A commercial lease transaction is a lengthy and complicated process. Once you've gotten buy-in from your corporate team on finding a space and been through the site selection process to identify a lease, you still have to get it negotiated and signed. Here are a few strategies that can help manage the process more efficiently so that you can get your lease done and move on to your next one with fewer headaches and inconveniences.
Pre-Configure Teams
Get everyone you need for the lease transaction on board before you begin the process. While you'll be able to make time for everything, if your architect, contractor, environmental site assessor or any other part of your extended corporate real estate team isn't free, you'll run into a roadblock.
Distribute Documents Electronically
While this should go without saying in this day and age, there are still holdouts using FedEx and fax machines. Distributing documents electronically doesn't just save delivery time. When you distribute word processing documents with "Track Changes" enabled, you can also allow every party to the lease transaction to work on the documents while still creating a paper trail of the changes that they made.
Separate Business Terms and Legal Terms
Draft a document that puts all of the dates, terms, and other specific negotiated business points in a separate document from the lease. This lets your attorneys negotiate and approve a legal document while also giving the business teams on both sides of the lease transaction the ability to work with their part of the document. It also makes the document easier to abstract and to work with on a day to day basis.
Negotiate to Win-Win
If you reach an impasse in your lease transaction negotiation, look for areas where you can painlessly give something up. Offering your landlord something as a trade-off can help him to both save face and justify compromising with you. If you can find issues that are important to him but unimportant to you, you'll be able to gain good will and, hopefully, concessions without giving up anything that you care about. Being able to choose your battles will also help to keep the lease transaction process moving forward.
Build and Comply With Timelines
While the construction process is typically controlled by a timeline, the lease negotiation process can also follow one. Work with the other side to figure out what dates they can meet and draw up a timeline for the LOI and for preparation of draft and final lease documents. Circulate the timeline and, if possible, hold weekly meetings to ensure compliance.
With proper time and process management, lease transaction management doesn't have to be a nightmare or even a major commitment of time for any one person. Setting forward some basic goals and complying with them will give you a good start. Using modern technology and getting everyone on the same page will also help to ensure a successful and on-time execution.
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Lease administration is a high-stakes business. In most companies, real estate is the third largest expense line, so the cost of even a small error can easily run into thousands or millions of dollars. In addition to the financial risk, errors can jeopardize the space that your company occupies. This doesn't just cost money -- it can also hurt your brand equity. With this in mind, there are the five key mistakes to avoid as you take care of your company's leased corporate real estate portfolio.
Missing Option & Termination Dates
If your lease rate is above market and your space is undesirable, your landlord probably won't care about the dates that determine when you must claim your option and when you must renew your space. However, if that isn't the case, you can be sure that your landlord's calendar is marked and that he knows exactly when he can take your space back to market. Track your dates carefully as a part of your lease administration regime, and always be a couple of weeks early, just in case there is a misunderstanding.
Misunderstanding Measurements
Many of your lease's provisions are tied to the size of your space. Whether you're paying CAMs or you're collecting on TI allowances, knowing how many square feet are part of the charge or credit will help you to minimize what you receive while maximizing what you spend.
Missing Regulatory Changes
Periodically, laws in the communities in which you occupy space change in a way that impacts your lease. One good example of this is when cities pass lighting efficiency laws that require retrofits. Having a good understanding of who will be responsible for the cost can help you to plan your cash flow needs.
Misallocating CAM Responsibilities
CAMs are one of the stickiest parts of lease administration. They're filled with little details and very easy to miscalculate. Read your lease carefully to understand exactly what you should be paying, and request an audit if your landlord is overcharging. Capital expenditures are frequently problematic, as are management fees. If your lease only allows your landlord to collect a CAM administration fee, make sure that you aren't also being charged for your pro rata share of the management fee. Review your lease to determine whether or not you have to pay for the CAMs on vacant spaces, as well. If you don't, make sure your pro rata share is being calculated on the building's total area instead of its total occupied area.
