Confessions of a Recovering Landlord

It sounds like I'm in a 12-step program, doesn't it? Well, in a way, I am. After working for landlords for 20 years as a Property Manager, Leasing Agent, Construction Manager and Asset Manager, I switched sides and now use that experience strictly for the benefit of tenants who lease office and industrial buildings.

It's really what differentiates me from all of my competitors. No other Corporate Real Estate Advisor (Tenant Rep) that I have ever met has had such extensive experience on the other side of the table. This really gives the tenant an advantage because by using me as their representative they get in-depth knowledge of how a landlord thinks and what motivates the landlord working for them. 

And this isn't just during the lease negotiations. It's during the entire lease term. When I was an Asset Manager I would get calls from Tenant Reps who would say, "Bob, my client just called me about the letter you sent them. They don't understand it and want me to explain it to them. But I don't know what it means either. Can you explain it to me so I can explain it to them?"

Of course, I was happy to do that because Tenant Reps are considered clients of landlords too. Landlords market to Tenant Reps because 95% of tenants will have a Tenant Rep handling their lease.

The main point to all this is that a tenant should have representation that is at least as knowledgable as the landlord's Leasing Agent and Property Manager. Be sure to interview the Tenant Reps being considered for your lease assignment or that you are referring to your clients. Make sure they have the relevant experience for the lease negotiation and throughout the lease term. Don't refer someone just because he/she is a friend or nice person. 

I was driving through Dallas the other day with a client and we were talking about how new developments these days are more dense and involve multiple uses - office, retail, apartments - all in the same project. These developments are much more dense than in past years. This has typically definied the central part of cities and when you think of the greatest cities in the world, they are always quite dense - New York, Hong Kong, London, etc.

Density seemed to be viewed as a bad thing by most cities in the US though - at least in the suburbs. But that is changing as people demand services within walking distance of their homes or places of business. Most of these developments balance out the density with green space, ponds or other open gathering areas. This provides a place to meet friends, play, and relax. 

What's interesting is that density is happening inside as well. For the last couple of decades, companies have been putting more people in smaller space. The average square footage per average worker in 1994 was 90-115 square feet (SF). Managers had about 151 SF each. Today those numbers have dropped to 75-95 SF for average workers and 120 SF for managers. 

But these companies often create more meeting space, break areas and other open areas within the office where collaborative work can be done. One of my clients is a tenant in Plano has the typical conference room, but they also added a conversation pit. This room is where the "corner office" would otherwise be and it has a faux fireplace, leather overstuffed chairs, side tables and a big coffee table in the middle. It's a great room to enjoy with co-workers or clients without the behemoth table in the way.

Design should reflect the company's personality. This includes the design of the development in which the office is located and the design inside the space itself. Density plays a roll in that as well.

Want to save a bundle on your next office lease? Try to find a sublease. Subleases are often priced 20-50% below what the landlord is charging for direct leases. So a building charging $20.00 may have subleases in the range of $10.00 to $16.00. The closer you get to the expiration date of the sublease, the lower the price goes. 

Other factors affecting the rental rate will include how long the space has been on the market and whether furniture and equipment are available for the subtenant. Many subleases have furniture, phone systems, equipment, and maybe even art and plants in place already. While the tenant (sublessor) will try to sell these things, the subtenant will almost always ask that it all be given to the them for free as part of the deal. 

But there are a few risks of taking a sublease. First, if the primary tenant stops paying the rent and the landlord terminates the lease, the sublease will likely be terminated as well. You may not have an office. So you need to underwrite the credit and financial situation of the primary tenant. The landlord could allow you to stay and just pay the subrent to him. Or the landlord could say you can stay only if you start paying the rate he is quoting for leases in the building.

Second, you usually won't get any money for improvements to the space. So you have to find space which is already configured in a way that works for you. You might negotiate for improvements or decide to pay for them yourself, but the landlord must approve that work first.

Third, you typically won't get a renewal option, termination option or any other kind of option. Options often are "personal" to the primary tenant and can't be extended to a subtenant. If you must have those things, you need to negotiate for them and be sure the landlord agrees to give you that right. That's not easy to get unless the landlord feels like they are getting something by having a subtenant in place.

Subleases can be really great for the bottom line, but be sure you know the risks. 

To see the excess space our clients have on the market, please go to the Properties page of my website. We have one in Dallas and one in Plano right now. We have a new listing for sale coming up in Rowlett shortly.

Many companies renew their leases without engaging a professional tenant rep. Their logic is usually something like, "I know my landlord and trust him. We have been in the building for years so I don't see any reason to get a tenant rep involved and potentially get in the way of that good relationship. Besides, maybe the landlord will give me a better rental rate if he doesn't have to pay a commission."

