TALF loans may provide reprieve to debt-strapped landlords

The commercial real estate industry has been operating for the last few quarters with a great deal of trepidation as a record amount of mortgage debt is getting ready to be called due in next couple of years. And the lending industry seems to be in no mood to discuss re-financing.

According to reports, the rate of loan delinquencies in the commercial real estate market is expected to double by the end of 2009 and continue to climb well into 2010.

However, the federal government may step in to offer the industry a reprieve and at the same time, end speculation that the collective calls on debt would drastically alter what appears to be an improving demeanor on Wall Street of late. For months, real estate industry professionals have been calling their looming lending issue "the second shoe" and the overall value of the market has fallen beyond 30%.

The help would come in the form of a modification on TALF (Term-Asset Backed Securities Loan Facility) loans from three-year terms to five-year terms. The longer periods would provide landlords the bridge financing they need to get through what appears to be a still shaky road ahead.

Wall Street is highly anxious for the TALF adjustment because experts believe that commercial real estate is an attractive enough investment to revitalize the Commercial Mortgage Backed Securities (CMBS) market, which in 2007 amounted to $230 billion but by the summer of 2008, dropped to zero.

The federal government is hesitant to make the change for fear that longer term loans would perpetuate inflation because of the additional money sent streaming into the economy. Plus, it just recently increased the loan terms from one year to three. In contrast, commercial landlords and many on Wall Street believe that the adjustment will shake loose the lending logjam and re-open up the capital markets.

TALF loans have already been involved in securitized car loans and credit-card deals but to not very much fanfare. The CMBS market, however, could change all that, as its value is larger than car loans, credit-cards and student loan securities combined. Thus, it seems all of Wall Street is pulling for the commercial real estate market.

In the midst of all the TALF loan extension lobbying, landlords are scrambling to shore up vacancies in their buildings and many developers are fighting to keep construction projects moving while some are simply bailing out altogether allowing their projects to go into receivership.

Tenants, however, are finding a terrific advantage to the plodding market, as concessions have become increasingly aggressive. And even if the TALF loan alteration becomes a reality, the tenant's market should continue well into 2010.

 
Current market conditions demand ongoing landlord scrutiny

Because of the array of tenant concessions accompanying leases in today's market, and its general inactivity, landlords will begin looking for alternative ways to recoup costs. And that means tenants need to be aware of how building operations and different facets of occupancy translate into ongoing costs.

One of the more prevalent instances of building operating costs catching tenants by surprise involves standard HVAC service and other forms of general building maintenance. Carpet cleaning, repainting common areas and window cleaning are typical maintenance items in most buildings. However, if these items are not specifically defined in a lease, the door is open for landlords to consider it an "above standard" expense and subsequently charge extra for it. Make sure there is no vague lease language relative to repairs and standard building upkeep.

The square footage of your space is directly related to your monthly rent and pro-rata share of expenses, so it is critical that you ensure your office is measured according to objective standards. The Building Owners and Managers Association has created extensive benchmarks for measuring commercial real estate, and they include a litany of specificities that are often misinterpreted. Quite literally, you have money riding on the calculations; thus, it pays to double check square footage before signing a lease or accepting your space.

If your office is in a suburban office park or other commercial center with shared exterior amenities, your share of common area taxes needs to be consistently scrutinized. Walking paths, seating areas or gazebos might also require vendors to maintain them, providing yet another pocket of surcharges needing to be monitored. While the tax rate itself is not controllable, how the landlord handles your allocation, however, can significantly impact your occupancy costs.

The economy may soon experience an increase in inflation as the federal government continues to pump money into the system. Because landlords often base annual rent escalations on the consumer price index (CPI), which will jump as a result of inflation, your rent could increase substantially. Therefore, it is important that a cap be put in place to limit annual rent escalations. The best way to do this is by pushing for fixed percentage increases each year, which are typically negotiated around 2-3 percent. While the presence of a CPI-adjusted escalation is fairly common, it may soon become landlords' defacto escalation standard given the financial benefit it could have for them should inflation jump as expected.

Inflation can also impact the cost of services to the building. Thus, landlords may begin to push those increased costs on to their tenants through higher than expected increases in operating expense pass throughs. Similar to capping annual rent escalations, you should also strongly advocate for a limit on how much of those controllable costs can be passed through to you.

Also relative to your fellow tenants (or lack thereof), is the concept of "grossing up" your base year. The base year is used as a measure against which future operating expense pass-throughs are calculated. This recession has caused vacancy increases in a number of buildings, so if your base year is one where building operating expenses are abnormally low, it can lead to a serious uptick in pass-through amounts when tenants move back in and costs accelerate. Grossing up calls for the landlord set your base year on costs assuming a stabilized occupancy such as 95%.

Finally, the right to audit a building's operating account is a very valuable lease term for a tenant, as it can help you uncover evidence of incorrect or misleading annual pass through charges. A solid lease will present in clear terms the portion of the building's expenses for which you are responsible. Ensure that your portion remains consistent, and if a sudden jump does occur, react to it using your right to audit.

Today's industry conditions may have enough impact to change the face of office leasing for quite some time. That is why tenants have to remain focused on sustaining their business and keeping operating costs under control. Use you tenant rep as a guide both during lease negotiations and as an ongoing advisor when your landlord tries to recoup more than you are contractually required to pay.