Missing Market Shifts
As norms in your market shift, there probably isn't a lot that you can do with a current lease, but tracking how leases get signed in your market is a crucial part of a long-term, comprehensive lease administration strategy. You probably know what direction rental rents are taking, but tracking landlord and tenant expense responsibilities takes additional research. However, if a market begins to move more towards a gross structure than a net structure, you'll want to know that before you start renegotiating leases.
Lease administration is largely about tracking small details. However, these small details add up into large sums. Doing it right can help you to positively impact your company's bottom line and help insure that you get the resources you need to do your job as well as the rewards and recognition that you deserve.
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Ronald Reagan was known to joke that "I'm from the government and I'm here to help" were the scariest words in the English language. Whether or not he was right overall, one thing is for sure: when it comes to setting up operations in a new state, that municipality can very quickly become your company's best friend. Between helping to smooth the transition process and providing money to lure you in, including state governments in your corporate real estate planning is an excellent strategy that can save your company money.
The Government's Thought Process
When you have operations in a state, you're a profit center for the government. The space you occupy generates property tax revenue while your business pays a range of taxes on the profit it earns. Every employee that you hire not only takes someone off of the state's unemployment rolls, but also generates new tax revenue for the state. That employee goes out and spends the money that they earn, causing other businesses to hire more people, generating more tax revenue.
State Benefits to Businesses
Many state governments realize this and create economic development programs to help lure companies and operations. The benefits that they offer vary from state to state, and county to county, based on both that state's political climate and what it perceives as being of value. To give you an idea of what you can get, here are some of what different states offer to new or expanding businesses:
- California. Generally not known as a particularly business-friendly state, California makes millions of dollars of incentives available to businesses that open the right types of operations. If you choose to locate in a designated "Enterprise Zone," you can earn up to $37,440 in state tax credits for every employee you hire, and claim an expense on certain equipment purchases instead of having to depreciate them for California state tax purposes. Opening a research and development facility anywhere in the state generates a 15 percent tax credit, as well.
- Alabama. For qualified companies, Alabama offers property tax abatements that can temporarily reduce or eliminate your property tax liability for facilities that you occupy. Capital investments in the state can also receive a five percent tax credit, good for up to 20 years. In other words, if you spend $10,000,000, the state will give you back $500,000 in additional tax savings over and above your depreciation.
- Iowa. If you grow your operation's workforce by at least 10 percent in Iowa, you can claim state tax credits of up to $1,560 for every new worker hired. A new facility containing what the state considers "high quality" jobs can also receive property tax abatements, refunds on state sales taxes paid to contractors, and even an investment tax credit, as well. Iowa also incentives research activities with refundable credits that you can actually cash out.
- Maine. Maine offers an Employment Tax Incentive Financing program for businesses that will hire at least five non-retail employees over two years in benefited positions. If you meet their standards, they will refund between 30 and 80 percent of your state tax withholding on the employees to you. You may also be able to receive a personal property tax exemption on certain business equipment purchases as well as additional tax credits for research-related activities or operations in certain industries, ranging from forestry technology to financial services.
Before moving or opening locations, have a conversation with business development offices in the states you are considering. Their incentives, coupled with local incentives, could make a real difference in the profitability of your new operation.
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Office relocation decisions aren't made in a vacuum. When you move locations, whether you go across town or you go across the country, that transition has a wide effect on your business and on the lives and businesses of those that are affected by your operation. Above and beyond the impact on the community as a whole, there are specific stakeholders that are impacted by corporate real estate changes.
Employees at the Location
The most obvious stakeholders in an office relocation are the employees that work there. Small moves within the same office park or grouping of office buildings should have minimal impact on them, unless the new location has significantly different parking, access or amenities than the original one. Larger moves, however, have a much broader impact. If you go across town, for instance, you could disrupt commuting patterns. Locations that are significantly farther from employee's residences could even lead to increased staff turnover. While it's usually impossible to make everyone happy, paying close attention to a new location's impact on the personal lives of your employees can help mitigate the impact of the move.
