Capital Reserves

New Accounting Rules- Shorter Term Leases?

Banking institutions, financial service firms and other enterprises may have to take on new leasing negotiations. New rules regarding capital reserves against liabilities are going to be in place.  A Landlord -Owner can expect some of these types of organizations to negotiate leases with shorter terms and maybe fewer renewal options. This can provide some uncertainty for owners as to how they are going to manage assets with shorter lease terms for tenants.

Capital reserves must increase by 5% on a balance sheet. If a firms lease obligations total 50 million annually, then their  capital reserves would increase by 5 percent, or $2.5 million, to cover the liability. To minimize tenant turnover, the landlord will need to think more strategically regarding improvements and amenities to the property to retain tenancy.

 Example: Capital reserves to be required

A financial institution that has a 3 yr term lease in place with $1M in rent and $3M of liabilities, they would be required to have at 2X the liabilities $6M in capital reserves.

Negotiations on Office Lease OptionsAustin office expenses

Building owners will experience accounting changes regarding lease extension options.  This will require the existing tenant to review those options more carefully. If a lease offers  a tenant a better deal or discounted lease rate with a  lease extension at the end of the term, the “economic incentive” could impact how the lease is classified beginning on Day One.

If a tenant signs a 10-year lease with two five-year renewal options that carry an incentive, such as a 95 percent of market rental rate during the extension period. Even though the lease is technically a 10-year lease, it could be viewed as a 20-year lease for businesses’ accounting purposes if it there is a “good chance ” that the options will be exercised.

Within the new regulations, corporate real estate users will have to determine whether their office leases qualify for the finance or operating lease accounting treatment. This will require their assets and liabilities to appear on their balance sheets. Tenants may need additional time for lease negotiations because they have to bring additional people into the process.  An owner can expect possible delays so are advised to start the lease negotiation process as early as possible.

Austin Texas Office Market 2016

Austin Texas Office Market 2016

The following is an overview heading into the 2nd quarter or 2016 for the Austin Texas office market. Overall it looks like Class A spaces are getting bit of correction on lease rates although it is not significant rates have come down approximately $1.00 per sf per yr. Whereas, the Class B office spaces in Austin are having lease rate increases. The reason for this could be the demand for Class B office spaces was a bit higher in Q1 due to tenants wanting a more affordable alternative as opposed to the higher priced Class A office properties in the Austin Texas office market.

There are currently 208 Class A office properties, 407 Class B office properties and 78 Class C office properties in Austin Texas.Austin Office

Austin Texas Sublease Market for Office Space

The current sublease market vacancy rate is coming in at around 1%, with this type of picture it bodes well for Landlords and shows consolidation and difficulties fulfilling lease obligations have gone down dramatically.  Currently there is about 418,000SF of sublease space available in the Austin Texas office market after the first quarter of 2016. There are still value offices available, however the closer you get to downtown Austin the tighter the office market gets as well as North Austin coming in at below 5% vacancy rates.

Parking Ratios

Parking Ratios for Office Space

Over the years, we have had folks contact us about leasing office space and there is one attribute that seems to fall thru the cracks more so than other parts of leasing an office in Austin. It comes down to parking and parking ratios.  A lot of tenants may think, no big deal, I can lease an office in Austin and parking is not a problem. Is this true? Actually, it is not true and should be of great concern. You see there are municipal codes in place called parking ratios that allow for only a specific number of parking spaces based on the type of use a tenant has and the square footage occupied.  Are there some parking lots for buildings that are overbuilt to handle more parking the answer is yes, however when it comes to a 100% occupied property the parking ratios will be more stringent.

Parking Ratios based on Office type?Parking Ratios

So how does it layout and what should a tenant expect? Well the first question that has to be answered is : What type of use is the office going to used for? Why? Because certain uses have higher parking ratios than others. Here are some quick examples a Billiard Hall will have 1 space for every 100 square feet, a Medical office will have 1 space allocated for every 275 SF.  What about a general office space? A professional office is 1 space for every 275 SF , recently a potential client called us asking for 1000SF and enough parking for 20 people, well let’s do the math. If they are using this as a professional office on 1000SF they are only going to be allotted 4 parking spaces. So how are they going to find a space that has a parking ratio for 20 people?  You see a professional broker would have flagged this and said they do not have realistic expectations and it won’t work.  Let’s take a scenario, you lease a 1000SF office and there seems to be plenty of parking because after all the property only has 80% occupancy. All of a sudden a few big leases go down and now the property is 95% occupied and the fellow tenants are complaining that you are taking up their parking spaces, is that a problem? Yes, it is going to be.  So make sure your broker covers your bases with you before you are given an impression that it is no big deal.

Listing a commercial property

Listing a Commercial Property

If you are a Commercial property owner, you can be tempted to market and list your own properties for sale or lease. Is listing a commercial property easy and is it a one step process?

Are some brokers and agents more effective and efficient at marketing commercial property than others? Does it come down to just sticking the signs in the ground? Listing a commercial property is just the first step, there are many more steps than just listing a commercial property for sale or for lease. A good listing agent has a credible marketing plan and is responsive to requests unlike a larger percentage of average brokers who don’t return inquires or phone calls.

What are some of the factors to weigh when considering a solid listing agent -broker for your commercial property?

