When tenants go out looking for new office space, often they're impressed by a building's appearance, location and rent. But they aren't aware of a landlord's financial situation, the performance of building systems, the likely trend of operating expenses during the next five or 10 years, neighborhood problems and other factors which could turn what seems to be a good deal into a bad deal that would hurt your company and your career.
To protect your company, you need candid, complete answers to 6 key questions when you look for office space:
1. Does the building maintain quality management?
You've got to go beyond the well-maintained corridors to determine whether the landlord can be counted on to honor the terms of a lease and be a good partner during the lease term. A seasoned Tenant Rep will for instance assesses the satisfaction of existing tenants and report how the landlord responds to routine and not-so-routine requests for maintenance, alterations and special services. Does the landlord respond promptly and deliver fair value? Do they see every request merely as an opportunity for revenue? Is the service adequate or does it take many repeated requests to correct a simple problem or achieve agreement on how to proceed with a desired alteration? One tenant moved into a Class A building that had just been completely refurbished. The building has other world-class tenants, and the landlord is a highly regarded institution. Yet every request this tenant has made for information and services has involved frustrating delays -- sometimes for months. Had they known how difficult and costly it would be to manage day-to-day operations at this building, they might have gone elsewhere.
2. How does one building compare with others?
This requires a thorough assessment. Your Tenant Rep should find out how
much debt a building is carrying, how the operating expenses and
management fees at a building you're interested in compares with the
operating expenses at competing buildings, whether critical maintenance has
been performed or deferred (which would mean much higher operating
expenses in future years). If a building has serious financial problems,
working conditions could be compromised by poor air quality, unacceptable
temperature swings and inadequate security. One office tower has a world-
class reputation, but because maintenance was neglected for many years, it
actually rated as less than a Class B building. A major effort was made to
rehabilitate the structure -- HVAC systems were upgraded, the facade was
refurbished, and building facilities were redone or upgraded at a cost of
many millions of dollars to existing and incoming tenants. The building
certainly is a better place now, but what tenant would want the soaring
operating expenses?
3. What's the physical condition of the building?
There are plenty of factors, difficult for a tenant to see, which affect the desirability of a building. For example, some floors might be offered with HVAC capacity suitable only for an open floor plan. Virtually any use of closed offices, as are typical, would require so-called "supplemental HVAC" at your company's cost. Buildings which seem quite modern could have elevators with unacceptable wait times. Should an office building be plagued by elevator delays and lapses in elevator service every day, tenants suffer tangible dollar losses as staff are gone longer than necessary from their offices, delayed by the elevators. A well known building was refurbished in the late 1980s, touted for its allegedly state-of-the-art building systems. In its new guise, the building attracted major law firms and financial services companies at top rents. After moving in, many of these tenants were immediately dissatisfied -- although most landlord brokers wouldn't tell you that. Nothing had been done to change the antiquated structure. In particular, the slab-to-slab height is too low, and employees often feel uncomfortable drafts from the HVAC system. It's easy for a tenant, touring a building, to miss signs of problems with structural integrity. For years, high winds caused excessive sway on the top floors of one well-known building. Many employees felt the effects of motion sickness, and some feared for their safety. Eventually, the landlord provided an adequate engineering solution, at substantial expense to existing and incoming tenants.
4. How do the nature of non-rent charges compare with other buildings?
Many deals appear similar when a lease is signed, but over time total costs tend to vary dramatically. Determining what costs your company is likely to face at a particular location must be studied. Items include but are not limited to: operating expenses, management fees, real estate taxes, overtime HVAC charges, supplemental HVAC charges, condenser water charges, tap-in charges, sub-metered electricity among other costs of buildings you're interested in.
5. "Hidden" drawbacks to a building's location?
Crucial drawbacks are often overlooked as tenants focus on obvious criteria like proximity to Downtown, Beverly Hills or a highway interchange. For instance, an institutional tenant sought reasonably-priced space for an important operation which involved people working beyond normal business hours. The tenant liked an older building that had recently undergone substantial refurbishment. It offered good light, a functional floor plate, adequate electrical capacity and a relatively low loss factor. Their visits during normal office hours left them with a good impression of the building and the neighborhood. They started preparing preliminary plans. Only their Tenant Rep explored their need for after-hours operation and told them about a nearby drug rehabilitation center. They had second thoughts. Additional research revealed that several adjacent buildings used extra-heavy night-time security including dog patrols to sniff out drugs. Since the tenant was not in a position to provide such security for their staff, they decided this wasn't a suitable location.
6. How would other tenants in a building affect its desirability?
It's reassuring to see that a building has Fortune 500 tenants, but you
need the right building dynamics, too. For instance, if you're moving into
a building with one or more tenants which occupy multiple floors, elevator
usage and wait times will be very much affected by inter-floor traffic. Your
Tenant Rep should advise you of this situation to avoid being in such an
elevator bank, to seek a dedicated elevator or other solutions. If you're
considering a building with a government entity, media entity or other high
profile tenant, you need to be well-advised about whether the landlord
maintains adequate security. You need to be further advised about the size
of other tenant's in a building and their possible need for expansion space.
We recently received a call from a big tenant whose landlord is interested in
giving their space to a bigger tenant and might not renew the lease.
Although this highly-regarded tenant wants to stay put and avoid the cost
of building from scratch their own highly-specialized facilities elsewhere,
the tenant might not have any choice -- a consequence of not adequately
assessing the long-term effects of other tenants before they signed their
lease.
As you might gather from these probing questions, candid and complete answers aren't likely to be forthcoming from a landlord broker because that would undermine tight relationships with landlords. Nor can adequate advice be expected from a good lawyer simply because the questions don't involve legal expertise. What's needed is expertise in real estate markets, expertise in building operations, expertise in landlord accounting practices -- and a policy of serving Tenants exclusively.