Other Company Employees and Departments
A new location can be more or less convenient for the rest of the company as well. If the data connectivity available at the new location is not as robust as at the first, it could cause a problem for your IT department. On the other hand, if you're moving a field office closer to the airport, that office relocation will probably reduce the time, length and cost of business trips into the office for management staff and others that service it from afar.
If a move will necessitate increased shipping and mailing expenses, it's a good idea to factor that into your calculus, as well. For instance, if your new location is hundreds of miles away from the corporate center, calculate both the cost and the time impact of having to ship materials instead of running them down the hall or across the street.
Clients
For offices that receive few, if any, client visits, this is a non-factor. However, when your clients interact with your company at your office, they become major stakeholders in your space. An office relocation will inconvenience some and benefit others. Others may even forget you moved and you risk losing their business.
Vendors
Generally speaking, your vendors should worry about you and not the other way around. However, if your company needs to be physically close to vendors, a relocation away from them could be a major disruption. Not only will they lose the benefit of being close to a major client, but you'll lose the ability to have vendors and other service providers in your office when you need them as quickly as possible. It could also lead to reduced service or even to higher costs as they recalculate what it costs them to serve you.
An office relocation is a complicated process. Even before you start crunching the numbers, ask yourself how it will effect these four key stakeholder groups. Keeping them in mind as you plan your transition can help you to make it a more successful one.
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The site selection process can be arduous and complicated. One trick that can make it easier for you to narrow down the sites that you have under consideration is to use basic demographic data to disqualify unsuitable sites. Since this data is easily quantified and readily available, it's an easy way to cull your database to focus only on sites that are potentially appropriate. These five metrics will get your site selection process off to a good start.
Search Radius
Before delving into demographics, choose an appropriate search radius. If you're running a business that caters to people in the immediate neighborhood, a one or two mile radius is usually enough. On the other hand, destination retail companies can easily draw from a 10 mile radius if not farther.
Household Income
Household income is useful because it gives you a sense of not just how much money the people in the area have to spend, but how they spend it. After all, people with a $25,000 per year household income shop at retail outlets just like people with a $225,000 household income. They just shop less, and do it at different stores. Assuming that you know your company's target household income, this is a crucial metric. To help you adjust for different costs of living in different parts of the country, take a look at disposable income as well. If you're not selling necessity items for which demand is inelastic, disposable income may turn out to be a more important demographic metric.
Average Age
An area's average age also tells you about the potential customer base. If you're a youth-oriented retailer, an average age in the upper 40's or 50's should be an immediate sign that an area is unsuitable. On the other hand, a craft shop might want to exclude areas that are filled with young singles from their site selection process.
Average Household Size
Families shop differently from couples who shop differently from singles. Understanding the average size of a household in a given area lets you know if the product or service sold at your retail establishment will be a good match for the area. It can also give you more of a sense of how people spend their money and, to some extent, how much disposable income they have.
Daytime vs. Nighttime Population
The population of an area is not always as important as it seems. If you're selling a product like pizza that people buy on their way home from work, a location in a high-density urban downtown may not be valuable, regardless of how many people you could serve. High daytime populations are good for products that are purchased at work or during the day while high nighttime populations are better mixes for retailers that sell products that people buy at night and on the weekends.
Of course, these five demographic criteria are just the first steps of the site selection process. When a site passes muster on these measures, you then turn to other demographic metrics to further refine your choices. Demographically perfect sites still have to pass muster on the basis of their access, parking, location and general desirability.
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With demands for commercial real estate increasing all across the country, tenants are finding that it's not as easy to negotiate with their landlords as it was a year or two ago. It's become increasingly difficult to get rent reductions without a very good reason, and landlords are actually starting to raise rents. This might seem like a landlord's dream and a tenant's nightmare. However, when you scratch beneath the surface, there are ways that many tenants can turn the increasing demands for their spaces into opportunities to achieve better cost performance from their corporate real estate portfolios.
