Commercial Real Estate Blog

Following payroll expenses, facilities and related expenses are generally the second highest expenditure for a company. While people are naturally the most important asset to a company, real estate decisions should not be far behind. Too often though, companies fail to see the significance of real estate in the same light.

The impact real estate has goes far beyond the bottom line; it plays an important part in everything from employee retention to the level of productivity and workplace morale. It’s for these reasons that companies should always be cognizant when making real estate decisions.

The top ten mistakes that companies make when leasing space are:

1. Not Using a Commercial Real Estate Broker. It is imperative that companies not only understand the market, but have an advocate working on their behalf to both maximize savings and help the company meet its goals. A good broker can provide insight into the market, trends, landlords, demographics, and be a skilled negotiator. It is also important that you use a broker who is focused on commercial real estate; residential brokers often try to dabble in commercial and get in over their heads.
2. Waiting Too Long to Start The Process. The longer a tenant waits to start the process, the fewer the number of options that will be available to them. Waiting too long can mean that a tenant will pay more, receive less favorable lease terms, or that they are forced to leave and take less than desirable space elsewhere.
3. Leasing The Wrong Amount of Space. Figuring out how much space to lease is not an exact science. Forecasting involves assumptions, which can often lead to costly mistakes if incorrect. Uncertain events notwithstanding, companies should take the time and effort to work with a space planner or architect to plan and program to determine the right amount of space to lease. With that information in hand, companies should then go one step further and think about the impact certain business scenarios would have on that number, the likelihood of those events happening, and adjusting the number so as to minimize the likelihood of taking down too much or too little space.
4. Picking the Wrong Location. What may seem like the right location might in fact not be. Companies should consider things such as access, public transportation, demographics, zoning laws, and other factors to help identify the right location for their business.
5. Not Thinking About The Future. Aligning a real estate plan with a corporate business plan is difficult to do when milestone events and setbacks do not always go according to plan. To help deal with the “unknown”, negotiating leases which provide both expansion and contraction rights to the extent possible is therefore instrumental. Companies need to go beyond the simple lease and think about sublease rights, expansion rights, rights to cancel, and options to extend.
6. Not Measuring The Space. Companies should strongly consider verifying the landlord’s square footage numbers. In larger transactions, even a small difference can translate into a large savings. If it is not possible to measure the space, tenants should at least try to negotiate a tolerance in the measurement. Generally though, and per BOMA standards, a variance of up to 2% is acceptable.
7. Signing Too Long or Too Short of a Lease. Companies often think that by signing a short lease they are buying themselves flexibility. That may be true in many cases, but that flexibility often comes at a price. On the flip side, tenant’s may feel a long term lease provides maximum stability, but there are far too many cases - particularly in Silicon Valley where swings in rent can be large - where long term leases signed at the height of the market have gone so far as to force companies into bankruptcy or caused severe harm to the company. It’s therefore imperative that companies take a long-term approach to real estate, while keeping short term trends and business activities in focus.
8. Not Verifying Building Systems and Infrastructure. In today’s environment, data, power, networking, and HVAC capacity and availability are crucial. Tenants should ensure that buildings they intend on occupying are capable of providing the network connectivity and other building systems necessary for a tenant’s operation before signing any lease.
9. Not Having Your Insurance Carrier Review the Lease Language. Tenants should always have their insurance carrier review the language within a lease that pertains to insurance and subrogation to verify that the insurance is not only attainable, but attainable at a reasonable cost. It is strongly recommended that the actual lease or lease language be sent to your insurance carrier for review before any lease is signed.
10. Not Retaining Legal Counsel. By using an attorney well versed in the documenting of a real estate transaction, companies can help avoid ambiguity and errors which could leave to expensive litigation or legal wrangling.

These are by no means the only 10 mistakes a tenant can make when leasing space. Instead, it is meant to outline some of the most common mistakes tenants can make, and also what can be done to help avoid them. A good commercial real estate broker can help guide you through the leasing process. If you have additional tips, feel free to share them by making a comment.

When considering office space, tenants will find that office buildings are generally classified as being either a Class A, Class B, or a Class C building. The difference between each of these classifications varies by market and class B and C buildings are generally classified relative to Class A buildings. Building classifications are used to differentiate buildings and help the reporting of market data in a manner that differentiates between building types. That said, there is no definitive formula for classifying a building, but in the general characteristics of each are as follows:

• Class A. These buildings represent the highest quality buildings in their market. They are generally the best looking buildings with the best construction, and possess high quality building infrastructure. Class A buildings also are well-located, have good access, and are professionally managed. As a result of this, they attract the highest quality tenants and also command the highest rents.
• Class B. This is the next notch down. Class B buildings are generally a little older, but still have good quality management and tenants. Often times, value-added investors target these buildings as investments since well-located Class B buildings can be returned to their Class A glory through renovation such as facade and common area improvements. Class B buildings should generally not be functionally obsolete and should be well maintained.
• Class C. The lowest classification of office building and space is Class C. These are older buildings (usually more than 20), and are located in less desirable areas and are in need of extensive renovation. Architecturally, these buildings are the least desirable and building infrastructure and technology is out-dated. As a result, Class C buildings have the lowest rental rates, take the longest time to lease, and are often targeted as re-development opportunities.

The above is just a general guideline of building classifications. No formal international standard exists for classifying a building, but one of the most important thing to consider about building classifications is that buildings should be viewed in context and relative to other buildings within the sub-market; a Class A building in one market may not be a Class A building in another.

There is no international standard for classifying office buildings. In fact, BOMA is generally against the publication of a classification rating for individual properties. Were there a more scientific method for classifying buildings though, some of the building characteristics which could be used to compare and rank buildings would be as follows:

• HVAC Capacity
• Elevator quantity and speed
• Backup Power
• Security and life safety infrastructure
• Ceiling heights
• Floor load capacity
• Location
• Access (freeway, public transportation)
• Parking
• Construction, Common Area Improvements
• Nearby and/or on-site amenities (dry cleaning, restaurants, ATM, etc.)

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.