FAQ About Office Leasing in Austin

Why should I hire OfficeLeaseSpace.com over another real estate brokerage firm?

What is the number one factor in getting the best lease deal possible?

What is really contained in your rent?

What happens if the Landlord fails to provide contemplated building services?

How do I calculate the amount of space being leased?

Who is responsible for constructing the lease space improvements?



Why should I hire OfficeLeaseSpace.com over another real estate brokerage firm?

1) Superior knowledge and service and 2) a contribution to children in need.

First, we believe that OfficeLeaseSpace.com can do a better job in representing your interests. We do not work on behalf of landlords, so our focus is on helping you—the tenant-- achieve the best possible deal without the typical conflicts of interest that you find in larger companies. We have tremendous experience in creating leverage through research and negotiation. Joe Simmons, the managing director and owner, has an extensive insight into both the legal and business aspects of a leasing relationship which helps his clients obtain the best overall transaction available.

Second, and as equally important, officleasespace.com will give 20% of any net commissions it receives from representing you or your company to Helping Hand Home for Children, Ronald McDonald House, or Austin Children’s Shelter. It only makes sense to hire a broker that will provide better representation and give back to those less fortunate. Even if you choose not to hire us, please consider asking your broker to make a donation.


What is the number one factor in getting the best lease deal possible?

Leverage.

The number one key to negotiation of any lease is leverage. Leverage is basically created in three primary areas:

(1) Market conditions, (2) accurate information, and (3) skilled negotiation

It is also dependent upon the size of the transaction and the credit of the tenant. I can assure you that the market in Austin, Texas today is much weaker from a landlord’s perspective than, say, two years ago. Consequently, the tenant is in a tremendous position of strength to negotiate terms favorable to its interest. The tenant’s broker should help capitalize on these conditions by positioning the tenant with several viable comparable space options. Obviously, if the tenant has several similar options, it can bargain with each landlord and negotiate the best possible financial deal. From a legal standpoint, the best possible deal also includes legal terms favorable to the tenant. This is also achieved through leverage and the threat of going to another property which is more accommodating. Leverage through market conditions and tenant alternatives is the most important factor in negotiation by either a broker or attorney.


What is really contained in your rent?

Base Rent plus Operating Expenses.

If there is one item the landlord is most interested in, it is collecting rent. Most of the landlord’s actions are ultimately based on achieving profitability in the building and that is determined in large part by the rental being collected. Rent for office space in multi-tenant buildings usually call for the tenant to: (a) pay a fixed monthly rental that is subject to adjustment or escalation to reflect increases in expenses after the base year – a base year lease; or (b) pay a base rental amount plus its proportionate share of all operating expenses – a triple net lease (NNN). Over the past ten years, most of the Class A office buildings in Austin have shifted towards a triple net lease, although the end result economically for both types of leases is the same.

The base rent amount under a triple net lease is specifically reflected in the lease document while the additional rent (operating expense proration) is estimated annually with an adjustment provision for any difference between actual and estimated expenses.

Within the lease document itself, the tenant and landlord generally spend most of their time negotiating what is included as an operating expense to be passed through the tenant. The landlord’s obvious motivation is to pass through all of the operating expenses of the property to those who enjoy the use of the property, namely the tenants. The tenant, on the other hand, wants to put some reasonable limit or cap on those expenses and certainly doesn’t want to pay for those expenses that are not typically associated with the operation of the property. Some landlords are very resistant to caps and carve-outs for expenses because it can become an accounting and management nightmare to treat tenants differently with regard to expense adjustments. Moreover, landlords don’t like to limit their ability to operate the project in a first-rate manner and the tenant should consider this in its negotiation.

We once represented a tenant who took most of a particular building, and wanted to really ratchet down the expenses with caps and exclusions. We pointed out to the tenant that this might cause the service level for the building to drop precipitously and it would be the tenant that bears the consequences.

We strongly urge you to obtain the property’s actual operating expenses for the prior two years as well as an estimate for the current year. Also, the type and size of the building will dictate the level of expenses a tenant is willing to accept. Clearly, a tenant would not want to pay the salary of an on-site property manager for a project which is only 20,000 square feet. If the project is 400,000 square feet and his or her salary is prorated to the tenants, then this cost is acceptable.

The easiest way to determine whether the landlord is operating its’ building efficiently is through comparisons to similar product. Once again, the broker can be invaluable in this area. A building which runs at $8.00 per square foot per year in expenses versus another at $10.00 per square foot can make a significant difference in total rent.


