Tenants How To Survive The Big Ugly 2008

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Tenants How To Survive The Big Ugly 2008

  1. 1. TENANTS: HOW TO SURVIVE THE BIG UGLY In many respects, we’ve been here before. Seriously, we’ve been representing tenants in the City for 27 years—all but a few of which have been great years for tenants! The Dot Com period comes to mind, now, but with seasoned experience; better tools and technology; and greater flexibility to address HR issues than several years ago. Facing soaring occupancy costs, tenants, what should you do about it?! 1. Do NOT assume that your next office leasing transaction will be anything like your last negotiation. There is FAR MORE AT STAKE this time and a great deal more strategy will be required in order that your organization is able to survive...and hopefully thrive...during your next lease term. 2. STRATEGY SESSIONS As we’ve mentioned in previous educational articles, it normally takes between 12-15 months of planning to either effectively renew one’s lease or execute a relocation to a new site for a tenant of 10-20,000 square feet or so (LONGER for larger tenants). However, under the circumstances, we recommend starting the entire process even earlier—giving yourselves an additional three months, or more, to delve into the really tough issues facing you in your next set of decisions. a. Hire your broker [Mihalovich Partners] and assemble your representative management team, first. b. We will help you to assemble the rest of a Strategic Team, including an architect/space planner; Team contractor; a furniture consultant; your IT specialist; and any other primary consultants necessary to launch a strategic study about your current and future occupancy needs. EVERYTHING about your office leasing needs should be on the table for discussion, since the magnitude of expenses have risen so dramatically since your last negotiation. c. HR will play an ever more critical role on this next lease. Careful examination should be made, not only of current and prospective employee home-locations, but also to perform a study to detect employee sensitivities to relocating...to either “suburban” areas of San Francisco, or to outlying counties...or potentially out of State. d. Telecommuting/hoteling/”hot-desking” should be explored. To what extent, if any, could your organization “export” its full-time and/or part-time employees to either work in the field and/or at home. It may become feasible, with rising rental rates, to build out and furnish work spaces in home offices—potentially to even contribute or pay the entire cost of retrofitting an employee’s home to accommodate a work space. Parking
  2. 2. TENANTS: HOW TO SURVIVE THE BIG UGLY By Dan Mihalovich, Mihalovich Partners Page 2 of 6 and transportation costs should be considered as well as the organization’s carbon “footprint”. 3. FURNITURE Tenants/clients are relieved to know that we’re here to assist you with RENEWAL negotiations....not just to orchestrate the competition for your business amongst several outside building owners. Your current landlord must compete for your business, too. Early on, during these strategy sessions, the conversations may focus on what you know best—the space you currently occupy—with all of its benefits and challenges. BEFORE assuming that the existing space is too small or that it can’t possibly be renovated to accommodate additional growth....let your team explore all the possibilities: a. Fact-gathering has to be done very early on. It may turn out that buying ALL NEW furniture and phasing a renovation of your space, while you occupy it, may be a LOT cheaper than relocating. You simply won’t know if you don’t do your homework. New furniture systems may be more efficiently layed out than when you last shopped systems. b. Given a choice between new furniture systems and keeping the old, but relocating to an inferior location, your management team and employees may opt to renew and “refresh” the space. You may explore “green” systems, as well as “green” paint and carpet tiles. c. Explore the democratic nature (or lack thereof) of your organization. You may decide to demolish some or all of the private offices in favor of creating more efficient space—adding more people without taking more space—opening up the light and views to more employees, too. d. The new lease—even a renewal—is a good opportunity to purge old files and examine all storage capacities and efficiencies. Off-site storage should be examined. Can more office space be created within your premises by creating either central files and/or taking storage off-site? Is condensed filing an option, even if it takes adding structural elements to the floor/walls/ceiling, if it saves office-space rent? New furniture systems are more efficient, all-around. They are built to handle “modern” filing; new telecom equipment and power; and can generally be moved within the office with greater ease than the old systems. Remember, we are planning for the future, too. In rising rental rate markets, one should maintain as much flexibility as possible. 4. OPERATING EXPENSES AND TAX ASSESSMENTS Long before your lease is due to expire (as we recommended, above), in your strategic assessment of your current building, your broker [Mihalovich Partners] should review the history of operating expenses and tax pass throughs from the landlord. Each and every building you will consider during the landlord-
  3. 3. TENANTS: HOW TO SURVIVE THE BIG UGLY By Dan Mihalovich, Mihalovich Partners Page 3 of 6 “contest” for your business will provide us with their operating expenses....past and projected; and we can verify the tax status, the currently assessed value of the property. a. With many months still running on your lease, it will be time to close out any “old” issues with the landlord before getting on to the “new”. Have you been overcharged for operating expenses all these years? How do you know? Did you ever exercise your right to audit the landlord’s books? We have a new article for you to read on this topic...but suffice it to say that you need to “square up” with the landlord and collect on any overcharges before entering into renewal discussions. b. Under Proposition 13, your landlord’s real estate taxes and, therefore, their billings to you, should not have increased more than 2%/year during the lease. Noting that your building may have recently sold, however, and will be reassessed to current “market” levels, the pass throughs could be HORRENDOUS. Judging from the recent purchases of buildings from EOP by Morgan Stanley, many of those tenants may see $5.00/square foot/year increases in taxes—and for NO incremental “value” to the tenants! c. Understanding and quantifying your CURRENT building expenses, and the forecasts, will lay the ground work for your team to assess all of the competing buildings in our comparison matrix. The grass may not be greener, folks, as ugly as it may appear in your current building. Total expenses may be a LOT more expensive—and the ensuing pass throughs—at other buildings. The PROCESS we lead you through will ferret it all out. The operating expenses and tax bills are just a couple of the many line item budget points for us to consider—-as we calculate your projected TOTAL OCCUPANCY COSTS. 