TI Allowances
During the downturn, landlords were hurting as badly as many of their tenants. With vacancies squeezing their bottom lines, many of them couldn't afford to invest in their buildings or in signing new leases. Now that they're filling back up and enjoying growing net operating incomes, many of them can afford to put capital back into their buildings. This can be very advantageous for you if you need to have new space built-out since, for the first time in years, your landlord should be able to afford to give you a
tenant improvement allowance. Using the landlord's money to pay for your TIs lets you keep additional debt off of your balance sheet and, in some cases, can make the cost of the TIs go away completely if it doesn't get built into a higher rent rate.
Long-Term Deals
When tenant demand was slack and landlords didn't know which way the market was going to move, many were willing to do anything to fill space, but they didn't want to lock it down for any length of time. Since the landlords assumed that better times were on the way, they wanted to keep their options open so that they could re-lease the space on more attractive terms. The better times that landlords were waiting for are now here.
You probably can't steal space anymore. Then again, you didn't steal your space before the downturn occurred and your business was probably able to handle the cost. Since the market is normalized, you can sit down with your landlord and work out a long-term deal. The long-term lease gives you stability, while it gives your landlord the knowledge that he won't have to worry about vacancy, leasing commissions and paying for tenant improvements for a new tenant for a while. You should be able to leverage this to get a reasonable discount on your rent.
Watch for Overbuilding
When the
real estate economy recovers, developers get back to business, as well. After they've built their pre-leased projects, they usually started developing new buildings on "spec." In many markets there are more landlords speculating that they'll be able to lease their newly constructed spaces than there are tenants to fill those spaces. When this happens, it's a great time to be a tenant looking for new space. You should be able to sign leases for highly desirable newly constructed space with very competitive rents and generous tenant improvements and other concessions. After all, if you don't lease the space, it'll just continue sitting vacant, so your negotiating position is extremely strong.
It's been said that every crisis contains an opportunity. While the ending of the lopsided tenant's market might seem like a crisis, the return of tenant demand is really an opportunity. Instead of running your corporate real estate portfolio by the seat of your pants on a year-by-year basis, you can finally lock down stable long-term agreements at good pricing.
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Site selection is, in and of itself, a due diligence process. Instead of just randomly picking a site, negotiating a lease and moving in, you and your team carefully analyze the market, its demographics, the location and the business terms that the landlord is offering. While the initial parts of the process are technically due diligence, the most important part starts when you have identified a potential site.
Once you choose a potential site, the due diligence process has multiple steps:
- Confirm your market assumptions. When you chose the site, you probably relied on publicly available demographics data, aerial or satellite imagery and combined market survey information. As a part of your due diligence, obtain additional data to ensure that the surrounding market is everything that you expect.
- Identify the cost of doing business. Every community has different laws that can impact what it will cost you to do business there. For example, you may have to purchase a business license, offer certain employee benefits, or match competitive local wages. If you're not familiar with the area and its particulars, you could end up with an expensive surprise should you skip this step of your site selection due diligence.
- Confirm the property's zoning, parking and access. Depending on the type of business you run, you may need conditional use permits or zoning variances to occupy the building that your site selection process identified. To meet the requirements of the zoning code, you might also need to have a certain number of parking spaces. Finally, it's also a good idea to confirm the property's access and to see if there are any road construction projects planned that might change it in the future.
- Review environmental surveys. While many tenants skip this step, many businesses would benefit from this. If you occupy a site that has environmental contamination, it could impact the health of your employees or customers or, if it becomes known, it could harm your brand. Should the property need to go through remediation, your tenancy could be interrupted as well.
- Visit the site. A site visit is a crucial part of the site selection due diligence process. It gives you the opportunity to experience the traffic flows, access issues and surrounding area for your self. You can also clearly gauge the condition of the property as well as the type of people that do business there both as tenants and as customers.