That sounds logical, but in 27 years in the business I have never seen that actually work out to the tenant's advantage. Even in situations where the landlord says he will pay the commission to the tenant, the rent has always been over market. One recent client in Plano showed me the landlord's proposal which specifically said that they would pay her (the client) the tenant rep commission if she didn't hire one. The only problem was that the rental rate was $24.50. I just laughed when I saw the proposal. We ended signing a lease in the brand new building across the parking lot at $21.00 and that landlord was happy to pay me. The current landlord dropped its rate to $23.00 and was happy to pay me too, but it was too late.

Another friend renewed his lease in a different building just before meeting me and wanted to know if he got a good deal at $21.00. My answer, of course was, "it depends." After asking a few questions I found out that the landlord had not given him a new base year for operating expenses.

In the Dallas Fort Worth area including Plano, Frisco, Richardson, Addison, etc. most office leases include a base year for operating expenses. This means that the rental rate includes the common area operating expenses in the base year (usually the calendar year in which the lease starts). This covers expenses like janitorial, landscaping, maintenance, security, etc. The tenant pays for any increases in future years.

My friend had gotten a good rental rate at $21.00, but he had not gotten a new base year. He was on a 5-year-old base year and was paying more than $2.00 in addition to their rental rate. So what looked like a good deal at $21.00 was not a good deal at $23.00 plus.

This happens, of course, primarily on lease renewals. So when you renew your lease, be sure to ask for a new base year. If you can't get the landlord to give a new base year, then you must add the amount you are paying above your base year to the new rental rate and then use that number to compare to the other rates being quoted by other buildings.

I have been in the commercial real estate business for 27 years so I have seen a few cycles. One thing is certain, whatever things look like today, they will look totally different in a little while. So while landlords have been suffering in this economy, it has been great for tenants who are enjoying lower rental rates and free rent.

While no one knows exactly when things will change, there is general agreement that the tide will turn back to the landlord's favor within the 18 months. So what should a tenant do now? Well, if you are in a position to either relocate your office or renew your lease, now is the time to do...at least if you want to make sure you get the lowest rental rates and greatest free rent available.

When a market cures, landlords will first start reducing the amount of free rent they are willing to give. Then they will start getting more firm on the rental rates and will eventually increase the rates if demand for new space holds up.

So if you haven't already had your corporate real estate advisor review your situation and make recommendations, please have it done now. We will personally help you find the right space or renegotiate your lease. There is no extra cost to you for our services and you get to work with one of the top local office specialists in the area.

There is still free rent available to qualified tenants in Plano, Frisco, Richardson, Addison and Dallas. Now is the time to make sure to lock in low office rental rates.

“I won't sign an exclusive representation agreement. I want to keep my options open.”

This is a common comment from prospects who are fearful that an exclusive agreement will restrict them. Behind this comment is also the assumption that an exclusive agreement is only there for the tenant rep broker’s benefit. The reality, however, is that clients should NOT engage a broker who is willing to work without an exclusive representation agreement. There two primary reasons for this:

Time - working with 2-3 brokers wastes the client’s time because all agents will likely find the same properties and the client will then have 2-3 conversations about the same properties wasting time.

Attention – the client deserves the attention of the broker and they just won’t get it without an exclusive. Tenant representatives are business people who have families, mortgages, tuition bills, etc. just like everybody else. So they must spend their time where they can reasonably expect to earn a living. Without an exclusive, they can’t assume that and, therefore, will not really work on behalf of the client. They might send the client information on a property that happens to cross their desk, but they won’t go out in search of what is best for the client.

“What if my tenant rep just isn't working my lease? Shouldn't I be able to fire him?”

Absolutely. Real estate has always been a pay for performance industry. If the performance isn’t happening, a client should be able to hire someone else. In my representation agreement, I give my clients the right to terminate the agreement with 30 days notice at any time. I get 30 days to get the client happy, but if I can’t, I’m fired and they move on. I have never been fired and am confident that I never will, so I don’t see this as a big risk, but it gives my clients peace of mind.

Bottom line - get references like you would for any other service. Don't buy and then regret. Know who you are working with before you sign the exclusive. But by all means, insist on an exclusive representation agreement.

You wouldn't go to court without an attorney, but you are likely to end up in court a lot faster if you don't engage an attorney when drafting legal documents. More importantly, if you don't use an attorney when negotiating the lease language, your lease will be one-sided and heavily weighted to the landlord's advantage.

Leases are generally written by landlords and you have to use the landlord's form or they won't lease you the space. Only in rare situations with extremely large companies will landlord's agree to use a lease form of the tenant's chosing.

So engage an attorney to review the lease document on your behalf. While the tenant rep broker should review the lease language and should weigh heavily in the lease language negotiations, he doesn’t replace the need for an attorney. They approach the lease document from different perspectives and should act as a team improving the lease to the tenant’s advantage. Both are vital and neither replacese the other.

