Tenant Improvement Costs Rise
The cost of refurbishing office space has gone up dramatically in recent months as shortages
have developed in certain building materials. And with fewer vacancies, landlords are becoming less likely to simply agree to pay for a tenant's above-standard improvements outright.
There are several factors affecting the building supplies market. Rebuilding the hurricane-ravaged Gulf Coast has caused immediate shortages, and demand should continue as the pace of rebuilding increases through the year. Globally the
expanding economies in China and India have also increased demand and created temporary shortages for items like concrete and steel.
Meanwhile steep increases in energy prices make transporting as well as making many building materials more expensive. For instance, making glass takes considerable heat, so a spike in energy costs can raise glass prices considerably.
Finally the timetables for projects often have to be extended because of slow and uncertain delivery of materials.
What this means for tenants is that there needs to be a lot more negotiating over improvements with landlords. You may have to take a closer look at what really needs to be done and refine cost estimates. Landlords may be willing to wait
to find tenants who have fewer demands or will take space more "as is." Even brand-new construction is being affected by the shortages. The bottom line is that tenant improvements are not a given like they were when vacancies were higher
and materials and labor were more plentiful.
Top Ten Ways Landlords Double Dip
Once a lease is signed, tenants might think things will run smoothly. Hopefully, this is the
case; however, sometimes landlords try to add extra charges, both before and after a lease is signed. Here are the first three of ten ways that landlords try to "double dip." We will present the remaining ways in the coming months.
1. Building measurements.
How much space are you actually leasing? If you rely on the landlord's measurements, you may pay more than you should for less space. The Building Owners and Managers Association (BOMA) has created definitions of acceptable measurements.
Various types of walls can be measured to the middle of the wall, the inside wall of the premises, or to a window. Floor area is calculated excluding vertical penetrations (elevator shafts, stairwells and HVAC supply/return), but
includes rest rooms, janitorial and phone closets. As you can see, BOMA measurement standards are complex and many owners don't interpret them accurately. Verification of these measurements is worth the investment.
2. No cap on inflation increases.
Many -through" of increases in operating expenses over and above the initial lease year. In periods of high inflation, these increases can be significant. We recommend that tenants insulate themselves by "capping" these increases. If
full-service rents have an annual CPI adjustment, put an upper limit on how much that increase can be from year to year. Sometimes a low fixed escalation (ignoring CPI) can do the trick. When it comes to operating expense pass throughs
(over an initial lease year), limit the amount operating expenses can increase from year to year with caps on "controllable" expenses such as janitorial and common area maintenance where landlords have more flexibility on pricing.
3. Pass-through of excluded operating expenses.
In most commercial leases the tenant is billed for a share of building operating expenses. We recommend that leases include detailed lists of what can and can't be included in operating expenses. For example, costs related to a
landlord's tax return or re-financings are not typically subject to tenant reimbursement. It is then also important to reserve the right to audit the landlord's charges each year to make sure only permissible charges are included in the
pass- through calculation. Our office can provide information on operating expenses that should not be passed through to tenants.
Next newsletter, more double dips to avoid.
Downtown Class "A" and "B" Office Statistics
Asking Rental Rate - $19.50
Vacancy - 18%
Source: CoStar Property
Galleria Class "A" and B" Office Statistics
Asking Rental Rate - $18.94
Vacancy Rate - $17%
Source: CoStar Property
Greenway Plaza Class "A" and "B" Office Statistics
Asking Rental Rate - $19.46
Vacancy Rate - 16%
Source: CoStar Property
State Bar of Texas' Advanced Real Estate Law Conference
ATR's Candace Baggett and John Hanly have been asked to speak at the State Bar of Texas' Advanced Real Estate Law Conference in San Antonio on June 29-30, 2006. Drawing upon their extensive backgrounds as tenant representatives, Candace
and John will address work letters and other issues important to tenants in the construction of leasehold improvements.
Please call or
Send Email if you would like more information.
The most important single ingredient in the formula
of success is knowing how to get along with people.
Theodore Roosevelt
