5 Things Every Office Tenant Should Consider in the New Year

©2012 Darvin Atkeson / LiquidMoon.com

Over the years I’ve observed that for many tenants, once the lease has been executed it’s filed away and forgotten until it’s time to renew or relocate.  This is partially because they’re focused on their core business but also because they assume that once the lease is signed, the terms cannot be modified again until after the expiration date; this is simply not true.  Depending on factors such as a change in the building’s occupancy level, the general overall health of the local market, and even a change in the building’s ownership, improving the terms and rental rate could be achievable by the tenant as leverage may have shifted.  At the very least, a quick refresher will remind a tenant of key dates, their rights and options, or even a potential liability they’re currently exposed to.

As we head into the New Year it’s a good time to dust off your lease and ask your commercial real estate advisor to conduct a review and provide you with an updated lease abstract. Here are five things they should consider:

1.  Could your rental rate be immediately lowered?
If the rental rate you’re currently paying is substantially higher than where current market rates are, then a “Blend and Extend” strategy may be possible.  Simply put, you amend your lease to extend the length of your term, and blend the new lower rate into the present high rate, thereby immediately lowering your rent.  If your lease expiration date is too far in the future or you do not wish to extend the lease beyond that date, there could be other options as well.  Perhaps the landlord has a large security deposit on file, and you’ve made timely rental payments whose sum now eclipses the cost of the landlord’s up front occupancy costs (tenant improvements, broker commissions, etc.).  Albeit risk-adverse, savvy landlords understand that their tenants’ success is tied to their own.  Therefore, they may allow you to apply a portion of your existing security deposit towards rent, and in some cases just simply give some back.

2.  Are you aware of important notification and lease dates?
If you have the right to extend your term, the landlord typically will build notification dates into the lease.  For example, you may need to notify the landlord of your intent to renew no sooner than nine but no later than six months prior to your lease expiration.  This also goes for Early Termination, should you have that right.  Make sure to be well aware of when your lease expires, as well.  It can sneak up on you and if you don’t plan and time your renewal or relocation wisely, your leverage could potentially be substantially reduced.  Mark your calendar and stay ahead of these dates.

3.  Have you received and reviewed your Operating Expense Rent Statement?
If the landlord is passing through operating expense increases to you as additional rent, they should be providing you with an annual expense statement.  Don’t hesitate to ask your real estate advisor to review your statement for you.  If something is irregular they’ll catch it and perhaps recommend you exercise your right to audit, which tenants are usually allowed to do no more than once a year.  It’s also worth the effort to make sure expenses are not being passed through to you that were not agreed to in the lease.

4.  Does the size of your office still accommodate your needs?
Do not think that you have to “ride out your lease” if you’ve outgrown your space or perhaps have had to reduce the size of your staff.  Your real estate advisor can help you work with the landlord to relocate within the building into a more appropriately sized suite, and if one is not available, then subleasing may be an appropriate solution.

5.  What sublease rights do you have?
For many reasons, tenants often need to get out of their space in advance of their lease expiration date, and subleasing can be a wise exit strategy.  However, not all sublease clauses are created equal.  First, do you even have the right to sublease, and if so, what restrictions will be placed on you?  Are you allowed to sublease to existing tenants in the building, or tenants who have recently toured the building on a direct basis?  Can you market the space at any rate you set, or does it have to be equal to or higher than direct space in the building?  How are sublease profits shared and how much time does the landlord have to respond to a consent request?  Know your rights, and how the subleasing terms will likely affect the ability to achieve your desired results.

When several years have passed since you’ve signed your lease, it’s easy to forget what you signed up for in the first place.  Your real estate advisor can effectively and efficiently digest your lease, extrapolate key points, and then present them to you in a lease abstract within the context of today’s current market conditions.  This quick refresher is time well spent, and having a better handle on your lease’s key points and terms could prove invaluable for whatever may come your way in the New Year.

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Office Towers Made From … Wood?

I’m not going to lie; when I first heard about CREE Buildings and their efforts to erect skyscrapers made from wood, I was more than just a little skeptical. I couldn’t help but recall the story of the Three Little Pigs and the image of the wolf…huffing, puffing, and blowing down the house.

