That’s why an estimated 75 percent of Fortune 500 companies use tenant representative brokers to manage the space selection and negotiation processes, according to Jeffrey Lanning, office specialist with Colliers Arnold Commercial Real Estate Services in Tampa.
Lanning spoke with Smart Business about factors to consider in a lease, potential hidden costs and the role of tenant representative brokers.
What are some important lease considerations that businesses may not be aware of?
A main reason businesses move is dissatisfaction with their landlord/building management. Landlords are differentiated by how quickly management responds to maintenance requests; whether there is on-site management that can respond to emergencies, maintenance of the building’s appearance and mechanical systems; and their aggressiveness in charging tenants for routine maintenance. Management fees and operating expenses can vary significantly among similar properties.
Lesser-known factors include how much debt the facility is carrying, whether critical maintenance and improvements have been performed or deferred, the makeup of the current tenant base, security and construction in the area.
Why isn’t base rent a true indicator of lease cost?
Landlords structure their leases one of three basic ways:
Full service, which covers everything for the tenant except their phone and
Modified gross, in which the tenant also pays his or her own electric bill and janitorial fees
Triple net, which has the lowest base rent, but the tenant pays separately for all operating expenses including, but not limited to, building insurance, property taxes, maintenance for common areas, electric and janitorial.
There are still a lot of variables within these categories. For example, if it is a full-service lease, there may be a separate charge for electricity and air conditioning used after normal office hours. There may be separate charges for parking, overtime for certain types of maintenance and other operating expenses. Other items that lead to the overall value of the lease are rights of refusal on expansion space, renewal options, repairs, improvements and replacement clauses, termination clauses, etc.
Traditional office buildings are full service, but even that doesn’t make it simple for the tenant. Full-service leases still have pass-through costs that change every year. Pass-through costs are for all operating expenses such as building insurance, property taxes, maintenance for common areas, electric and janitorial.
Recently, insurance has become a big variable. In the last year-and-a-half, it has increased 200 percent to as much as 1,000 percent.
Pass-through expenses can be capped and negotiated.
What role does a tenant rep broker play?
The tenant rep broker is there to protect your interests. He or she will find appropriate properties, further investigate the buildings, negotiate the lease, and can manage renewals because they know various conditions and terms in different submarkets. He or she also knows which landlords are more willing to negotiate. Tenant rep brokers make sense for leases of 2,000 square feet or more.
If a business is thinking about moving, the tenant rep broker should be involved very early. He or she will provide a detailed analysis of the client’s needs and can immediately rule out some buildings and landlords. The broker will also save the business a lot of time in lease negotiations. We tell our clients to expect the moving process to take nine to 18 months. They often think it won’t take that long, but that is a realistic number.
What should businesses look for in a tenant representative broker?
Expertise in both the geographic area and the product type. A firm that did a great job for you with industrial leasing in Atlanta isn’t necessarily good at finding office space in Tampa. Local experts know about the buildings in the area, which saves time and money. They also know who the good and bad landlords are, who’s moving and what space might be coming available. In a tight market, you can’t afford to work with an inexperienced representative that slows down the process, because it could easily cost you a critical opportunity.
JEFFREY LANNING is an office specialist and tenant representative broker with Colliers Arnold Commercial Real Estate Services, which was founded in the Tampa Bay area more than 30 years ago. Reach him at firstname.lastname@example.org or (813) 221-2290.