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Leveraging transactions for maximum benefit.

Today's extremely competitive business environment demands that real estate projects are executed as efficiently as possible.

Too often with commercial real estate, tenants and their brokers gauge the success of a real estate transaction primarily by the difference between the current market rental rate and the negotiated lease rate.

How much was saved on the rent? $2.00 per square foot below market rate can add up quickly. On a 50,000-square foot, five-year lease, the savings translates into a pretty impressive number at $500,000.

However, by focusing solely on the rental rate, a corporate tenant could actually stand to lose multiples of the negotiated savings.

To maximize savings potential, tenants must negotiate all facets related to their company's circumstances. As an important starting point, the following factors are crucial to the success of any transaction:

1) Lease Negotiation

Among the myriad of pages that make up most lease documents, there are dozens of negotiable aspects that can lead to significant savings for tenants. These range from smaller items, like monthly parking space fees and rooftop access rights, to more substantial matters such as sublease rights and termination options.

2) Accuracy of Space Needs Assessment

Is the space needs assessment accurate? For instance, is 30,000 over the five-year term efficient, or could the requirement be redesigned to utilize only 28,000 or even 25,000 square feet? What about the potential for expansion or contraction over the term of the lease?

3) Base Building Conditions

Have the deficiencies of base building conditions been identified? If the landlord is not held responsible, what is the tenant's cost to upgrade mechanical, electrical, or fire/life safety systems? A seemingly even comparison of two buildings with the same quoted rent is not truly comparable if one requires additional expense to improve base building condition.

4) Construction Costs and Tenant Improvements

How much of a tenant improvement allowance is necessary to build out the space to effectively meet the project's requirements, accounting for all soft costs? This is essential for negotiating an accurate tenant improvement allowance.

By using project management services, landlord cost estimates and oversight fees can also be negotiated. It is very important to have construction expertise on the tenant's side, given that it is usually the landlord's strength.

5) Realistic Occupancy Date

When can occupancy be realistically achieved? This estimate must account for all factors, including scheduling of design, permitting, construction, furniture delivery, technology installation, and all other relevant vendors' work.

The best course of action for addressing these considerations is to enlist the appropriate expertise up front.

Typically, when a company conducts a real estate transaction, project management is not considered until the ink is dry on the lease documents.

Fortunately, more corporate tenants are beginning to realize the value of bringing project managers into the initial phase of the process--the strategic phase--to assist in creating a stable foundation for cost savings throughout the transaction and project.

An integrated team that includes a project manager and a real estate advisor facilitates more aggressive negotiation and avoidance of costly mistakes by helping to accurately identify both short- and long-term space and infrastructure needs.

Together, they also assess building deficiencies, establish a project budget inclusive of construction, technology, furniture, and relocation costs, and determine a realistic occupancy date.

The early integration of project management and transaction services generates maximum benefits by utilizing experienced real estate advisors and project managers. Combining the pre-planning expertise and management skills of project managers with the market knowledge and negotiating savvy of corporate real estate advisors generates efficiency, continuity, and accountability.

From strategic planning and transaction support through project preparation and execution, an integrated-service approach creates increased upfront transaction savings, decreases client time involvement, mitigates risk, produces overall occupancy cost reduction, and delivers functional projects on schedule and within budget.


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Article Details
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Title Annotation:Commercial Sales & Leasing
Author:Martinez, Barbara R.
Publication:Real Estate Weekly
Geographic Code:1USA
Date:Nov 17, 2004
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