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While the real estate recovery has taken hold in many of the country's largest cities, many perceived second and third tier markets are emerging as major destinations for office and industrial tenants. Some of them are being fueled by growth in natural resource production while others are growing thanks to business-friendly policies or low costs of living for workforces.
Sioux Falls, SD
Located in the southeastern part of the state, Sioux Falls is already a major destination for credit card processors due to the state's industry-friendly banking laws. The northern end of the community holds a business park with call centers for such major financial institutions as Citibank, HSBC and Wells Fargo. However, Sioux Falls has a business friendly tax climate with no corporate income tax and no personal income tax. This is fueling growth in many sectors. Sioux Falls is also a major regional center that is home to a new Sanford health campus that is being developed to rival the Cleveland Clinic and Mayo Clinic as well as the largest shopping mall between Minneapolis and Denver.
Vernal, UT
While Vernal is an emerging destination on its own merits, it's also a symbol of a larger trend in the United States -- energy boom towns. With the discovery of new oil and gas fields coupled with new technologies that extend the life of existing fields, communities from Rock Springs, WY to Elk City, OK are experiencing growth. As these communities emerge, the primary demand will be for industrial space to support oilfield and gas field operations. However, over time, some will emerge as regional centers with significant population growth. After all, Houston, Dallas and Los Angeles were all oil towns at one point in their history. Midland, TX and Casper, WY are excellent examples of this since they have all grown large enough to support industries above and beyond energy, and Williston, ND is in the process of attracting major tenants.
Chattanooga, TN
Once made famous by a song about a train, Chattanooga's emergence comes from another form of transportation -- Volkswagen cars. The recent opening of the first US-based VW plant added approximately 11,500 jobs to the market -- only 2,000 of which are with VW. Other companies, including Alstom Power, have already followed suit.
Elko, NV
Long known as a regional ranching center and home of the Cowboy Poetry Festival, Elko is growing thanks to gold mining. At the same time, it also enjoys favorable tax treatment like the rest of the state of Nevada and a location on Interstate 80 that makes it within a day's drive of San Francisco, Reno, Sacramento and Salt Lake City. As with many of the energy boom towns, Elko's growth is largely industrial at this point but its growing population should fuel additional office development as well.
Omaha, NE
Home to Warren Buffett and his Berkshire Hathaway company, Omaha is a sleeper city for office growth. Without attracting a great deal of attention to itself, it has built a highly educated workforce that spans multiple fields of industry. At the same time, it enjoys a low cost of living, low occupancy costs for office tenants, and a central location at the intersection of Interstates 80 and 29. The city is also well served by rail, befitting the headquarters of Union Pacific, the country's largest railroad.
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The open layout offices that were once the exclusive purview of creative industries like graphic design or advertising have become popular in many different industries. Their supporters point to their flexibility, their support for collaboration, and their ability to suit the needs of a changing and mobile workforce. On the other hand, open office layouts have many drawbacks that can negatively impact productivity and office utilization.
To Meet or Not To Meet
Open office plans make it easy for workers to interact with each other. Some integrate casual meeting spaces right into the floorplan so that work teams can get together, discuss issues and move their projects forward. The problem with these spaces is the potential to open the floodgates to too much collaboration. There sometimes comes a point where talking and strategizing get in the way of executing and open spaces can emphasize conversation over working.
Leave Me Alone
Sometimes, it's just nice to be able to concentrate. Open floorplan layout offices tend to have limited spaces where an employee can sit down, focus and work quietly without interruption. This can be extremely problematic in industries where workers have to perform complicated tasks. In many cases, the need to have a quiet place to work leads workers to turn conference rooms and meeting areas into ersatz private offices, or it causes them to work off-site, negating the collaborative benefits of the design.
Gezundheit!
