The Reason Commercial Real Estate Rents Keep Increasing is Because Office and Industrial Construction Still Lags Demand in Orange County

1 million square feet of supply was delivered last year, yet only 231,068 square feet was under construction during the first quarter of 2016. Although development activity has improved in the past two years, construction activity and completions still cannot keep pace with demand and absorption. Local real estate professionals anticipate this trend to continue throughout this year, although several developments are due to be completed late this year and early 2017.

Much of the construction is happening in Irvine, where the 425,044 square feet 200 Spectrum Center project was completed in March. This walkable, WiFi-enabled campus with 40-feet-wide uninterrupted window line provides breathtaking views of the surrounding lifestyle. Right next door is 400 Spectrum Center, which is perhaps the most significant project to break ground in the first quarter, and is predicted to be completed by September 2017. Another notable project is The Boardwalk on Jamboree Road in Irvine, which will comprise of two, nine-story towers amounting to 537,224 square feet of premier office space, due to be completed next spring.

Signing a Lease? 7 Things to Expect from Potential Landlord

Often, tenants are unsure of the items that a potential landlord may be looking for. The below list should help you get prepared.

1)   Rental Application. Every landlord will require a tenant to complete a comprehensive rental application. Landlords need to understand whom they are leasing to. Landlords will need to run a credit check to verify the tenant is in good credit standing with other credit agencies, because in reality the landlord is lending you the space for a period of time. All landlords should run a credit check in order to protect their investment.

2)   Two Years of Tax Returns, Income statements, and Balance Sheets. Many landlords want to see the past history of a tenant. This can only be done by looking at the tenant’s past income statements and balance sheets and compare those with what was given to the Internal Revenue Service – also known as their tax return.

3) Current Financial Statements. Landlords will also want to review the “most up to date” balance sheet and income statement of a client to make sure the tenant is performing in an acceptable matter.

4) Articles of Incorporation. Landlords would want to see the Articles of Incorporation should the company be incorporated. The landlord wants to make sure it is a viable entity and can enter into a lease.

5)  A visit from your landlord to your current property. Many landlords like to swing by a client current office to get an idea of how he or she might treat the property. It’s important to make sure the tenant’s “current” property is in a neat and tidy fashion in order to give the landlord the necessary comfort level that you will take care of his or her property as well.

6) Potential references. Some landlords will require references should the company financial not be as strong as they would like them to be. If you are unable to provide references, this might be considered a potential red flag to the new landlord.

7)  Conversation with your current landlord. Many landlords will contact your current landlord to verify your payment history. This can be a tricky situation because if your current landlord would prefer you out of “his” property, he or she may provide inaccurate information. Most landlords complete their due diligence before entering into a lease. Landlords would prefer to have a tenant that they feel comfortable with, than to sign a lease with a tenant who could be a potential nightmare for years to come. As a tenant, it is important to live up to your obligations when you say you will live up to them.

I heard of a story where a tenant and landlord come to an agreement and the next step was for the landlord to cash the tenant first month rent and security deposit. The tenant kept stalling and asking the landlord to wait until some specific contingency had expired; the tenant kept moving the date where the landlord could cash the check, which inevitably frustrated the landlord enough to where he canceled the lease. The tenant was in a world of hurt after that circumstance. We believe the reason the tenant did not want the check cashed was that the company was cash poor until a specific date, however no one ever confided in the landlord to tell him the real situation and because of that lack of communication, the company lost the space which dramatically affected its future business operations.

Being prepared and knowing what to expect will greatly speed up the negotiations and everyone will win.

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty Specialists

When is Too Much Too Much?

Negotiation, that is. Let’s start this off with the understanding that my career has always been to represent my client’s fiduciary interests in commercial real estate transactions. My goal is to get the best terms feasibly possible at all times.

When negotiating something as important as a commercial real estate lease or purchase transaction, all parties want to maximize their positions. It just makes sense. Both sides need to assess the market and determine who has the most negotiation leverage in that particular market cycle. Sometimes it’s the tenant/buyer; sometimes it’s the landlord/seller. If there are abundant competing properties, it’s pretty obvious that the buyer or tenant carries the most leverage; the inverse is a lack of availability, which creates leverage for the seller or landlord.

One also has to understand that if the space is unique (but not in a positive way), the property owner will need to make concessions they would normally not want to make. If the property user had some unique requirements, it might be forced to look at a finite number of properties, thereby decreasing the amount of leverage it had in the marketplace. I recently worked with a client who needed above-standard parking in a market where the majority of the buildings provided standard parking. We had a few opportunities to choose from, and had to negotiate nimbly on the few properties that could in fact work for us.

