Austin Tenant Representation

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Austin Tenant Representation

Why go with being “Represented”?

Let’s say you are a startup or moving to Austin Texas  and need to find office space? Most tenant’s have a strict budget for office space expenditures.  As a new business in the Austin area , let’s say you need the following or want the following attributes as well.

  • Downtown Austin
  • Parking for alot of employees
  • Modern finish out and look for image purposes

Understanding tenant representation

 

What happens when a tenant has expectations of a budget for a specific area? Is it realistic , who would know they answer to that?  Let’s say the Austin tenant representation provided you  strong alternatives to a downtown location that would your expectations.  Unfortunately, a tenant who have

Tenant representation

a fixed perception and is not flexible beyond their strict and unrealistic parameters and focused only on what they perceive versus what is truly available.  What can happen during a lease negotiation where the tenant is strict is the landlord may get another offer that is more beneficial to them and cut the negotiations off only to keep the tenant in limbo trying to find another office space that is suitable- which may not exist.

During professional and responsible Austin Tenant Representation you may be urged to review other options,  What if there is an office space with the upgrades, restaurants, retail, entertainment, that is close to your initial downtown location?  A tenant rep if they are good will help you be on budget, get the parking you need and the image you want, keep in mind a professional works with you as a team, they are not a go through person to just comply with bad assumptions.  With the help of tenant representation, and handle on the market you can find alternatives. Unfortunately, alot of tenants hit the wall with this scenario

Negotiations with Tenant Representation

Commercial real estate leases will contain provisions to  regarding the terms of your lease – with tenant representation that is professional, you will receive  throughout the contract process expertise that you cannot buy.  Examples of some of the interactive negotiations that take place are as follows:

  • Termination clauses – can be done or can’t be done
  • TI negotiations
  • Ways to provide security deposits
  • Caps on expenses

It comes down to , do you know what to ask for and “How to get it done”?  If you don’t have the contacts and the market experience and knowledge the question is , why find this out on your own time?

Tenant Improvement Decisions

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Tenant improvement Decisions

Let’s go over how a Landlord will or will not consider TI allowances for a warehouse space: There are 3 primary factors to consider.

Cost:

An owner will typically calculate the total consideration of the lease by multiplying the monthly rent by the term of the lease. The result of the calculation is the gross amount of revenue that the owner will receive from you as the tenant over the full term of the lease. Using the figure, the Landlord has calculated, they will make a determination whether to invest a small percentage of this future income to secure a tenant.

Tenant improvement decisions such as painting and carpeting the office areas re- painting the warehouse and office walls are standard finish out. Also damage to dry wall would be a standard finish out to make the space ready. Some tenants want improvements over and above normal turnover renovation.

Here is an example:  a tenant requests that new lighting in the warehouse at a cost of $10,000 and the total gross income of the lease was $1,000,000. Chances may be good that the owner would accept this TI request. Tenant improvements

On the flip side, if the tenant requests that the power service to upgrade to 3 Phase power at a cost of $100,000 and the lease income was $750,000 it would be a tough negotiation. The negotiation aspect is tougher because the upgrade cuts into revenue too much for the owner.

 

Resources:

The Landlord has to assess the amount of cash they have on hand to fund tenant improvements. Most owners have a tenant improvement  “savings” from the rents received in the past for  (paint, carpet, etc.). If there is a mortgage on the property, most  commercial real estate lenders will require a reserve for replacements.

Reserves for replacements allows the owner to not spend all of the income received  jeopardize his ability to re-let the space when a  tenant vacates. Would a tenant be required to pay for improvements? Yes, if the Landlord does not have the funds they may provide an abatement concession to wash out the tenant expense.

 

Types of Tenant Improvements:

Some tenant improvement decisions provide value to the tenant occupying the space and no value to the landlord.  Some improvements such as adding a dock to the warehouse may provide value to the landlord for marketing the property down the road.  Specialty improvements defined as interior type improvements that are re-done after the tenant moves out.

 

Title Insurance

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Title Insurance – What does it really do?

When talking about title insurance the question arises , what does it really do for a buyer? When you purchase an Austin office property such as a condo or building, you will be receiving Title Insurance.  In a nutshell title insurance provides the buyer with assurances that the property they are buying has no impediments against it such as mechanics liens, judgments against the seller, restrictions on the property etc. That the property would convey to the new owner without any issues and if there are the title company may be liable.

Digging a bit deeperGetting title insurance

Under a lender’s title policy the buyer has no protection. Purchasing an owner’s title policy is an option not a requirement which would be of personal benefit. The cost of the owner’s policy is dependent on the purchase price of the property.  If the owner’s policy is purchased first then the title company will issue a lender’s policy for alot less money as long as the loan amount does not exceed the sales price of the property. So if the sellers provide the buyer with an owner’s policy then the buyer can purchase a lender’s policy for around $100 which does not include any endorsement charges.  The savings is significant enough on a lender’s policy to do it this way.

 

Next Steps?

Next the buyer should ask the seller for a survey that provides information for amending the title policy to read “shortage in area” only. By doing this the policy insures against discrepancies, conflicts, encroachments or overlapping improvements provided on the survey. Unless a specific endorsement is purchased, it will not provide for coverage in shortages in the area. The current cost (as of this blog writing) of an amendment when purchased by a person and not a business is 5% of the base premium for the owners policy or approx $72 on a $200,000 owner’s policy. Hopefully, the seller will accommodate the buyer’s requests for this , or the Buyer can purchase these items.