 
Adobe sees return on green investments

While many of the nation's commercial real estate developers, and the business owners in general, remain on the fence about the return on sustainable building investment, one of the nation's leading software companies has climbed down on the side of the environment. And in only a few years of being on that side of the fence, the grass looks much greener.

Adobe Systems Incorporated, makers of the ubiquitous Acrobat Reader, Photoshop and an array of print and web authoring applications, has no fewer than three buildings certified LEED Platinum at its San Jose, CA headquarters, which consists of 1,000,000 square feet. The company's San Francisco facility is also certified Platinum.

Even in a state much of the nation considers the hotbed of sustainable business initiatives, Adobe's accomplishments are attracting a great deal of attention. It wasn't always that way, however. Three years ago, the sprawling, technology-rich Silicon Valley had only one LEED certified facility. Today, there are more than 118 properties pursuing and possessing LEED certification. According to leadership at Adobe, representatives from almost all 118 projects have scheduled tours of Adobe's headquarters.

Adobe considers a large-scale server virtualization project as one of their trophy green efforts. Virtualization is simply a way of partitioning a single server into multiple, virtual servers that can concurrently manage several computer operations while occupying less physical space and requiring less power. As a result, Adobe was able to substantially cut its utility bill. The company received additional help by the California Public Utilities Commission through a rebate granted for every standard server that could be replaced by virtualization.

The company also implemented a number of grassroots efforts. Led by a company appointed "Green Team," Adobe began mandatory double-sided printing on its busiest printers, cutting paper usage by just under 50%. Fax machines were programmed to send directly to computers and employees were encouraged to quit drinking bottled water, allowing the company to reduce plastic waste and the cost of the water. That initiative alone netted $270,000 in annual savings.

Additional green projects currently being considered for implementation at Adobe include solar power, more server virtualization and a 2.4 megawatt natural-gas-fired fuel cell installation that in theory could reduce the company's dependency on public grid electricity by two-thirds.

Throughout the country, LEED projects remain a priority for many companies, despite the higher costs of materials and challenging certification requirements. Since the LEED program's inception ten years ago, 14,000 properties have obtained a level of certification from the U.S. Green Building Council. However, Silver, Gold and Platinum designations are limited to about 1,270 projects.

Power usage was Adobe's primary reason for implementing so many energy-saving initiatives, even before LEED became the standard it is today. After noticing expensive power spikes when all building systems would turn on at the same time each morning, the company began system start-ups in phases to eliminate costly jumps in wattage.

Since 2001, when all energy saving efforts and state and federal rebates are taken into account, Adobe has seen a 148 percent return on their green investments. That sort of return is certainly much easier to obtain for a company of Adobe's size. Still, it should be noted that the company did use a number of widely available technologies and took very basic steps within its operations to make that impact, like configuring parking garage fans to turn on only when needed according to carbon monoxide levels instead of running all day, every day. That change resulted in savings of $90,000 per year.

Solar arrays, sever virtualization and giant fuel-cells may not be very realistic methods by which to go green for most companies. However, there is a good chance that somewhere in most offices, there are desk-lamps left shining, a trail of half-empty water bottles and a stack of printed memos that never made it to the meeting because someone misspelled the boss's name.

 
The Miller Richmond Company represents National Electronic Attachment, Inc. in 17,000 square foot lease

The Miller Richmond Company is pleased to announce that it has represented National Electronic Attachment, Inc. (NEA) and its sister company, Medical Electronic Attachment, Inc. (MEA) in its new lease of 16,987 square feet at 3577 Parkway Lane in Norcross, Georgia. NEA and MEA, who recently developed an equity partnership with Polaris Venture Partners in Boston, MA, provide a streamlined process for dentists, healthcare providers and payors to expedite the claims process by digitizing otherwise cumbersome healthcare attachments. As the country moves toward increased dependence on electronic health records, NEA and MEA sit at the forefront of improving secure medical record access for healthcare professionals.

Julie Hoffman and April Hawkinson, Associates with The Miller Richmond Company, handled lease negotiations for NEA. According to Ms. Hoffman, "NEA came to us at a very exciting time for their business and required a real estate strategy that offered maximum flexibility with minimal financial impact. We were able to leverage a soft commercial real estate market to provide them just that. At a time when many companies are contracting in size and even closing their doors altogether, NEA continues to grow and thrive due to an expert management team, a strong corporate vision and superior technology offerings."

Tom Hughes, CEO and President of NEA and MEA added "As exciting as growth modes are for a company, they carry their own set of challenges. It's wonderful to be moving into a space that supports our business in such a way that we can concentrate on what's most important- increasing our national customer base while continually improving our technology offerings, attracting the best and brightest talent and maintaining the core values by which we have built this business."

The building's landlord, VIF II/Royal Peachtree Corners, LLC, was represented by Bryan Heller of TPA Realty Services. NEA moved into its new facility in late April.

The Miller Richmond Company
Two Ravinia Drive, Suite 1590 • Atlanta, GA   30346
phone: 770-390-1891 • fax: 770-390-1899
drubenstein@millerrichmond.com  •  http://www.millerrichmond.com