5. THE ARCHITECT’S JOB: WHAT ARE YOU AFTER? EFFICIENCY? Plan, plan, and plan some more, as we described above. It cannot be overstated at this time and in this economy. There is far too much money at stake. In fact, your business is at stake. The Tenant-Team Architect will assist us in many ways, not the least of which is to interview all key management team personnel to produce a working-document: “The Program”; your space needs, as defined by YOU and told to your skilled architect/space planner. Your current space, if at all a possibility for renewal, should be carefully examined by your architect to explore any and all productive ideas for renovating to create additional efficiencies—all juxtaposed to your Program. Your architect will likely “see” opportunities that the rest of us cannot. a. They will also examine the way you do business. How do people and traffic flow in your space? Are the current and projected adjacencies appropriate? b. What are you losing, if anything, being on more than one floor?
  4. 4. TENANTS: HOW TO SURVIVE THE BIG UGLY By Dan Mihalovich, Mihalovich Partners Page 4 of 6 c. Could it make sense to departmentalize and locate a “support” or “service” group on a lower floor? In a nearby building? In a suburb? Can your IT people support such a split? Will morale allow it, even if the economics make sense? d. What flexibilities are there in your Program? These areas should be well defined, if possible, since many a landlord in this tightening marketplace will be quite rigid about offering expansion or contraction options. How TIGHT can you manage, if you feel compelled during negotiations to gravitate toward LOWER square footage alternative sites? Your architect will need your direction on these fronts, to be prepared to react to highly expensive construction costs/higher rental rates. e. Examine after-hours usage. In our experience, the vast majority of building owners do NOT know how to calculate their actual costs for providing after-hours HVAC service, beyond the basics of the cost of union labor to run the system. Power calculations are complicated, but we want to ensure, at a minimum, that you’re only charged at-cost....without markup. So, most often these landlord charges are arbitrary. Your architect and contractor should explore ways to create more efficient systems within your premises...all to minimize the extraordinary costs of after-hours occupancy. Using just three hours of “extra” air conditioning per day, at, say $150/hour, would cost you over $540,000 during a five- year lease. Can we save some money...and energy? 6. NEGOTIATE. THEN NEGOTIATE SOME MORE. THEN...WELL, JUST HIRE US. If you’re a tenant of size (in San Francisco that generally means greater than 10,000 square feet), you’ll still be respected by most of the landlord community—in spite of rising rates, etc. Most of you, though, do not live in the world of negotiating as we do...and it’s not only OK to entrust us with this fiduciary responsibility on your behalf....you should find great comfort in doing so, knowing that our Principal, Dan Mihalovich, has handled over 200 representation assignments in his 26 years in the San Francisco leasing community. As you’ve read this Editorial, written by Dan, and reviewed his 40+ letters of recommendation, do you get the sense that we’re on to something important—tracking these issues, trying to prepare you for your upcoming project? NEGOTIATING the business terms and lease will be “the meat” of it. We will have you simultaneously pursue AT LEAST three buildings, if not five....including a renewal, if possible and desirable. Do we need all five to meet the best of the best of terms in order for your project to be successful? a. Only one alternative, assuming that ALL of your short-listed buildings are serious contenders, needs to be the “perfect fit”. After all, you will sign only one Letter of Intent, not more, in the building where you decide to spend your future.
  5. 5. TENANTS: HOW TO SURVIVE THE BIG UGLY By Dan Mihalovich, Mihalovich Partners Page 5 of 6 b. The most aggressive, straight forward, eager and forthcoming landlord usually rises above the rest fairly early in the process. However, one must keep one’s options open...until YOU are ready to make a commitment. Our letters of intent are usually more thorough than any of our competitors. Why? There are scores of business issues, and the purpose of a Letter of Intent is to flush out and identify ALL of the important business issues....leaving the balance of LEGAL issues to be reviewed during lease documentation. We do NOT “bury” or defer important points to a later date after LOI execution, when much of the leverage is diluted. LEVERAGE is paramount. Repeat. LEVERAGE is paramount. c. TIME, the availability of time, is paramount to creating a successful negotiation. DO NOT delay the entire STRATEGY process or subsequent processes because you think your lease expiration date is too far out...It’s NEVER too early to create the strategy we referred to above. USE THE EXTRA TIME to your advantage. We should not be rushed through this process. You’ll have ONE chance to have your transaction put together on time; on budget; and managed by us in the most methodical and productive way for everyone. d. ALL options will be considered for renewal and relocation sites, provided that you want to pursue a renewal or relocation within your building. Perhaps the expansion space you desire isn’t currently available through the landlord. OK. But we will pursue ALL options, including those which may become available through other tenants in your building. Your landlord may not be an interested party if the best deal is for you to pursue expansion space into another tenant’s space in the building! Be flexible. Be creative. We’ll explore all the options together. e. CREATIVE brokerage is paramount. We have dozens of examples to share with you. We’re here to save you lots of time and lots of money....no matter the market conditions. f. FOCUS from your broker is paramount. Unlike our competitors, we’re focused on a small number of deals each year—and we ALWAYS REPRESENT TENANTS, ONLY. g. It’s OK to BE DEMANDING. We’re used to it. We’re up to it and we’re ready to help you. WRITTEN BY: Dan Mihalovich President MIHALOVICH PARTNERS Tenant Leasing Services 655 Montgomery Street, Suite 810 San Francisco, CA 94111 T: 415-434-2820 C: 415-999-9244 F: 415-434-2830 E: dan@TheSpacePlace.net W: www.TheSpacePlace.net
  6. 6. TENANTS: HOW TO SURVIVE THE BIG UGLY By Dan Mihalovich, Mihalovich Partners Page 6 of 6

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