LAN Systems
 
November/December 2011

You are cordially invited to our Christmas Celebration.

Wednesday, December 14th 11-2

3079 Crossing Park

Norcross, GA 30071

Please RSVP 770 662-0312 or lauren@lansystems.com

  
We hope that you will be able to join us for our annual Christmas Celebration on Wednesday, December 14th from 11-2.  Come and enjoy good company, food and holiday cheer.  RSVP by phone or email.
 
On Thursday, December 15th from 6-8pm, LAN Systems and Microsoft are hosting a TechAmerica "Bash in the Burbs.  More information and registration.
 
Happy Thanksgiving!
Mary
Five Ways for Companies to Reduce Operating Expenses in Office Leases by guest author Don Travis   

 

For most companies, the cost of rent for their office or industrial space is the second largest expense after the cost of compensating their workforce. While rents in Atlanta either have remained steady or in many cases have declined throughout the Great Recession, going forward, one component of rent, Operating Expenses, could be a major concern for Tenants as inflationary pressures begin to take hold in the economy.

 Office Space

Many office leases are "full-service" leases meaning that all Operating Expenses at the building such as those for utilities, property taxes/insurance, and common area maintenance are included in the rent. Tenants, however, are usually required to pay their pro-rata share of any increases in Operating Expenses over a Base Year which is typically the year in which the lease term commences. This increase in Operating Expenses which is borne by Tenants is commonly known as a "pass-through" of Operating Expenses.

 

Outlined below are five (5) ways that Tenants potentially could protect themselves in their lease against a sizable pass-through in Operating Expenses which can operate as a somewhat hidden increase in rent.

 

  1. Evaluate Base Year.   Tenants should obtain from the Landlord a breakdown of Operating Expenses for the building for at least the past three (3) calendar years as well as a projection for the current year to understand the building's Operating Expense history.   Operating Expenses traditionally increase year-over-year in step with the overall inflation in the economy.  

While Landlords will generally establish the Base Year as the year in which the lease term commences, renewal agreements are often treated differently. Landlords may or may not readily agree to establish a new Base Year.

 

(a)    Period of Rising Expenses. During a period of rising Operating Expenses, Tenants should negotiate for a new Base Year which would be the beginning of the renewal term. Obtaining the new Base Year would eliminate any existing pass-through of Operating Expenses that the Tenant would otherwise carry into the new lease term.

 

Moreover, if a Tenant executes a lease or lease renewal agreement in the 4th quarter of a given year, then that Tenant should negotiate for the Base Year to be the following year to delay by one (1) year the impact of any pass-through in Operating Expenses.

 

(b)   Period of Declining Expenses. On the flip side, what if Operating Expenses have declined during the lease term? With some buildings, this has indeed occurred since the onset of the Great Recession as building valuations have declined precipitously which in turn has caused property taxes, one of the largest components of Operating Expenses, to decrease

 

If this were the case, it would be beneficial for the Tenant entering into a renewal agreement to retain the existing Base Year in the current lease. For example, if Operating Expenses in 2008, the original Base Year, were $8.00 per square foot and were projected to decrease to $7.00 per square foot in 2011, the Tenant would be well-served to retain its existing Base Year since the original Base Year, 2008, would offer the higher expense figure going forward. This would minimize the possibility of Tenant encountering a pass-through of Operating Expenses during the renewal lease term.

 

  1. "Cap" on Operating Expenses. Tenants should seek to "cap" increases in Operating Expenses at a building to no more than four percent (4%) per annum. Landlords may counter that some Operating Expenses such as utilities and property taxes are "uncontrollable" meaning that these expenses are outside the control of the Landlord and should not be "capped." At a minimum, Tenants should "cap" increases in "controllable expenses" which should be defined to include all Operating Expenses except for utilities, property taxes, and property insurance.  
  2. "Gross-Up" Operating Expenses. Some components of Operating Expenses such as utilities and janitorial expenses are highly "variable" in nature and are impacted by occupancy levels at the Building. Tenants should therefore insist that the Landlord "gross-up" Operating Expenses for the Base Year to the level that the Operating Expenses would be if the Building were operating at a 95% occupancy level.     Otherwise, a Tenant at a Building with 20% occupancy could incur a sizable pass-through which is caused not by rising prices but instead by an increase in the occupancy level at the building.     
  3. Operating Expense Exclusions. Tenants should negotiate a list of exclusions to Operating Expenses such as expenditures that are "capital" in nature. These capital expenditures could include a new roof or a building lobby renovation. This list of potential exclusions to Operating Expenses is too large to address here.    
  4. Right-to-Audit. Tenants should negotiate in their lease agreement a Right-to-Audit Operating Expenses to ensure that the pass-through of Operating Expenses is calculated correctly.

In conclusion, Tenants could incur significant liability through a pass-through of Operating Expenses and should therefore take measures to protect themselves in their lease agreements.

 

This discussion of Operating Expenses is for discussion purposes only. Tenants should retain legal counsel to review their lease agreement and have their counsel draft the appropriate language to protect themselves in this area.

 

Don Travis is a Principal of Travis & Associates LLC, a commercial real estate brokerage firm which focuses on representing its tenant clients in securing office or industrial space. Mr. Travis holds a B.A degree in economics, summa cum laude, from Vanderbilt University, holds a J.D. degree from the University of Virginia Law School, and holds a M.B.A. degree from the University of Georgia Terry School of Business.   Contact Don at: dtravis@travisandassoc.com

Requiem for the Blackberry

 

A recent Blackberry outage caused lots of withdrawal pains. The blogs and message boards are filled with comments defending and vilifying Research in Motion (RIM) Blackberry's creator. Network interruptions are inevitable as we have seen with Sony, Google, Microsoft and Netflix. Someday we may have uninterruptible networks, but the departure or threatened departure from Blackberry seems to be more about the availability of multimedia, cooler mobile devices than a network disruption.

 

For years Blackberry has been the choice in mobile devices for corporations. You can argue that this is because they are more secure because of how RIM handles encryption or the limitation of online features. Certainly iPhone and Android users can be more social online because their devices support many more apps. They can access Facebook, Tweet, Farmville and Angry Birds from anywhere that they have a signal. The available apps make it easy to stay connected. But with the convenience of being online all the time, some sacrifices are made in being secure. If you want a real scare, google "mobile device hacking" and read some of the recent hacking successes and access your vulnerability.

 

It really comes down to which device you are most comfortable with and how easily you can change. Corporations like Blackberry for many reasons including solid systems and the ability to regulate users. Often corporations don't change their infrastructure because of the expense of installing new equipment and training employees to use and support the new system. Rationale always states the benefits of one technology over the other to support the choice, but equal arguments can be made for practically any technology choice.

 

As interesting and amusing as it is to read the comments from the technology aficionados, it is as important to balance the arguments with facts. Facts may not change the product choices we make - that's a subject for another blog - some products will win and others will lose based completely on preference and little on the superior technology. Blackberry once led the pack but is now struggling for market share in a sea of products that offer more. The loyal followers of Apple and Google are happy to share their opinions on why their choice is the best and the features that make mobility fun and efficient.

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