Real Estate Taxes and What They Mean to You as a Tenant
Brokers Who Serve Two Masters?
Ignoring the Elephant in the Room?
DUAL REPRESENTATION BROKERAGE IS THE REAL ESTATE BROKERAGE INDUSTRY’S “ELEPHANT IN THE ROOM”.
Dual agency occurs when one real estate company represents both the tenant and the landlord in a lease transaction. Sometimes it is one individual on both sides; other times it is two individuals within the same firm.
No one serves two masters.
Every year tens of thousands of businesses are misled by brokers whose true loyalty is to the landlord. This costly mistake translates to higher rent, more overhead and less profits. Yet, like an elephant in the room, many business tenants negotiating a lease ignore the elephant and allow a major component of their future impacted by people whose loyalties lie across the negotiating table – the dual rep broker and his true client, the landlord.
In Southern Arizona, a professional services firm that occupied 15,000 square feet of office space was approached by its building’s listing broker and his landlord. This dual-loyalty broker and his landlord client said all the right things to the tenant, focusing on the great relationship they had shared over the past ten years. They told the firm not to hire an outside broker to represent the tenant’s interests and offered the tenant “a below market deal.” The dual-agency broker promised the tenant that it would save the cost of a commission, and that savings would be reflected in reduced rent.
The tenant was contacted by our ITRA office, and happened to ask if we could review the landlord’s “wonderful terms”, based on our recent experience in the building and in the surrounding area.
What happened next shocked the tenant: we showed them that the deal was below the belt, not below the market. The proposed rent was actually $4 per foot higher per year than recent new deals we had finalized in the same building. In addition, the landlord wasn’t going to change the tenant’s base year for operating expenses. In the proposed deal, they would pay an extra $.40 per square foot per month in expenses, and that increase would have continued for another ten years had we not reviewed the deal. The tenant was offended by the deception attempted by the landlord and the landlord’s broker. We moved them out of the building to higher quality space in a better building and saved them almost $2 million dollars.
Although the commercial real estate market has been trying to hold the lid on this dirty little secret for decades – it’s called conflict of interests – a growing group of tenants is having an epiphany. These savvy tenants are realizing that in the world of big commercial brokerage houses, the house wins, and in this case the house is always the landlord, because that is where the money is!
The landlord’s goals and objectives clearly conflict with the tenant’s. Next to payroll, “rent” is the highest expenses for most companies. Rent is defined as base rent plus all the additional occupancy costs landlords impose upon tenants during their lease term, including operating expense pass-throughs, real estate taxes, parking charges, amortized tenant improvements, and much more.
Landlords are in the business of leasing and operating office buildings: they are pros at it. They know every trick in the book. And their soldiers are the landlord brokers.
How does a broker who has a listing on a building, and a fiduciary responsibility and contractual obligation to the landlord, fairly and adequately also represent the tenant? The answer is, no matter how much marketing spin they might use to justify it, they can’t.
An unsuspecting tenant doesn’t stand a chance when standing alone against a dual agency broker and his landlord. Commercial tenants aren’t in the real estate business. Their focus and experience lies in whatever it is they do to maximize their own profits and maximize expenses. However, one sure way to minimize expenses is to hire a specialized tenant representation firm and level the playing field when negotiating an expansion, renewal, relocation, contraction or purchase. An exclusive tenant rep firm – like ITRA – only represents space users, never landlords.
Let’s look at another example: A tenant was renegotiating his firm’s lease directly with the landlord and the landlord’s broker. Without a tenant representative in his corner, the tenant was at a disadvantage. ITRA stepped in and reviewed all the correspondence as well as the existing lease. The landlord was threatening to re-measure the space per BOMA 1996 standards. This would have increased the tenant’s core factor by more than 7%. However, we pointed out that the tenant had a favorable extension option which they hadn’t exercised yet, and the lease was specific: the landlord had no right to re-measure the space. We helped the tenant go to arbitration, and saved them $1,000,000 in rent – money that would not have been saved had they used a dual representation broker.
Dual representation brokers serve landlords in securing additional listings or management contracts, from the landlords, or to market their success to other potential landlords.
When this writer started in this business over 23 years ago, everyone worked for landlords. We made our money by filling landlords’ building with new tenants and retaining tenants on lease renewals. It wasn’t until the mid 1980s that exclusive tenant representation started to emerge as a realistic business model accepted by corporate users.
