A Tale of Six Cities – CFO.com’s Alix Stuart analyzes corporate real estate stats in six major US cities

Alix Stuart’s A Tale of Six Cities is a well-written article about considerations a CFO must make related to real estate and peripheral costs impacted by real estate, like cost of living.  In the article, Alix identifies six major cities – 2 on the East Coast, 2 on the West Coast and 2 in the Central US – pairs of which account for three major points on the tenant/landlord power spectrum.  Below is a chart that identifies the six cities, linked to their respective reviews, and where they fall in the spectrum.  NOTE: This is not to say that Chicago and Austin are necessarily “value cities”, nor that New York and San Francisco are cut-throat, but rather that these classifications are relative to each other.

Power of Tenant/Landlord	City #1	City #2
Stronger Landlord	New York City, NY	San Francisco, CA
Moderate	Las Vegas, NV	Charlotte, NC
Stronger Tenant	Chicago, IL	Austin, TX

For any corporation occupying space in one of these markets, Alix’s analysis of each market, paired with real-world examples and statistics, provides some insight into where the market is trending and whether it will continue to remain a financial opportunity… or hazard.  One thing that I did find absent from the report, however, is whether the average rent per square foot is net or gross.  I would imagine gross, but as we all know, it’s a bad idea to assume.

As a little added bonus, the final page of the article comprises five tips for dealing with rent-hungry landlords.  I particularly admire Jeff Klausner’s wily strategy of negotiating an option to buy their single-tenant office building and then flipping the property for a $2 million profit – now that’s unlocking hidden value.

The Under-Utilized Tenant Representative

NOTE: This post applies more to small and mid-sized businesses than for large enterprises with in-house real estate and facilities employees.

Since I transitioned into commercial real estate, I have served as a tenant representative for thirteen clients across eighteen active or completed transactions.  About one-third of these deals have come from existing corporate clients, while the others have come through referrals and various prospecting methods I employ.  Whether this number of projects sounds like a lot or a little, there’s one thing they all have in common – if given the opportunity, I could have provided so much more to these clients.

Except for a few particular brokerage firms that focus exclusively on tenant representation, like UGL Equis and Studley, most commercial brokerage houses have built up their tenant representation work out of their existing property management and leasing practices.  An Entrepreneur.com article from a few years back identifies roughly when the shift to begin focusing on tenant needs took place, stating that the process still does not suitably address the needs of the tenant – “most brokers… continue to focus on the specific goal of the property owner–the signing of the lease or purchase agreement.”  Using the term “out-tasking”, the article continues by stating that the right approach is to look at the business strategically and determine what processes, or tasks, can be delegated to an outside firm.

Unfortunately, smaller firms do not typically have the resources or know-how to determine which processes can be outsourced, or even what processes they may have to deal with in the future.  As a result, I feel that many firms, including those of several existing clients, still look on a commercial real estate broker as a space finder, neglecting to appreciate the vast resources we may have at our disposal to help them with more of their facility and real estate needs.  For instance, when was the last time you asked your tenant rep to perform a lease audit to ensure that you weren’t being overcharged for operating expenses (see Are you being served… more expenses than you deserve?)?  Or called on your tenant rep to help you evaluate your space plan to see if you might be able to improve space use and decrease your rentable area (see Calculating your office space needs)?  What about asking your broker to peruse your lease to see where key terms might impact future financial planning, relocation or expansion possibilities (see There’s gold in that contract)?

You may be wondering why I italicized “transactions” and “deals” in the first paragraph.  My goal was to emphasize that these client experiences were based on the old perception of broker as space finder.  At the end of the day, tenant representatives can do a lot more than help their clients simply find space.  We can help you identify your site requirements, ensure that you find the right space on your timeframe, assist you with navigating the build-out and furnishing process and more.  In the past several years, the industry has evolved significantly to better meet client needs.  Now, all you have to do is ask.

One of the stranger lease clauses I have seen

The following is an actual lease clause I came across recently.  For the sake of the parties to the lease, I have removed any personally identifiable information.  Please allow this example to serve as an illustration that there are a lot of different factors involved in negotiating a lease.  An item that doesn’t strike you as much to give up could allow you to win concessions in another area of negotiation.

Pornographic Uses. Tenant acknowledges agrees [sic] that the value of the Premises and the value and reputation of the Building and the reputation of the Landlord will be seriously and irreparably injured if the Premises are used for any obscene, immoral or pornographic purposes or any sort of commercial sex establishment. Tenant agrees that Tenant will nor [sic] allow any employee to bring any obscene, pornographic or erotic material into or to be maintained at the Premises, including, without limitation, any obscene, pornographic or erotic printed material, video material, audio material, signs or displays, and shall not conduct or allow any employee to conduct any photography of any obscene acts or nude or semi-nude persons on the premises (but the foregoing shall not prohibit Tenant from conducting fashion photography or, to the extent permitted hereunder, fashion shows reasonably related to Tenant’s business which involve nude or semi-nude persons) and will have a company policy prohibiting the use of the internet for such purposes; provided, however, the violation by any employee(s) of Tenant of such policy shall not be a default hereunder provided Tenant takes appropriate disciplinary action (including termination for multiple violations) against any such employee(s). Tenant agrees further that Tenant will not permit any of these uses by any sublessee or assignee of the premises. This Article shall directly bind any successors-in-interest to the Tenant. Tenant agrees that if at any time Tenant violates any of the provisions of this Article, such violation shall be deemed a material breach of this Lease, in which event Landlord may exercise any remedies it has under this Lease. Pornographic material is defined for purposes of this Article as defined in Section 235 of the Penal Law of the State of █████████ (as amended or supplemented from time to time).

What if someone gave you $50 per square foot to remodel your home?

Would you redo your kitchen?  What about your bathrooms?  Add on a sundeck or a swimming pool?  And why would someone just give you that kind of cash, never expecting to see it again?

In the world of residential real estate, this concept may sound kind of crazy, but in the world of office leases, tenants are routinely given hundreds of thousands or sometimes even millions of dollars to build out the interior of their office space prior to starting a new lease.  Known in the industry as a tenant improvement allowance, or “TI” for short, this seemingly large dollar amount goes faster than you may think, even if you have been through the process before.

Are You Being Served… More Expenses Than You Deserve?

On Monday morning, my colleague Bill in our Audit and Recovery practice presented to all of us on the expense and fee clauses that he frequently sees when he is brought in to audit a client’s lease.  Since he is compensated on a contingency basis, he is very good at finding discrepancies between what the lease obligates and what the landlord actually charges.  However, the gems that he shared with us had less to do with comparing rent bills to leases and more to do with how to reduce the likelihood of these improper charges ever being an issue for our clients.