Another consideration that needs to be understood and addressed is the creditworthiness of the property user or tenant. Landlords rarely like to get under contract or sign a lease with a user that may not be able to close or may not honor the full lease term. If a company’s credit is not adequately strong, the tenant may need to increase its security deposit, provide a letter of credit, reduce its rental concessions from the landlord or any combination of the above. Having shaky credit can definitely limit your negotiation leverage.

Regarding security deposits, a client I was representing was asked to provide more than eight months’ rent as a letter of credit or cash security deposit in order to secure a particular property. Understandably, the tenant did not want to provide said security deposit, yet they forwarded me an email from their existing landlord stating that should they desire to renew, they would need to provide personal guarantees (in other words, an increased security deposit).

Still another consideration is how much one should ask for during a negotiation. That is impacted by how many people are looking at or negotiating on the same property. If there are few opportunities for people to consider, the desire of wanting a seemingly endless amount of tenant improvement dollars, free rent, moving allowances, etc., may be unreasonable—and flat out foolish should one really want to secure that particular space. This is where being knowledgeable and reasonable may in fact secure a building that other tenants or buyers desired, as well.

Timing has a lot to do with knowing how much to ask for during a negotiation. If one has not allowed themselves more than enough time to research the market, negotiate and actually play the negotiation game, the ability to ask for excessive beneficial terms may not be realistic. As with many things in life, it is extremely important to plan well ahead of an actual need.

There are many factors to consider to determine “when too much is too much,” and a solid strategy needs to be developed in order to achieve the best terms possible.

By Randolph T. Mason, CCIM, SIOR, Managing Partner, Commercial Realty

In Tightening RE Market, Quick Action is Key

This current commercial real estate cycle is continuing to heat up. Available product across the board is decreasing, rents are increasing & concessions are decreasing and those companies that react quickly often reap the rewards.

In order for a potential tenant or buyer to feel comfortable about the decision they make, early market research & education is paramount. Generally, no one wants to make an important decision without adequate information.

Comfortable decisions are made after educating oneself in the specific area that must be decided upon. In real estate, markets can change very quickly. I’m reminded of an incident where a tenant was reviewing a property brochure that was only two months old, yet the lease rate had increased by 20 percent within that two month period.

Once suites started leasing up, the vacancy rate declined and the rents went up: simple effect of supply and demand.

Fortunately, my client and I started the education process early on so when an actual decision needs to be made, they would be educated and feel comfortable about the decision they make. As the market continues to tighten, astute investors and tenants will need to react quickly when an opportunity arises.

 

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty

Ouch, Wish I Had Negotiated These Terms in My Commercial-Property Lease

Three clauses that are very important in a lease include the holdover provision clause, the relocation clause and the sublease clause.

Under the holdover provision clause, the landlord is allowed to charge some rental amount that is above the last month’s rent the tenant paid during the last month of its lease term should the tenant stay in the property after its lease expires. I have seen these clauses as high as three and four times the last month’s rent. A typical and fair amount would be approximately 150 percent of last month’s rent. I like to negotiate this provision up front with a term that is more reasonable such as 125 percent of last month’s rent for say, three months and then the rent bumps up to the 150 percent number.

If a tenant is contemplating relocation, and his new space will not be ready upon by the time of his current lease expiration, this increased rent does not penalize him excessively in order to stay a few additional months.

Regarding the relocation clause, a landlord is allowed to relocate a tenant, usually to accommodate a larger tenant within the property. While this is not an unreasonable request for a smaller tenant, it can provide some unplanned inconveniences. The tenant may be asked to relocate during their busy season, which could greatly impact the tenant’s business. Often, negotiating the removal of this clause is typically not difficult provided it be done upfront, prior to the lease being executed. It’s an important clause to attempt to strike in order to mitigate any tenant disruptions. Remember, the landlord always has the option of approaching the tenant and asking him to relocate. A landlord usually pays all of the tenant’s costs due to such relocation.

The sublease clause is an important clause that benefits the tenant should the tenant need to get out of his existing lease obligation. This clause should be carefully reviewed by the tenant and his counsel in order to craft a clause that works for all parties. Generally speaking, a tenant cannot sublease his space without receiving the approval from the landlord, which should not be unreasonably withheld. Also, make sure the cost to the landlord is reasonable. I’ve seen clauses stating the landlord may charge the tenant all of its costs, which was very vague and could get rather expensive. Also, if it is a multi-tenant property, or the landlord has been in discussions with a prospective tenant, it should be allowed that the tenant could still sublease to that prospective tenant.

It is not uncommon for a landlord and tenant to split any of the profits that the tenant may receive from the new subtenant. The landlord should respond to tenants’ requests within a reasonable period of time, which should be no longer than 30 days after landlord’s receipt of a request for consent to a proposed transfer. If it takes too long to get the landlord’s approval, most likely the replacement tenant will go elsewhere.