What happens if the Landlord fails to provide contemplated building services?

It depends.

Most Landlord leases provide little or no remedy for the failure of building services. In fact, many leases waive any right the tenant may otherwise have to vacate or without rent if the landlord fails to provide essential services. The tenant may have a possible common law remedy for breach of the implied warranty of suitability. However, the warranty is generally limited to latent physical or structural defects and does not exist as to matters specifically addressed in the lease. Moreover, most landlord leases attempt to waive implied warranties. Therefore, if the landlord fails to provide essential services, under most lease forms the tenant, at best, has a tenuous remedy, and at worst no remedy.

The following language is something I recommend inserting in the lease on behalf of my tenant clients to address this problem:

“Default by Landlord: Any provision in the Lease to the contrary notwithstanding, if Landlord fails to perform its obligations under the Lease and such failure (a) interferes substantially with the normal use of the Premises or appurtenant parking and/or other common areas by Tenant as allowed herein, and (b) continues for more than three (3) consecutive business days, then the rental shall be proportionately abated until such interference is eliminated or the Premises are otherwise rendered tenantable again. Additionally, if such interference continues for a period of 30 or more consecutive days, then Tenant shall have the right and option to cancel the Lease by giving written notice to Landlord within 15 days after the end of such 30 day period.”


How do I calculate the amount of space being leased?

Premises-Area Calculations.

The lease must adequately describe the leased premises. The manner of description will depend upon the nature of the space being leased. In this regard, it is important to know the standards by which the space is calculated. Are we being charged rent on net usable area, net rentable area, or some other standard? How are these terms defined and derived? Typically, rentable area calculations contain a percentage of the common areas of the building. This percentage is known as an “add-on” factor and can be up to 18%+ in some cases. That basically means you are paying rent on square footage that is up to 18%+ greater than the area contained within the confines of your office. The higher the add-on factor, the less efficient the building. This can have a substantial impact on the rent you are paying. See below as an example:

With Building A, you are paying rent on 300 additional square feet every month even though the actual space you are occupying is the same. Choosing Building B could save you tens of thousands of dollars in rent.


Who is responsible for constructing the lease space improvements?

It depends on what is agreed to in the lease and accompanying workletter agreement.

One of the more important issues to be decided is who will construct the leasehold improvements – should the tenant (a) use the landlord as a general contractor or (b) act as its own contractor? Traditionally, landlords insisted on acting as a general contractor for their tenants. This allowed landlords considerably greater control over “their” building and, importantly, often constituted a significant source of income. Tenants were considered a captive clientele and the economic terms were often not competitive with what could be obtained in an open market. However, labor disputes, insurance costs, unpredictable inflation, volatile interest rates, construction liability, construction permit obstacles and the general aggravation of coordinating numerous and specialized subcontractors have caused some rethinking. Giving the construction responsibility to the tenant may also shift to it the sometimes enormous burden of dealing with things that can delay completion, which can, in turn, shift to the tenant the “cost” of ailing to complete the work by a specified date beyond which rent begins to accrue. For these reasons, it is no longer uncommon for a landlord to willingly relinquish the construction oversight function to the tenant. Also, tenants have grown in expertise and bargaining power (especially the latter, where tenants have such great value in a competitive market) to the extent that they can greatly influence this equation to produce a result that favors them. If the Tenant will perform the work, but the landlord is responsible for performing any demolition of existing improvements, the workletter should address that fact.

Among the things that should be considered in the analysis of who should do the work is the existing status of the space to be improved. For example, if the space is unimproved “shell” space in a new building in which the base building contractor is still working, it may prove much more cost-effective to retain the landlord and, thereby, its base building contractor to construct leasehold improvements. Crews will already be on site and there may well be an existing contractual relationship between the landlord and the base building contractor that results in the same work being producible at less cost than would be required to involve a contractor unfamiliar with the building, who has no employees or subcontractors regularly on site and who has not given the landlord a price break on construction of leasehold improvements as an inducement to obtain the base building work contract. The tenant and its counsel should be aware that it is not unusual for things to be structured just the opposite – the base building contractor often gives the landlord a reduced price for base building work in return for being allowed to do the landlord’s work component of all tenant leasehold improvements, and the latter type of work can be the means to recoup the “bargain” given up front.

If the landlord acts as the contractor, then a workletter usually will be negotiated between the landlord and the tenant, often beginning from the landlord’s standard form attached to the lease agreement. On the other hand, if the tenant acts as its own contractor or hires a third party, a work allowance or credit will usually be included in the lease or in a work allowance agreement.