For example, an attorney is going to be critical at protecting the tenant from legal liabilities while the tenant representative should review the lease from the perspective of the practical landlord/tenant relationship.

So how do you know what attorney to hire? First, make sure it’s someone with extensive commercial real estate leasing experience and not just a general attorney. Just because someone knows how to write a will or incorporate a company, doesn't mean he or she is an expert in commercial lease negotiations. Your attorney should know what is acceptable, reasonable and typical in the market.

In addition, it's best to hire someone locally...or at least from within the state. I wouldn't recommend using an attorney from Baton Rouge, Louisiana to negotiate a lease in Plano or Frisco, Texas. Laws vary from one state to the next and your attorney must know those nuances.

Ultimately, your tenant rep should be able to refer you to a good real estate attorney with whom he has done business. But once you pick an attorney, be sure to confirm when he/she will commit to getting the review done and how many hours it should take. A great billable rate per hour may be attractive, but if you are billed for twice the hours or it takes 2 weeks to get the comments, it may cost you far more than you think.

Finally, you must instruct your attorney as to the degree to which you want the lease reviewed. Do you want him to hit the most likely big picture issues or do you want every paragraph redrafted. The size of your space relative to the overall size of the property will make a huge difference in the landlord's willingness to negotiate. The more changes requested, the more it costs both parties in legal fees.

Remember, time kills deals. Don't let your attorney be a deal killer. 

Okay, so you found a building you really like and you have negotiated what you think is a pretty good deal....or your tenant representative has done that for you. So now you are ready to charge forward with the lease itself so you can get the construction done and move in. Right?

Wrong.

You should talk to some of the other tenants in the building. Or at least be sure your tenant rep does. It’s important to know what the current tenants think of the building and the landlord. How are they being treated? How does the landlord maintain the building? If other tenants aren't happy, what makes you think you will be?

When someone is trying to sell you, do you think they may treat you differently than after they have sold you? Do treat your spouse differently after 15 years of marriage than you did while you were courting?

Don't make that mistake with a contract (lease) which is going to last 3-10 years with possible renewals. Find out what the landlord is like before you sign on the dotted line. In my primary target markets of Plano and Frisco, I proactively go talk to tenants to see what they think of their landlords before I even have a tenant considering the building.

If you are sued and you hire an attorney to represent you, who does the talking in the courtroom? Would it make sense for you to call the plaintiff's attorney or even the plaintiff directly to discuss the case? The answer is obviously no. 

It’s the same in any negotiation in which an agent or intermediary is hired by a principal. You can't successfully negotiate if there are multiple people contacting the other side. Not everyone would have the same information when needed. 

So it's important that your tenant representative (corporate real estate advisor) be the single point of contact for all buildings under consideration - even with your current landlord. Otherwise, the tenant rep can’t possibly provide you with objective advice because he won’t have all the details of your conversations.

If you are considering a move of your office from Frisco to Plano, there will be well over 100 buildings to choose from. It wouldn't make sense for your tenant rep to consider only 99 of those buildings while you dealt with the last one. When the tenant rep makes a recommendation, he will do so without knowing what the 100th building is offering. 

You hire a tenant rep for many reasons one of which is to use his expertise to negotiate on your behalf. He may choose to present information in a specific order or at specific times to improve the tenant's position. If the tenant continues talking to the landlord and leasing agent, the tenant rep can't manage the information provided or the timing of its delivery and that may compromise the negotiations and hurt the tenant.

Besides, the tenant has more important things to do – like running a business.

As you can probably guess, this is my favorite tip. So while I have this as tip #7, it actually is the first thing taht you should do before you do anything else. Don't contact any landlord, not even your current landlord, before selecting and engaging a tenant rep.

The rental rates landlords quote already include a fee for your representative. So if you don’t use one, it’s like paying for a service that you don’t receive. The landlord may offer to reduce the rent by the amount they would have paid a broker, but if the landlord is so willing to do this, you have ask yourself, why? Why doesn't the landlord want a tenant rep involved? This list is long and includes all of the tips I write about, but here are two biggies.

Market dynamics change daily. A veteran tenant rep is equipped to use market information and conditions to the tenant’s financial advantage. All landlords negotiate and strategize to their financial advantage...and they should. Tenants need to do the same thing, but they are often "out-gunned" because they aren't in the real estate business. The tenant rep levels the playing field for the tenant.

Be sure that your tenant rep is exclusive. He should only represent tenants. If he represents landlords too, it could create a major conflict of interest. An exclusive tenant representation firm never wears the landlord hat. He is solely focused on negotiating the best terms for tenants at every building in the local market.