There are many items in a lease that need to be scrutinized in order to have a fair and equitable contract between the tenant and the landlord, and a competent real estate attorney is a person to help craft those changes.

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty Specialist

7 Ways for Tenants to Win in a Competitive Office Environment

The office landscape in the Orange County, Calif. market is making its long-anticipated shift. While this is a clear and positive reflection on a recovering economy and local job creation, this shift is impacting both landlords and tenants in very different ways. As supply continues to dwindle in many of the sub-markets, tenants are left with fewer properties to consider and as a result, less clout in office lease and sale negotiations, leaving landlords with the leverage.

In this competitive office setting, it’s important for tenants to be proactive and prepared when considering a move, expansion or lease renewal. Listed below are a few important items that every tenant should review to aid in their chances for a favorable relocation.

1) Space Programming: Know your space needs (headcount, parking, product type) and your desired configuration and finish (contemporary vs. open plan). Time and money spent during the transaction cycle developing plans will put you at a competitive disadvantage with other prospective tenants.

2) Create a Budget: Anticipate -fit costs and funding challenges. Contemporary, open-plan up-fits cost $50-$55/ square foot whereas most building owners will only spend $25-$30/ square foot, leaving a $25/square foot funding gap. Tenants should know where they are willing to give. A landlord may choose another potential tenant based upon a less-costly up-fit.

3) Plan Well Ahead: When renewing in place is not desirable or possible, tenants should enter the market 12-15 months in advance of their lease expiration (30-36 months, if a user seeking 50,000+ square feet) and should be prepared for the possibility of committing to a space several months in advance of a current lease expiration. With planned and proposed development projects taking 18-36 months to deliver, tenants can find themselves boxed-in, needing to renew short-term or move part of its operations to another location.

4) Get Ready to Date: In a tight market, landlords have the luxury of interviewing prospective tenants and selecting those who best fit their risk profile and their asset’s needs. Tenants should have up-to-date financials and business plans available and be ready to share and defend them.

5) Be Decisive: Tenants thinking that they can take their time to consider multiple options, leverage every last nickel of savings, and navigate a lengthy internal approval process, will likely find themselves needing another solution.

6) Do You Have a Plan B?: Where possible, every tenant should keep a ‘plan B’ in their hip pocket, whether it is to renew in place, acquire space in an alternate property or even to move to another sub-market.

7) Get Help: One final word of advice is to leverage the knowledge and resources of a local real estate professional. This will not only make you an educated consumer, it will enable you to stay focused on your day-job while your advisor navigates these now-tricky waters.

Although the office market is shifting away from the tenants favor, don’t despair. Have heart that it remains, and will always be, an open and dynamic marketplace. Great values and opportunities exist and new ones are evolving every day. With a blend of preparedness, focus and flexibility, you can both discover and take advantage of opportunities when they materialize.

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty Specialist

Strong Purpose Business Strategy

Purpose-Led Transformation is a new approach to driving strategic transformation, innovation and growth. Harvard Business Review Analytics released 91% of respondents identified that their company has or is working on developing a purpose. A strong purpose focuses the business strategy on delivering value and meaning for customers, employees and other stakeholders. Companies that are able to infuse goals into their business strategy, operating model and value chain have seen significant results and increasing profits.

www.crscre.com

 

Information collected from:

EY- The Power of Purpose (2/5/15)

(Source: http://goo.gl/JRdKMJ)

When Does It Makes Sense to Purchase Your NNN Building?

By Randolph T. Mason, CCIM, SIORThe decision to buy your own building is a question that plagues business owners and investors ona consistent basis. Is there ever a correct answer to this question? I believe there is. If a business is going to be occupying its own building, purchasing versus renting often makes sense if the business is fairly stable with its growth projections. If a business has been the same size headcount and occupancy space-wise for some time, looking at purchasing your own property could warrant some investigation. I recently represented a buyer in the purchase of their facility. They had been at a fairly stable head count for some time and buying the property was less expensive than renting.
When the monthly purchase costs are similar to monthly rental expenses, and the buyer has the down payment, clearly this could make sense. Currently, there are many tax advantages to owning your own real estate. The owner is able to deduct the interest expense along with all of the other costs of ownership. In leasing, all of the expenses are deductible, yet no equity is realized. It always makes sense to discuss this opportunity with your accountant prior to finalizing any transaction. When clients have monthly or quarterly meetings with their accountant, projections can be analyzed, cash on hand can be assessed and discussions determining a long term investment should take place.