A tenant broker wants to do a good job, develop a long-term relationship with the client based on trust, and win referrals to other tenants in their market in the process.
The choice is yours! Let’s send the elephant packing!
Picture Your Customers When Considering Commercial Property Lease
When and why customers visit you are crucial information when doing a site evaluation.
When evaluating commercial real estate sites for your office or retail business, knowing who your customers are and why they want to visit your business is crucial.
We’ve identified several factors that affect customer activity to your business in Tucson or elsewhere.
Overall, look for sites where your customers have numerous reasons to be in the immediate vicinity or in the larger trade area. Linked clusters of businesses that serve your customers provide this activity.
Time of Day
Most of your customers spend the bulk of their money depending on the time of day, such as
- mealtimes
- after-work shopping
- before-work fueling and snacking.
If your business in convenience-oriented, it needs to be near daytime convenience-oriented populations.
Destination-oriented business will often generate their own draw and can therefore do without being located near day-part populations, though that business is at risk of being out-positioned.
Some businesses get by with depending on one part of the day to bring in the bulk of a day’s revenue. It would be a dire mistake, however, to apply this across the board.
This thinking is often referred to as “the law of compensation.” Blind followers of this law often find their business struggling. Low volume in one day-part is not always compensated by strong volume in another day-part.
Only highly successful locations can excuse the loss of revenues from any normal day-part.
Location also affects this “law of compensation.” Just because a business does well on a particular day-part does not mean it will do as well on the same day-part in another location.
If you are considering opening an additional location of the same business, do a full site evaluation process. This will make you money in the long run.
Infrequent Customers
Frequent customers, whether they come in numerous times a week or a couple times a year, are a key consideration in site selection. But infrequent customers usually are more vital to a business’s success.
A site with a high number of frequent customers and a low number of infrequent customers is at risk of changes in the marketplace such as
- new competition
- out-positioning by a competitor
- cannibalism by one of your other locations
- closure of large manufacturing plant, military facility or school.
Infrequent customers are not as fragile. Increased competition can even increase the trade area’s attraction, thus increasing your business’ volume.
A site evaluation can predict whether there will be a large enough infrequent customer base. A business will rarely be unsuccessful with a solid infrequent customer base, even if that business has a low frequent customer base.
The best location is often a convenient stop for your frequent customers and an easy destination for your infrequent customers.
Image and Competition
With the exception of a few small town and extremely competitive city sites, the amount of customer sources and the supply of actual customers is not a risk factor.
The problem to consider in a site evaluation is not so much the supply of customers, but the demand, the amount of actual customers for your particular business.
The amount of actual customers for your business is a result of the complex, changing relationships among these factors:
- customer sources
- image
- competition.
Customer sources include residential areas, employment areas and populations who use your service as a convenience or as a destination.
Image is a composite of the features influencing customer perception to visit your business:
your location’s surroundings
your business’s visibility and access
the market presence or customer familiarity with your product.
A strong image can increase the demand for your product over your competition.
Competition, both direct and indirect, is a composite of all businesses a customer considers when making a purchasing decision.
Competition will influence your site’s success by adding visits to your business or dividing the visits among all competitors. This composite interaction provides a quantitative measure of the demand for your product.
A high number of total customers can allow for a high amount of competition, while a low number of total customers requires lower competition.
A successful site has a strong supply of customers relative to the amount of competition. It possesses an image that attracts those customers with the quality of location and market presence.
Commercial Real Estate Group of Tucson can help you evaluate a potential site with customers in mind. Contact the tenant representation company to learn more.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States, Latin America, Europe and Asia as a member of ITRA. For more information call 520-299-3400.Understanding Rental Rates for Commercial Real Estate Leases
Clearly understand how rental rates will be quoted and what else affects that quote.
When it’s time for you to call about properties you’re interested in, you want to
- decide which ones are worth the time to inspect
- obtain written information and floor plans of the offering.
Part of that call will include asking for some information about rental rates. Normally, the rate quoted for a lease on commercial property reflects the amount of rent you pay per square foot. However, you must pay attention to whether this quote is for a monthly rate or an annual rate.
In Arizona typically office and retail space is quoted annually. Industrial is quoted monthly. Most markets quote on an annual basis, as do landlords or owners of industrial space and retail space. Rental rates aren’t the only financial concerns to pay attention to.
Other Cost Considerations
One essential question in comparing the final cost of leasing one property to another is, “What are all the things I will be paying for that are not included in the rent?”