When employees are in close physical proximity, it becomes easier for illnesses to spread. A recent survey conducted by the Staples office supply chain showed that 80 percent of workers go in to work when they are sick and, of those that stay home, two-thirds return to the office while they are still contagious. An open floorplan makes it easier for them to infect larger numbers of workers. Even if this doesn't cause absenteeism when your employees don't take sick days, it does reduce productivity.
Doesn't Anyone Work Around Here?
Employee coffee lounges, collaboration areas with beanbags, and office air hockey tables can all provide a chance for your team to get together and create ideas. They're also excellent places to goof off. Furthermore, encouraging employees to work away from their desks also makes it harder for managers to observe them and influence their performance. Harvesting an environment wherein employees can unwind and organically produce has proven to be an winning formula, but make sure you have the right employees.
A Place of My Own
While the "hoteling" arrangements that come with many open work plans can be very convenient for workers that are rarely in the office, they can be an inconvenience for workers that are in the office every day. Many open floorplan offices make it impractical to set up projects and files and keep them in place beyond the end of the day. This makes it harder for workers to come into work in the morning and hit the ground running.
You Saved... $0
An open floorplan office should be less expensive to build since it doesn't require cubes, offices or doors. However, many companies find that the savings from building a minimalist office space doesn't materialize. Between the cost of furnishing collaboration areas and the need for multiple common spaces and other semi-private spaces, it often becomes difficult monetize such areas.
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It's not easy running a corporate real estate portfolio. The challenges of managing the nuts and bolts of tracking important dates across different leases that are frequently written in different formats are daunting by themselves. Adding in responsibility for one of your company's largest cost centers further complicates matters. Capping off the challenge is the reality that what you do touches every one of your company's on-site employees every day.The right commercial real estate software package can make all of the difference for you.
Good
commercial real estate software does more than just track dates and run simple reports. The best packages go beyond simple administrative and tactical support and cross over into being strategic tools to help you plan your entire portfolio. The combination of tactical and strategic support can help you spend your company's real estate dollars more wisely and grow your company's EBITDA.
Date Management
While strategic planning capabilities are crucial, your commercial real estate software also needs to get the basics, like tracking your option notification dates, right. An integrated calendar that shows all of the important dates for your corporate portfolio is a useful visualization tool that helps you maintain an overall view of your portfolio. Best-in-class software goes beyond this passive approach, though, and takes an active role in ensuring that you never miss a date by emailing or text messaging you to remind you of crucial lease milestones.
Benchmarking and Analysis
Benchmarking and analysis tools help you to compare your occupancy costs across your portfolio. Understanding these basic metrics equips you to make better business decisions about how to manage your company's real estate assets moving forward. However, looking at real estate metrics in isolation can be limiting.
A powerful
benchmarking tool combines your commercial real estate data with your company's operational data. After all, a sales office that costs you $30 per square foot isn't less expensive than a $45 per square foot office if the latter one does twice the sales of the former. Many packages also automate site utilization surveys so that you can better identify which spaces are being effectively used by employees and which ones need to be reconfigured.
Market Comparisons
With the increasing availability of industry data, commercial real estate software packages can now go beyond your company's spaces and into the broader market. Paying $5.25 per square foot for property tax reimbursements for a Class A office space in a Midwestern market might seem like it's a pretty good deal compared to $10 per square foot in a major Northeastern market. If market data shows that the average for the first building's market is $4.50 and $11.25 for the second building, though, your view may change.
The integration of date management, benchmarking and analysis and market data lets you strategically plan your portfolio. While you are sitting at your desk, your commercial real estate software can remind you of leases that are up for renewal, show you what the perfect space's performance and configuration looks like, then show you alternate spaces in the market that may compete for your tenancy.
Visualization Capabilities
Providing raw data is no longer adequate. Your commercial real estate software can use
mapping tools to help you visualize your spaces, how they relate to each other and how they relate to other spaces in the market. Overlaying real estate data on maps lets you see nearby spaces that you might not have otherwise considered. It can also help you identify efficiency and cost factors like traffic patterns or customer/vendor proximity.
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