The security one receives by owning their property should not be overlooked. Landlords can increase lease rates, sell their investment, not renew tenants, as well as a myriad of other scenarios. Running your business is challenging enough; why add another level of uncertainty to the mix if it’s not necessary?

If a company is on a dramatic growth spurt, is a new business or simply needs the affability of a lease, I generally do not recommend purchasing. Having relative flexibility in turbulent times is an important feature of a lease. It always makes sense to look at your long term vision when considering these alternative decisions.

Simple Steps on Closing CRE Escrow Fast

By Randolph T. Mason, CCIM, SIOR, Partner, Commercial Realty Specialists www.commercialrealtyspecialists.com

In today’s fast paced commercial real estate market, investors of commercial real estate should be prepared to move quickly should a good opportunity present itself.

One of the biggest questions any seller will have is “can you afford my property?” I believe it is extremely prudent and productive for a serious buyer to get pre-qualified by a lending institution. There is some up-front work that is required, but in the long run it will save time and allow a buyer to jump on excellent opportunities.

In order to open and then close a commercial real estate escrow, a simple, yet effective piece of advice is to know what your investment parameters are. You can waste a lot of time pursuing many different types of product and then in the end, not pull the trigger on any of them. If single tenant net industrial product is your cup of tea, pursue that product. If it’s apartments or office buildings, pursue those and become an expert on that specific product. As an expert, you will know when you have come across an excellent investment opportunity.

Always remember that if it is a deal, it probably will not last long. One must be ready to make fast decisions in a timely manner. There is a saying that says time kills all deals. That’s another reason for having your financing all lined up, or find sellers that are willing to carry paper.

It is always important to have an environmental report done in order to assure the new buyer that they are not buying someone else’s problem. While most often the lending institution will require their own inspection company, it does make sense for a buyer to have relationships with various environmental consultants. If environmental problems do raise their ugly head, it may make more sense for the seller to remediate any problem and then sell it.

After a property has been identified and an initial offer presented, it makes sense to have a preliminary title report done in order to uncover any hidden skeletons that could slow down the transaction. Are there any recorded leans that the seller is not aware of? These items can delay an escrow unnecessarily.

I find that sellers who have taken the time to complete a property information sheet prior to going to market will save an enormous amount of time for both the buyer and the seller. If full disclosure is done up front, transactions can close expeditiously and all parties will know the true state of the property.

Should there be multiple tenants within the property, it is advisable to request the estoppel certificates and leases up front so due diligence can be done expeditiously. If there are any open items that need to be addressed, the estoppel certificates should help uncover those areas.

The purchase and sale contract is another important item to consider. If the buyer is able to use their own contract, it should address areas that are of importance to the buyer. One needs to be aware that many sellers prefer more of a standard contract that is considered fair to both the buyer and the seller.

With the commercial real estate market heating up due to the availability of capital and low interest rates, it makes sense to be prepared for the right opportunity when it comes along.

Why Would I Ever Use a Representative to Renegotiate My Commercial Lease?

By Randolph T. Mason, CCIM, SIOR, Managing Partner for Commercial Realty Specialists

So, this article was inspired by various clients. It’s a funny thing. I find that attorneys tend to utilize the services of a professional negotiator more often than other business owners. This got me wondering, and helped guide me through questions that needed answers. A client of mine broke it down very simply. “Why would I ever want to negotiate against somebody that negotiated commercial real estate transactions on a daily basis and fed their family utilizing skills, strategies, and tactics that I use at best once every three or five years or so.” An attorney explained that during a divorce, a client who is trying to achieve the most favorable results in the negotiation always needs to have their own representative in the negotiations to ensure the client’s best interests are being served.

Without proper counsel, one party can be taken advantage of by the other side. I find that there is a strong similarity between what an attorney does for his clients, and what we do for our exclusively represented clients. In any negotiation process, both parties need their own separate specialists in the field of what is being negotiated, and that is where professional negotiators come in.

When using a representative to renegotiate your commercial office or industrial space, you need to have leverage in the negotiation. If the landlord believes, or knows you want to stay in your existing location, there will be no serious negotiation taking place. The landlord has you. Alternatively, if the tenant knows that the landlord does not want to lose them as the tenant, the tenant has negotiation leverage. If the tenant believes that the landlord is ambivalent, or has other opportunities to backfill the space, the landlord is in a position of negotiation leverage. By having an advocate on your side of the transaction, this helps facilitate strategic discussions to maximize the best terms possible.

As a property owner myself, I thoroughly enjoy negotiating directly with my tenant. I am able to ask questions and receive responses that a well-trained and astute representative would never give me answers to. It’s almost as if you’re playing poker with a finely trained gambler. Having alternatives is also an excellent strategy in negotiations; whether actual or perceived. Alternatives create leverage, and leverage helps create success in a negotiation.