Office lease negotiations are complex, and tenants who lack strong representation are often at a serious disadvantage—they don’t know what they don’t know. One key area where this shows up is the tenant improvement allowance (TIA).
TenantSee Weekly: AirOffice
For many companies, office space is among a variety of resources they make available to employees to help facilitate work. Other primary resources include technology. In fact, today, technology arguably contributes more to how work is done than the physical office. The diminished role of the office in facilitating work has resulted in changes in how companies look to use office space. One manifestation of this change is in flexible offices, or coworking spaces. This product segment, having grown considerably over the past decade, is tangible proof of shifting consumer sentiment.
TenantSee Weekly: When the Landlord Isn't (the Value of Options)
We’ve written a lot over the past few years about the capital stack, the equity and debt structures that commonly define ownership of office assets. We’ve talked about “broken” capital stacks, situations in which the original equity is wiped out and some portion of the debt may also be under water. We’ve noted it’s very challenging to transact in these assets because the financial partners would need to invest more capital on transactions that would generate negative returns. In other words, good money after bad.
TenantSee Weekly: The Ingredients Matter
Strategy is to occupier real estate what a recipe is to a great meal. A recipe is more than the sum of its parts. It’s about how each ingredient is prepared, how and when it’s added to the mix. As with any recipe in which there are primary ingredients, vital to its success, similarly, every great strategy requires 3 main parts:
TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VII: Design and Construction
One common mistake tenants and their advisors make when negotiating the office lease is failure to properly account for design and construction implications. These are important considerations. Space design plays a vital role in determining the efficacy of the space, how it translates in terms of value to the employees. Construction is expensive, representing a material component of the tenant’s total occupancy cost. Gaining understanding about design and construction at the right time in the transaction process provides useful data in the context of effective negotiations.
TenantSee Weekly: This, or That?
Negotiations are always about (or should always be about) this or that. There’s always something else, maybe that something else is nothing (as in sometimes the best thing to do is nothing at all). Decisions made without proper consideration of all relevant alternative scenarios are decisions made poorly. As important, in the context of office lease negotiations, the best negotiated outcomes are directly correlated to the extent to which we understand the alternatives of the landlord counterparty. This is a bit counter intuitive, allow us to explain.
TenantSee Weekly: Translating the Lease
Recently, we completed a lease for a client in a small San Francisco building. The transaction was negotiated to provide our client with a tenant improvement allowance, and the right to manage their construction. Because the client is a design firm, this approach suited them well. They understand design and construction and can leverage relationships to mitigate cost. The ownership of this building is not an institution, its management team lacks the sophistication you would otherwise see with professionals working for larger institutional owners. The lease provided the landlord with the right to approve the plans prior to construction, but it notably lacked a specific mechanism for communicating such approval. Our client provided detailed plans. They received a few minor comments/questions to which they responded promptly. Otherwise, the landlord agreed to the project schedule and let them commence their construction – implicit approval. During the construction, the client invited the management team to attend weekly meetings, to walk the space and generally sought to keep them informed (under no obligation to do so). Despite a few bumps along the way (the building had non-compliance in a few areas and a small amount of hazmat was discovered), the project was successfully completed. However, after moving into the space, the landlord sent a letter stating numerous elements of the construction had been completed without its approval, and the space must be restored at the end of the lease term (an undertaking which would cost hundreds of thousands of dollars). Naturally, our client was concerned. Thankfully, they sent us the letter and asked for our guidance.