Office Condo Issues

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Here is a summary of Office Condo Issues

written by the ABJ during an interview with a local Austin attorney dated March 14,2014

Office Condo– More Demand – risks?

Do Office Condo issues and risk provide higher exposure than other deals in real estate?

  • 10% of claims against architects , only represents 2% of the architect’s business revenue
  • Developers of commercial office condos have more knowledge than the average consumer regarding construction
  • Major factors of the issues are the relationship between the condo owner and the architects and contractors

Prevalent Condo concernsOffice Condo Ausitn

  • Design and construction
  • Water issues – leaking windows, roofs etc.
  • Plumbing and or HVAC  in the condo

Important documents any buyer must read or understand before purchasing an office condo 

  • Purchase agreement
  • Resale certificates
  • Provisions about the maintenance of the project
  • Maintenance funds and how they are handled
  • Understand the dispute process
  • Financing an office condo purchase

Brokers that are buyer representatives can help consumers get the appropriate paperwork which is required for them to complete a due diligence on the office condo property. This will help you be proactive so that you can avoid some office condo issues. Selling your office condo may be easy or tough depending on the market. One rule of thumb to keep in mind is do not over-improve your condo. There are sellers-owners who feel they can get every dollar out of their improvements. Remember, improvements can be very subjective and personal. Just because you love it, does not mean it will work for the next owner.

 

 

 

What are Tenant Improvements?

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What are Tenant Improvements and what can I expect?

Tenant improvements are commonly called “TI” for short or “tenant improvement allowances”. As a tenant, you have the potential with any landlord to have your space be it Retail, Office or Warehouse property be improved. The mistake most tenants make fall under the following categories:

  • Expecting the landlord to do too much of the improvements
  • Under-estimating the true costs of the improvements
  • Not understanding how the allowances work
  • What is meant by “move in ready space”

Let’s tackle each of the bullets above to provide some clarity on what is expected. Let’s shine some light on the true reality for a tenant leasing a  commercial property.

Managing Expectations for Tenant Improvements Commercial Real Estate Construction Austin, TX

For all commercial properties a property owner has exposure, or risks. These risks equate to money, dollar and cents- meaning if a landlord dedicates funds to finish out a space depending on the cost. The owners have to measure their exposure. It is just being smart about how they mitigate their risk with a new tenant. The higher the allowances to make the space ready for a tenant, the more the money gets amortized into the base rent.

You can also use more term from the tenant to absorb the costs.  Keep in mind , as a tenant you want a good deal, but the landlord wants to make positive cash flow. Any type of fixture that is not permanent does not stay with the property. This is usually on the tenant’s nickel , this bodes especially true in Retail situations.

Costs of construction and improvements

Typically, all estimates are approximately 15-20% under quoted. Unfortunately it is not usually in the favor of the tenant. The construction process has be managed whether the tenant is using the landlord’s contractors or their own.  You do not have an inordinate amount of time to get your tenant improvements done. If you are using your own contractors and they delay your construction it could eat into your operational period. Highest costs are always HVAC, re-routing electrical and plumbing .

 

Allowances and how they work – Move in Ready

A commercial property is made move in ready when tenant finish out is “substantially complete” that means a tenant can take possession of the space and start running their business fairly quickly. Again, all non permanent fixtures are the tenant’s responsibility, if it does not stay with the commercial property then it is not the landlord’s concern. If a landlord dedicates funds to finish out your space that means the ceiling is what they offer. As an example if $10,000 is dedicated that means that is all you have , if  a tenant can provide the finish out at a lower cost, they do not get to keep the money left over. Also, the landlord never cuts a tenant a check and says go ahead and finish out your space , it is always controlled.

 

Business interruption during a lease

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Business interruption during your lease

As a tenant and a business owner you want to  protect yourself from potential risks that can interrupt your business.  Broken building equipment as well as faulty building equipment may compromise you ability to run your business. What happens when your business is interrupted during your lease term?  In Central Texas is can be  caused from extreme weather or the equipment  that is not serviced for a long period of time.

Perhaps the HVAC is on it’s last leg and needs replaced. If there is any property damage it will keep your  business from operating correctly. These types of instances would include hail storms, wind damage, fire etc.

Business Interruption during an Office Lease

What is in a lease to protect my business?

