Square Feet

Under current law, only 2.5% of a improvement costs to a commercial (or residential) property could be written off in the first year. The new economic stimulus package now allows for up to 50% of the improvement costs to be written off the first year provided the work is started and completed this year.

This will likely spur some activity both on the leasing front as well as construction front as Landlords and Tenants both will seek to take advantage of the favorable tax treatment.

It used to be that when a new owner of an office building or office park set out to “add value”, it meant getting contractors involved to make improvements to anything from upgrading lobbies and common areas to improving lighting.

Now, more and more landlords are turning to architects to help them “add value” by re-measuring buildings to the latest BOMA/ANSI standards. As the office market has rebounded, owners (particularly new ones) are taking this opportunity to re-measure their buildings and recalculate load factors and rentable square footage numbers (see the glossary for definitions).

As existing tenants look to sign new leases or renew in this market, they might find that they have to fork over more rent, both based on the healthy condition of the market, but also as a result of an increase in square footage.

One example is in Mountain View where the previous owner was leasing space utilizing a load factor of approximately 12%. The new owners have gone out and remeasured all the tenant spaces and common areas and have revised the load factor up to over 20%!

As a tenant, it is therefore important to pay attention to this trend and work to mitigate risk in this regard by: 1) measuring space upon move-in to confirm its accuracy, and 2) including language into the lease which solidifies the square footage and limits the ability of the landlord to remeasure and revise a tenant’s rent during the course of the lease.

The local economy has been moving along just fine. Large amounts of venture capital flowing into startups and continuing growth by local companies such as Apple, Google, Cisco, and VMWare have been contributing factors to the rapidly increasing rental rates for office space in Silicon Valley. As company’s grow they might find that their growth plans are coming ahead of their lease expiration dates.

Traditionally this would force comapnies to either negotiate buyouts or attempt to sublease their space for the remainder of the term. In today’s market whereby many tenants signed their leases 2-4 years ago when rental rates were significantly less, this provides a catalyst to the landlord to let tenants out of their leases under much more favorable conditions with little to no buyout expense.

Of course, we encourage tenant’s to consider the language in the lease to analyze how excess rents (the portion of rent under a sublease which exceeds the rent the tenant which is subleasing is paying) are handled along with what recapture rights the landlord might have in a sublease situation. These items need to be taken into consideration when tenant’s analyze the possible profit they might realize from a subleasing situation. In the end though, most tenants prefer to simply forego the hassle of subleasing and capturing a portion or all of the excess rent when faced with the opportunity to simply and cleanly walk away from a lease.

In most parts of the country, the most common method for measuring office space and determining the gross leasable area is the BOMA (The Building Owners and Managers Association) standard. It is the most commonly used method as it provides Landlord’s with the ability to capture all common areas when calculating rentable square footage. The 1980 standard analyzed tenant spaces by floor while the 1996 method took into account the entire building’s rentable square footage.

In Silicon Valley, the BOMA standard is most commonly used while a number of office buildings use the Drip-Line method which determines the rentable square footage where the measurement is taken to the outermost perimeter of the building, regardless of whether it is enclosed or not.

In addition, there are some methods of measurement based on regional standards. Two of these regional standards are the REBNY and GWCAR methods, which are commonly used in the New York City and Washington D.C. area, respectively. The REBNY method attempts to bring the rentable square foot number as close to the gross built area so that they can maximize profits.

Regardless of what measurement method is employed, it is advisable that tenant’s perform proper due diligence before executing a lease to ensure they are getting what they pay for. While smaller tenants may not have the leverage that a 100,000 square foot user has, they should ensure that the rentable square footage of their space is at the very least within close proximity of what the landlord is quoting.

Lease options come in many flavors; a tenant can have an option to renew, an option to expand, an option to terminate, or an option to purchase just to name some of the more common options which are negotiated into deals. Options also exist as first rights to negotiate or first rights of refusal.

For the purpose of this post we’ll focus on options to renew and when tenants should exercise them. When a lease option is negotiated, the language in the lease most often is generally centered around giving the tenant the right to continue or extend their lease at either a pre-determined rate or at a rate adjusted for fair market value. These options often must be exercised months (and in some cases more than a year for large users) in advance.

If a tenant fails to exercise their option Read the rest of this entry »

One of the most significant and common mistakes a tenant can make is not retaining the services of a qualified broker when negotiating a sale, lease, expansion, termination, or renewal.

As a tenant it is likely that you are only negotiating a a single deal in a given market every few years. A landlord on the other hand is involved in negotiating leases on an on-going basis. Your broker can provide the market knowledge, leverage, and negotiation skills to level the playing field. A broker can also provide input on landlords, service providers, market trends, and guide tenants through the leasing process.

Tenant’s should also continue to keep their real estate brokers involved whenever they are considering expanding, renewing, or extending their lease. A tenant without a broker often sends a loud and clear signal to the landlord that the tenant is not serious about moving and thereby significantly diminishes the impact of one of the most important “pressure points” the tenant has access to when considering its options and negotiating or renegotiating lease-related transactions.

Finally, when you consider the fact that landlords often pay the fee for the tenant’s broker it really is should be an easy decision for a tenant to retain the services of a broker.

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In a commercial leasing, rents are often quoted as being NNN or Triple Net. What this means is that in addition to the quoted rental rate, the tenant, under the lease, is responsible for their share of the operating expenses and real estate taxes associated with the property, in addition to the tenant’s own janitorial and utilities.

NNN refers to Maintenance, Insurance, and Taxes. Maintenance generally covers the maintenance of the property, including landscaping, common area utilities, and property management. It is important tenant’s understand the operating expense clause in their lease to know exactly what costs the landlord is capable of passing-through. Insurance refers to property insurance (this is seperate from tenant’s general liability insurance), and Taxes refers to tenant’s proportionate share of the property taxes.

Because different landlord’s might include or exclude certain expenses from their definition of NNN, it is important to ask the question so as to be able to accurately predict operating expenses. It is also important to ask for historical operating expenses to understand if there has been any deferred maintenance or abnormal expenses associated with the property that could impact the expenses going forward.