Also understand that commercial space often needs to be modified to meet your needs as a tenant. Rarely do the existing conditions of space precisely meet the needs of the incoming tenant.
Landlords anticipate this and are prepared to negotiate the cost of improvements with the tenant. This should play into your comparisons of properties to lease.
Commercial Real Estate Group of Tucson can tell you all of the considerations you need to know when you start asking for information about properties that interest you. Contact our tenant representation company to learn more.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States, Latin America, Europe and Asia as a member of ITRA. For more information call 520-299-3400.
Business Outcomes You Expect
You want a Tenant Representative who understands the business pressures you’re under and business goals you want to achieve.
Commercial Real Estate Group of Tucson becomes your knowledgeable and able partner in your commercial real estate transactions, whether it’s for office space, industrial space, a medical office, warehouse or retail space in Tucson.
You can count on us to do the following:
Meet and Exceed Your Expectations
We know that commercial Tenant Representative must demonstrate an understanding of principles and practices. Commercial Real Estate Group of Tucson is equipped with the critical technologies and skills that guide a client-focused sales process.
More efficient processes allow us to serve you promptly and effectively. Our methods have satisfied our clients and they return to us again and again for services. We provide added value in every phase of the real estate sales process. We do so with the goal of developing business that contributes greatly to your financial success.
Reduce Your Risk
By meeting the business and technical challenges of a Tucson commercial real estate transaction, we will lower your overall risk exposure. This will help preserve your capital and keep earnings as high as possible through a true 360-degree view of the current market.
Help You Succeed with Today’s Sophisticated Investor
Our team of professional business consultants focuses on your need for Tucson industrial, office, retail and other commercial real estate space.
We use a system of time-proven skills to identify and capitalize on your needs. Commercial Real Estate Group of Tucson has 19 years of experience and investment spent on acquiring the technical expertise and market savvy to help you become more profitable.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States, Latin America, Europe and Asia as a member of ITRA. For more information call 520-299-3400.Our Difference is Your Advantage
How is Commercial Real Estate Group of Tucson different from most other commercial real estate brokers?
We exclusively represent tenants and buyers. You can count on us as an experienced professional and your trusted advisor. (“We do not represent owners!“)
We never represent landlords or developers. As Tenant Representatives, you will always receive conflict-free representation with total objectivity.
We negotiate on your behalf, not anyone else’s. You get the necessary negotiating leverage to reduce your real estate costs.
Through our affiliation with ITRA, we provide broad geographical coverage. With offices in major markets around the world, you receive seamless representation in multiple markets.
With Commercial Real Estate Group us on your side, you reduce the risk of making a costly mistake in your commercial property lease or acquisition.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States, Latin America, Europe and Asia as a member of ITRA. For more information call 520-299-3400.
Our Services
Tenant Representation
As Exclusive Tenant Representatives, we work on your side of the table in negotiations with landlords and building owners. We handle all types of transactions:
- leases
- dispositions
- acquisitions
- 1031 exchanges
- lease renewals
for all kinds of commercial real estate uses in Tucson and Southern Arizona, including
- retail space
- industrial space
- office space
- medical office
- research and development
- life sciences
- warehouse /distribution
- manufacturing
- headquarters.
Our comprehensive services include
Real Estate Market Analysis
- acquisitions
- dispositions
- lease renewals
Strategic Planning
- model development
- acquisition /consolidation analysis
- policies and procedures manuals
- space planning
Location Analysis
- labor market analysis
- transportation costs
- utility costs and availability
- quality of life
- taxation
- market accessibility
Financial Analysis
- buy vs. lease
- build-to-suit
- equity participation
- sale / leasebacks
Negotiations
- proposals
- lease contracts
- dispositions
- acquisition contracts
State and Local Incentives
- sale / leasebacks
- work letters
- operating expense and tax audits
- architectural engineering contracts
- developer agreements
State and Local Incentive Negotiations
- statutory and negotiated incentives
- cash grants
- infrastructure
- tax credits and abatements
- workforce grants and training
- subsidized land and building costs
Lease Management
- lease abstracting
- financial reports
- tax and operating expenses
Surplus Property Analysis
- marketability
- highest and best use
- disposition strategies
Project Management
- needs assessment
- project budget management
- selection and oversight of design team, contractors and vendors
- move coordination.
Creating a Proposal to Lease
A well-written proposal opens the process of negotiating for a commercial real estate lease while covering major issues important to you.