Visual representationsCommercial Property Listing

Will a listing broker or agent use up to date technological standards for shooting pictures of your property? Today, it isn’t just about taking photos with your mobile phone. Some brokers may or may not have good photographic skills. Are the promotional images of good quality and are they used using the tools provided to potential buyers and tenants?

Depending on the type of commercial property, will depend on what an image should look like. Obviously vacant land doesn’t require much photography that can’t be found on satellite images. Also there are drones today that can provide real time images of the land you are trying to sell. Most residential realtors use virtual tours, it has been our experience that most commercial brokers do not use them, however Shire Commercial does use Virtual Tours as a major benefit when we take on a listing.

Flyers and Collateral

Just because a flyer is made doesn’t make it effective, how is it marketed? And how often? Brochures or flyers must contain the most important information about a listing. Are the flyers detailed enough or are they missing key pertinent information? Some flyers are made without all the details just so the phone will ring from buyer or tenant reps or directly from potential clients because they are missing information. We have found over the past 12 yrs this really a time waster and doesn’t provide qualified leads.

  • Can a flyer be updated periodically quickly and easily, is it marketed consistently?
  • Flyers should be soft – copy for sure, hard copies are fine but with email today anything that you can hand somebody , you can always email them.
  • Some residential agents use a 24/7 toll free line to access information, what about QR Codes are those being used?

This is not an all-inclusive list, there are commissions to be negotiated – standards that the industry uses as well as the ability to draft purchase agreements and leases for the owner.

 

CAM Charges

CAM Charges and Capital Expenses

Tenants need to understand what is included in CAM charges. A tenant needs to understand what is in CAM Charges. Capital expenses- roof, structural, not normal wear and tear items can come up and  Landlords can try to pass thru these expenses.  A capital expenditure adds value to the property for more than 1 year, whereas OPEX or NNN charges are more about maintaining the property near term.

New laws that may allow the LL to not show capital expenditure expenses itemized and they may be passed thru to the tenant. It is almost a form of double dipping when adding capital expenditures to CAM charges. Whatever expenses are being used to maintain a building ( as an example free standing) to maintain the building in an on going long term basis could be considered as a capital expense.Cap rates for commercial property

Capital expenses may be removed from the accounting expenses but may not be excluded from a lease document. Developmental costs should be excluded , as where a parking lot improvement should be expensed out of a longer period of time such as 7 yrs for CAM. CAM charges may have a hidden maintenance fee in a lease as a percentage management fee. Cap protections can be negotiated.

Example: Perhaps a top coat on a parking lot is required maintenance which is just a coating on the parking lot versus digging up a parking lot and putting in new concrete which could be considered as a capital cost. However there are some grey areas , if a portion of the parking lot is done as opposed to the whole parking lot,  that may be considered as common area maintenance and not a developmental cost or capital expenditure.

Benefits and Detriments to Landlord

For the landlord or the REIT, they it is possible for them to pass thru costs and expenditures to squeeze tenants to improve their P&L. In a NNN deal, line items can be audited as a judgment call. If a tenant goes to a landlord and asks for line itemization it is entirely possible to get into a judgement call which may not be correct and consequently this would upset negotiations. So it is important to be clear on perspectives and what is reasonable.

Landlords tend to have a sensitivity to keeping costs in alignment to keep tenants, if they pad or keep CAM charges out of control, then the consequence would be their tenants moving out.

Mis-charges of CAM

NRTA – National retail tenants association, is an organization for tenants to protect each other. A tenant can reach it by viewing : www.retailtenants.org

Most tenants do not pay as much attention to CAM charges as they should. Tenants should be provided a reconciliation statement before the end of the year. There should be a provision for this in your lease this can keep the landlord honest to reimburse a tenant if it is required.

Retail Leasing Austin Texas

Retail space Austin TXLeasing Retail Space

As a tenant when you lease retail space in Austin, you are typically responsible for all maintenance that is provided to your retail space.

Sometimes this part of the lease can be the most confusing for tenants. Do you have a good market knowledge of what to ask for when it comes to maintenance?  A broker will and will be able to ask the right questions to apply the best leverage possible for retail leasing.

Who is responsible for Maintenance and Signage?

Can the landlord provide an estimate of monthly maintenance costs for the retail space?  What about signage? Let’s not forget about signage it is most likely outside of other marketing efforts one of the most important marketing items you have to consider regarding visibility and design.

Expenses

Who is responsible for what, what is covered by the landlord and what has to be paid for by you as the tenant. Retail leasing can be the most complicated commercial real estate transaction there is versus office and warehouse properties.Depending on the retail space you lease, some utilities may be part of your lease rate and some may not be. You may be responsible for utilities based on a percentage or based on the square footage your occupy within the retail center.

Are Water and sewer are typically included in your lease rate? What about gas if applicable, trash removal and janitorial costs? 

Landlord history?

Does the current landlord have a good reputation?

When there is an uncertain market a tenant – broker should ensure that you aren’t signing a lease in a property that is under any kind of financial hardship. Surely as a tenant you would not want to be in a situation where a property was to be foreclosed on, this is not typical for Austin however in 2016.

Asking the right questions are easy when a professional broker is asked to help a tenant acquire a retail space, it takes the guessing game out of the equation.

Quick leasing Do’s or Dont’s

  • Who pays for what repairs?
  • Additional fees?
  • Utilities , what is covered?
  • How are utilities metered?
  • Landlord history?