Most  but not all leases “standard” office leases drafted by the landlord state that if essential building services such as  (electricity, HVAC, etc.) are interrupted,  your lease  payments continue as if nothing has gone wrong.  Tenants should be aware of this and negotiate this to make sure they are covered and not stuck  since the office you are leasing has services incorporated into the space that are a fundamental part of the lease and the landlord should be responsible , or at least attain part of the risk of business interruption.

 

Solutions for service interruption?

Tenants should  negotiate a provision in their lease which provides  some type of relief in the case of business interruption that lasts more than 3 to 5 days. If there is a service interruption that is much longer then a  cancellation of the lease may be in order if the issue lasts more than 60 to 180 days.

One way to ask for a concession is by asking for it to be in the form of rent abatement. Most landlords will  be acceptable to these modifications to a tenant’s lease. The key element is that the provision should  give the landlord a reasonable amount of time to repair and restore essential services. But if the business owner does not raise this issue in the negotiation, they are  unlikely to receive any concessions  for a long period of service disruption.  Keep in mind, free rent and lease termination for extended service interruptions are fairly common and generally acceptable practices.

Finance an Office Condo Purchase

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Rent Acceleration Clauses

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What is a rent acceleration clause?

Do you have a rent acceleration clause in your present lease? A commercial  real estate lease acceleration clause in Texas would be a clause in which a landlord can accelerate the payment of rents when a tenant breaches a lease.  The challenge is , not all rent acceleration clauses are created equal. Furthermore,  rent acceleration clauses in Texas are often highly regulated or limited. It all depends upon the state where the leased properties are located. Some states, by law allow for a landlord to implement this upon the tenant’s default and others may simply leave it up to the parties to agree or not.

 

Rent Acceleration in TexasAcceleration clauses

The accelerated rent clause  will state that all rent becomes immediately due and payable upon the tenant’s breach. Theoretically this means if you break or breach the lease, the landlord can sue the tenant for all rent (hence rent acceleration) that is due for the remainder of the lease term that the tenant has not fulfilled.

This type of provision is unenforceable. In Texas, landlords are responsible for mitigating damages and exposure to leases with tenants. This means that if a tenant terminates the lease early, the landlord must take reasonable steps to re-lease the subject property.  The landlord is only entitled to recover  lease  payments from the tenant if the landlord attempts to re-lease the property and is unable to do so. It is impossible to determine the amount of time for the landlord to re-let the commercial property space. Therefore, a this clause can’t really be  utilized. All that can be done is the landlord can ask the tenant who has breached the lease for rent payments that are currently due versus rent acceleration.

 

 

Building Commercial Real Estate

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What does it take when Building Commercial Real Estate?

Building a commercial real estate property is not an easy task, and there are alot of moving parts. Step 1 is identifying the land in which you want to build upon. With your commercial real estate broker., the process gets alot more detailed and potentially complex.  This series is provided as an educational foundation to help buyers identify the various areas of potential concerns. It also summarizes facets and processes required when building commercial real estate property. Shire Commercial represents the buyer-developer typically in this type of transaction.

Developing Commercial Real Estate

Below you can view part 2 of a series of development video interviews done with Larry Nelson of Nelson Development Company in Austin.  Let’s hammer out some commercial real estate building bullets. 

  • Timing – your personal income picture.  Look for declines in inflation and unemployment declines. Demand is on the increase in your target city. Major economic incentives and population increases.
  • Location analysis and zoning reviews
  • Site Details- you can understand more about this in the video below
  • Marketability – Due Diligence Studies. Make sure your project has good site quality, convenience, and exposure.  There are also technical considerations such as size, environmental, utilities and traffic patterns to understand.

Poor Decisions

Making a bad decision about building commercial real estate is obviously something you want to avoid. Here are some things to not ignore when you are digging into due diligence.

  • Selecting a weak strategic position in a highly competitive market
  • Access- having a new location that is not easy to find or access
  • Locating next to low income developments
  • Having a location that can be out-positioned by a competitor
  • Not bothering to find out why there is no competition?
  • Locating near retail that doesn’t operate within the same hours you operate. This means they close earlier that you do.
  • Ignoring demographic reports that show you do not have the right customer base.
  • Not understanding the Permitting process

Module 2: Interview Regarding Build to Suits  (time 10:45)

The following interview continues with Larry Nelson of Nelson Development Company regarding build to suits for commercial real estate.  In this module we are going to review the following attributes:

  • Sub Surface issues
  • Contours of the commercial real estate property (land)
  • Coverage dilemmas
  • Potential environmental concerns
  • Utility availability
  • Build To Suit Module 1 video