After you’ve inspected several properties[link to touring properties] for your retail, office or industrial space, you’ll have a good idea of which ones you’d like to lease.
At this point, you’ll write a proposal to lease a specific commercial real estate property. This proposal is necessary whether you’re seeking a lease in Tucson or elsewhere. This step helps launch negotiations with the owner, landlord or their broker.
Actually, a well-written proposal to lease will get you well into lease negotiations. Once the proposal stage is complete, you will be provided a draft lease that you and your legal counsel will review and fine-tune into a contract that accurately defines your agreement.
First Steps
In preparing these letters of intent, I prefer to focus the proposal on working to gain agreement on the big issues first. Smaller issues should be set aside to work out later in the lease negotiations.
This strategy relieves much of the inherent tension in negotiating and makes agreement on the side issues easier to obtain.
If you have been provided with a floor plan of existing conditions, mark it up with your requirements and include it with your proposal.
Multiple Proposals
It’s appropriate to negotiate for more than one space in order to get the best lease possible. Creating competition, especially in a softer market, can work well in your favor. Letting other property owners know you have options can garner some nice concessions.
If you take this route, I advise you not to go much beyond the first round of proposal responses or into multiple space-planning sessions without informing all the property owners that you are entertaining several proposals.
Owner/Landlord Expectations
Security deposit. Expect to provide this unless you represent a major corporation with very high credit. Security is important to owners, especially when they provide a significant amount of tenant improvement dollars to secure a tenant.
First month’s rent. Owners expect this payment when the lease is executed, even if it is several months before the commencement date.
In most retail-space transactions, which commonly use net rents, the onus is on the tenant to make their own improvements or install fixtures. Therefore, it is customary to start the lease, but delay the start of the rent for a time to allow you to do this work.
An owner might be more willing to grant rent abatement if you propose one of two options:
half-rent for a longer time rather than free rent for a shorter period.
free rent amounts spread out over the term, which is often more palatable to owners.
Hazardous materials. It is important to discuss this front to avoid wasting everyone’s time. Include in your proposal any hazardous materials you will use in the space. Ask the owner for a complete written disclosure about prior uses of the premises.
You will want assurances that industrial space is clean before occupancy.
Operating costs. Tenants are required to pay for any increases in the cost of operating the building after the first year of the lease.
The first year of the lease is called the base year to which all future operating expense budgets are compared. Base years are most often calendar years, especially in multi-tenant properties.
If the space is within a multi-tenant property, you will need to define the owner’s obligations related to the common areas.
Space to Grow
Taking more space than you initially need is one way to deal with planned growth of your business. Most tenants are concerned about expansion rights so they can avoid moving if they outgrow the current space.
If you use this method, ensure you have the right to sublease a portion of the space.
Owners are reluctant to grant any options since options never serve the owner’s interests. Options to expand or renew are definitely considered concessions by property owners.
Ask for what you want, but expect the owner to try to water down your rights as much as possible. In tight markets, option concessions tend to dissipate.
If you are leasing more space than you need initially, ask to structure the rent one of two ways:
Start with a lower rent that gradually increases.
Calculate the first year’s rent only on the portion of the space you will use initially.
Tenant Improvements
If you are providing your own space planner, it’s possible to negotiate for the owner to pay for your architect. Typically this occurs when the owner already is offering space-planning services in order to attract tenants.
A reimbursement for tenant improvements that you initially pay for could cause a taxable event. Consult a tax advisor before agreeing to any cash allowance that comes as a reimbursement.
There are many more issues that should be included in a proposal to lease. Commercial Real Estate Group of Tucson can help you draw up a lease proposal that covers all the bases. Contact the tenant representation company to learn more.
Working With a Tenant Representation Firm
Find out how a tenant representative works in the best interest of business owners who are looking for a commercial real estate lease or purchase.
Tenant representation describes a licensed real estate professional who represents only tenants and users of commercial real estate.
As the client of a tenant representative, you are certain that your agent has no conflicts of interest regarding building listings and landlord contracts. Your agent is on your side and represents only your interests.
Count the Savings of Tenant Representation
A rental rate quoted for a space includes
- the marketing costs for any leasing representative
- the developer’s in-house marketing
- compensation for the tenant representative.
If you don’t use your own tenant representative, the landlord’s listing agent—and advocate—gets the entire fee. You paid without having an advocate of your own.
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