Austin Office Expenses

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Austin Office Expenses

Tenants will pay a portion of the additional costs (office expenses) a landlord incurs in operating the building they take occupancy in. How much of that increase is the responsibility of each specific tenant and how that additional office expense cost is calculated are two separate equations. First, let’s touch on the two generally accepted types of “Additional Rent” from expenses and how that works.

Base Year Expenses and Expense Stop

Are all additional rents calculating the same way? No, some landlords use a BASE YEAR EXPENSE method. Other landlords use an EXPENSE STOP. While both address the same expenses that the tenant is responsible for these methods differ.

Base YearAustin, TX Offices for lease

Part of your rent in year one, let’s say $18.00 PSF per year. This goes towards the landlord’s debt service and profit. The remainder goes towards operating the building. In a Base Year scenario, let’s say $10 goes towards debt service and profit and $8.00 towards NNN expenses. NNN expenses or are expenses to run and operate the property. If  a tenant’s lease calls for a base year, $8.00 is set as your foundation amount and your lease will state what calendar year is the base year expenses . Should the actual expenses increase in the second year to $8.12, you pay not only the contract rental increase, if any, but you also pay $.01 PSF (which is .12 cents /12 Months)  as “Additional Rent”.

“Additional NNN Expenses,” is what you would incur. If the expenses go down, the landlord should transfer the decrease to the tenant. Operating Expenses are budgeted and assessed to the tenant for the calendar year. They are then reconciled at year end. At reconciliation, the expenses may be less (actual vs budget) or higher which should be transferred over to the tenants leasing the property.

Office Expense Stops

An Expense Stop operates in much the same manner. Except, there always seems to be an Except! The landlord simply gives you a number, maybe $8 PSF, and tells you that $8.00 of your rent goes towards building operating expenses and anything above that you pay. Office Expenses will benefit landlords by limiting exposure to expenses being greater than expected during the course of a tenant’s  lease.

In other words, many landlords will incorporate some type of Expense Stop into Full Service leases. This is because it protects the owner’s operating income. For instance, when the property’s expenses increase over the life of a tenant’s lease term, the landlord is then able to bill the tenant for those increases, rather than absorb 100% of the expenses on their own.

 

Valuing Commercial Property

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Cap rates for commercial propertyValuing Commercial Property

There are 3 ways when it comes to valuing commercial property that you should be aware of and by no means are they absolutes. Why? Because market conditions can have direct affects on valuation principles such as comparables. Here are the 3 approaches to value:

1. Cost Approach to valuation

Using the cost approach, investors or buyers will calculate how much it would cost to build the subject property at the current market’s prices. Remember , we said the market can affect and influence this approach?  After that is done, they would subtract the depreciation for commercial property and add to that figure the current rent value of the site.

2. Comparable Sales Approach

In Texas, a brokerage firm or Realtor does not have to reveal sales of a commercial property. This is probably the most popular request among Buyers and Investors. However, sometimes it is not easy valuing commercial property because the data is not there. Using the comparable sales approach, a Buyer or Investor will compare the subject property with other similar (comp) properties that have recently sold.  You can adjust prices for the positive and negative features of each of the comps as compared to the subject commercial property. This allows you to make a knowledge based guess on valuing the commercial property.

 

3. Income Value approach

Using the income approach , investors can estimate the lease rents a property can be expected to produce. By estimating rents, we then convert those rents into an expected income stream.

This can be used in valuing the commercial property using net operating income calculations and cap rate formulas. See blog on cap rates.

Tenant improvements

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Tenant Improvements

When a tenant negotiates a lease with a commercial real estate broker one of the items that is addressed is alterations or tenant improvements. What is involved within a lease when negotiating or navigating thru a tenant improvement?  Tenant improvements can encompass changes such as paint, carpet, demolition, building new offices, walls, doors etc.. it all depends on what the tenant need to operate their office efficiently and effectively.

Landlord’s interests?

The landlord in this transaction is not interested in allowing tenants to alter their premises extensively or use paint colors that are typically unusual like purple, black. Within the no-go’s for landlords would be the tenant making major alterations to the permanent fixtures within the office space such as restrooms, , electrical wiring or any tenant improvements that could damage or cause issues with other tenants.  Typically in an office environment, a tenant would use the landlord’s contractors to do the job of improvements.

Tenant improvement interests?Tenant improvements Austin, Texas

As a tenant you want the flexibility to modify the premises and want the modifications to improve the property’s value for you to use. There may be a provision where the tenant has to provide the landlord the premises back to them in it’s original condition when their lease expires and they vacate.  You will have 4 options or a combination of these when embarking on a tenant improvement negotiation within a lease provision. They are as follows:

Option 1:  The tenant shall make no alterations or tenant improvements without the written consent of the landlord, you will find this standard in office leases within the Austin Texas marketplace.  This does include paint or flooring.

Option 2:  The tenant may make minor alterations to the premises such as paint, wallpaper , or lighting fixtures to suit their needs.

Option 3: As the tenant, all alterations made to the premises become the property of the landlord excluding non permanent fixtures such as lighting as they are not permanently attached to the office space.  A tenant can remove personal property which is not a permanent fixture to the office space.

Option 4: The tenant can make tenant improvements to the property with written consent from the landlord, however the work will be done only by the landlord’s contractors or mechanics approved directly from the landlord. All alterations , additions or improvements shall become the property of the Landlord and shall remain and be surrendered with the premises at the termination of the lease.