But, seeing is believing.  In November, 2012, CREE Buildings opened its doors to LCT ONE in Dornbirn, Austria – the world’s first 8-story timber hybrid building.  The office tower was built using glulam wood beams as the primary building material and combined with a limited amount of concrete, using a process called the LifeCycle Tower system.  (It took only 8 days to erect 8 stories – check out the time-lapse video below.)

Put simply, they’re scaling the already familiar pre-fab, modular construction model and applying it to industrial office construction to buildings as high as 30 stories.  The benefits of prefabricated construction are many – shorter construction times, reduced construction waste and fewer resources used throughout manufacturing, to name a few.

I caught up with CREE’s CEO, Michael Zangeri, at GreenBuild in San Francisco recently, where he converted me from skeptic to evangelist.

Cree LifeCycle Tower systems deliver tall commercial green buildings, up to 30 stories with 90% fewer C02 emissions, reduced costs, and 50% shorter construction time.

One of my first concerns was related to my perception of wood being more dangerous in a fire than steel.  Well, apparently wood is safer in a fire than its unpredictable counterpart, which can collapse instantly and without warning in high temperatures.  Wood on the other hand has a predictable burning rate.

From a sustainability perspective, wood is just about as an abundant and renewable raw material you can find.  Unfortunately, the same cannot be said of steel and many other building materials.

And what does a skyscraper made from wood look like?  Absolutely nothing like you’d expect.  Aesthetically, they’re gorgeous.  Check out the pics below and see for yourself.

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www.CREEbuildings.comMedia Contact:  Technica Communications
Lisa Ann Pinkerton
Lisaann@technicacommunications.com
408-806-9626

Rose Begonia
rose@technicacommunications.com
(UK) +44 741-474-5238

Lease Structure Key to Energy Savings

When office tenants pay only for their actual energy consumption, they inherently use less of it. Unfortunately, most tenants in “Class A” buildings have a lease structure called “fully-serviced” which does not account for how much energy each individual tenant uses, and therefore doesn’t motivate them to reduce their energy consumption because there’s no economic incentive.

Leasehold structures can generally fall into one of three categories:

• Triple Net (NNN):  In addition to paying Base Rent, the tenant is billed separately for property taxes, insurance, maintenance charges, utilities and janitorial services.

• Industrial Gross (IG):  All of the above expenses are included in the rental rate, with the exception of utilities and janitorial, which are paid separately by the tenant. This can also be called “Manufacturer’s Gross” (MG) or “Net of Utilities and Janitorial” (NUJ).

• Full-Service (FS):  In this lease structure, the tenant’s rental rate covers all of the above expenses, and is also sometimes referred to as a “Gross Lease”.  Any increases in Operating Expenses “OpEx” are passed through to the tenant as “Additional Rent”.  So for example, if the utility company decides to hike up the cost of their electricity, the tenants get stuck with the bill and pay according to their pro-rata percentage share of how much space they occupy in the building.

Turn off the lights behind you.  One day when you’re paying the bill you won’t forget! – Mom

So here’s the problem.  In a Full-Service lease, the landlord is not incentivized to implement energy-saving measures since they’re passing all increases through to the tenant.  And the tenant has no reason to try and save energy because doing so won’t reduce their monthly rent.

The logical solution is to sub-meter the tenant’s space so that they’re only paying for what they actually consume, and will realize the economic benefit from conserving energy.  This is much easier said than done, however.  Most Class A buildings simply aren’t designed to sub-meter individual tenant spaces, and most tenants do not have the necessary leverage to get the landlord to agree to pull them off the Full-Service lease.

Commercial real estate firm CB Richard Ellis found that separately metered buildings where tenants pay for what they consume, lower their energy costs on average by 21%.

So what do we do in the meantime while we wait for new buildings to be designed that can address this concern and take advantage of the huge opportunity for mass energy reduction in the workplace?  One option is to seek out buildings that already offer leaseholds on an Industrial Gross basis.  Typically you’ll see this in smaller, older buildings with a lower tenant density.  Or, if you are in an office tower and occupy several floors, you may have the necessary leverage to negotiate a lease that’s net of electric and get the landlord to agree to sub-meter your space.

As a broker, I always give preference to buildings that have leases structured as Industrial Gross.  In addition to the obvious benefit of saving money, I think employees appreciate being engaged and knowing that their energy-reducing actions have a positive impact and benefit.

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