic at these locations is unfortunately wasted; worse, it becomes a burden that could put the business under.  What a shame.

There is more to traffic count than meets the eye.  It is more than just a number:  Is the subject traffic artery busy due to local commerce, or is it a favored route across town or to the freeway?  Is exposure of your brand (i.e. your sign) your goal, or is your objective fitting strategically into the fabric of shopping patterns for your target customer?  There is no universal right or wrong here.  But you need to define what is right or wrong for your business.

You and your real estate broker need to clearly understand your customer and their reasons and methods of patronizing your business.  Traffic count is indeed very valuable information, but only if interpreted correctly. 

Enterprise Zones -- The Best Kept $100,000 Secret In The Business

There exists a golden opportunity for tenants – large and small –  to save potentially tens of thousands of dollars every year at their leased properties – one they don’t even have to squeeze out of their landlord!  And their current broker (if they even have one working on their behalf) may be too myopic to know about it and bring it to their attention.

Enterprise Zones are created by state governments to incentivize business investment in geographical regions of under employment or economic blight.  In many states, such as California, these zones cover huge swaths of real estate and include areas you would never expect to qualify.  Few people realize, for instance, that virtually every corner of downtown Los Angeles is within an Enterprise Zone!

The economic incentives come in the form of income tax credits for new hiring.  Usually, these credits repeat year after year over the first five years of employment  and the incentives do not expire as long as the tenant is doing business continuously at the eligible location – the gift that keeps on giving!

So find an expert in your market who can show you where the Enterprise Zones are and can in turn coach your tenant clients to maximize their savings.  I have one.  Her firm has saved my clients hundreds of thousands of dollars and has helped me earn their undying loyalty.  And for me, that’s the “End” Zone!

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

The New Tenant Creditworthiness Game

Landlords will forever insist on seeing financial statements before finalizing a lease deal with a tenant, whether they are a small business or a publicly traded company.  And they should.  But what does a tenant do if their ship has been tossed – and perhaps badly damaged – in the hurricane of the recent, extended recession?  And, I mean, who amongst us hasn’t suffered?

I represent tenants who, in some instances are looking to downsize for the sake of their very survival.  It is unlikely their financial statements are going to inspire many landlords to spontaneously break into song.  So, does this tenant need to resign themselves to rejection?  Absolutely not.

Landlords have suffered a parallel fate as their struggling tenants.  They naturally prefer tenants that have capital reserves that will better insure that their rent will arrive in the mail every month.  But today they are forced to look beyond the numbers, and brokers need to coach their tenant clients how to tell their story in a persuasive way.   That comes with taking the time to learn about the clients business and ask some difficult questions to get at the truth.

I recently  had a client – we’ll call him Stuart – who is a prominent interior designer for large homes and hotels.  His industry was decimated by the recession and the very fact that he survived at all was a testimonial to his reputation and perseverance.  We presented the landlord with a couple of years of personal tax returns (since the landlord would require a personal guaranty on the lease.)  This gave the landlord the facts.  They are what they are.  Starting off with honesty is always the best policy.  But what we submitted with the numbers was Stuart’s story: his long history in the business, his impressive resume of clients worldwide, and his nimble resizing of the company to insure its continued viability.  We worked together on the story so it hit what I knew from experience would be a landlord’s hot buttons .  We proceeded to final lease documents without a single question from the landlord.

The facts + a success story that reaches back to more robust economic conditions = the new creditworthiness. 

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

When “Triple Net” Isn’t Really Triple Net – Kellogg’s Swale Tale in Detroit

Can the landlord force their tenant to cure all latent defects at a property under a NNN lease?  The answer is yes…if you let them!  Tenants take this on the chin day in and day out without a good, experienced broker in their corner who can come out swinging!

Properties can have latent defects even if they are brand new.  The benefit of brand new is that there are construction warranties in place.  Did the broker make sure those warranties were addressed in the lease to protect their tenant against construction defects?  If not, the tenant just got the shaft!  If the warranties have long since expired, did the broker get wording into the lease that latent defects would be the landlord’s responsibility?  Admittedly, those assurances are hard to get, but you gotta ask!   Putting protections into the lease regarding premature and extensive repairs to a property that is being tendered in “good operating condition” is the stuff of another blog post, but I wanted to share an interesting story that involved my client, The Kellogg Company.

Kellogg was 3 years into a five year lease at a free-standing, single tenant facility in the greater Detroit, Michigan market.  This was a classic triple-net situation: the tenant was the only one using the property.   I got a email from Battle Creek: the Detroit distribution center manager was complaining that a broken concrete drainage swale running down the middle of their truck court was breaking up and causing damage to their trucks.  After reviewing their lease and finding what I expected – pure triple-net without any carve outs – I took a few minutes to reset the client’s expectations; after all, it was their truck traffic that caused the damage.   But before I came to any final conclusion, I asked them to take several photos and send them to me.

What the photos revealed was that the concrete swale was poured with the rebar very close to the surface which arguably caused the concrete to spall.  The rain and freezing temperatures took care of the rest.  I presented the problem to the landlord thusly: the faulty construction of the swale was the root of the problem.  And the tenant was considering their options with respect to renewing this lease.  Can you guess what the outcome was?  Problem solved…and at no cost to the tenant!

The moral of the story here is that the tenant or their broker must give these situations a closer look before incurring the cost of repair.  And if you think you need the leverage afforded by a Fortune 100 tenant, that’s not necessarily the case.  So long as the tenant has held up their end of the lease and paid their rent on time, they are golden.

Nothing is absolute when it comes to business.

 

Aaron Weiner CCIM, CPM, LEED AP

aaron@bailesre.com

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