Right of First Refusal or First Offer…which is better?

When negotiating an office lease you need to ensure that you have enought space now as well as the ability to accommodate future growth—say for the next five years.  BYOBroker offers you a tool to make these calculations ( our SmartBuild program, which we’ll highlight soon), but you can also accomplish this through the skillful use of options.  The rights of First Offer (ROFO) and First Refusal (ROFR) both give their owners an option to pick up additional space, but in very different ways.  If your firm has a Right of First Offer on an adjacent space that becomes available, the landlord is obligated to offer it to you before he puts it on the market to the general public.  This is good for him, because if you pass on it he can lease it to another tenant at whatever rate the market will bear.  The Right of First Refusal however, obligates him to check with you before he enters into a lease with another tenant.  In the event that he is approached by another potential tenant and they negotiate a very aggressive deal, before he can go to lease with  them he must offer the space to you at the same terms, giving you the benefit of their negotiations.   Bottom line, ROFO is good but ROFR is better.

Chages to accounting standards will affect office leases

The Financial Accounting Standards Board, which sets American standards on accounting practices, is mulling over proposed changes to its generally accepted accounting practices (GAAP) regarding the recording of office leases.  The changes would require companies to book leases as assets and liabilities on their balance sheets, a move that will have the effect of making rent more expensive.  Office leases will be booked as a long term liability, with the entire lease on the books from day one, and the right to use the space as an asset.  This added liability will reduce the operating cash that companies have available and could potentially weaken an already struggling economy.  The new rules wouldn’t go into effect until 2013  but may be completed in 2012.  Read the post below:

http://www.costar.com/News/Article/Decision-On-Lease-Accounting-Rule-Changes-Likely-Pushed-Back-Until-2012/131352?ref=100&iid=245&cid=6707B0B5885DE2993BAB818312B089DC

CoStar Report

Switching to Renewable Energy provider to make money

The BYOBroker will be highlighting Green initiatives from across the country in the next several weeks.  Today’s comes from the New York Times and it focuses on how switching energy providers can be both good for the environment and good for the bottom line.

Coming Together to Pray, and Also to Find Reduced-Rate Energy Deals

Shameless plug for yours truly

I recently attended a presentation by CoStar for their new iPad app (which is fantastic) and made it on their YouTube video.  Check it out:

http://www.youtube.com/watch?v=D0UaiFlVu5g

New trend of businesses moving back to the city?

Bucking a trend that started in the 70’s and peaked in the 80’s and 90’s, businesses are starting to abandon the suburbs and move back to Chicago.  Long viewed as an opportunity to reduce operating costs and get more space, companies like Sears Holdings and Sara Lee moved their headquarters out of the city and into massive suburban complexes.  In a surprising about-face, Sara Lee is now considering moving back.  If it happens, they would join other big names like BP, United Airlines, Willis Group, and possibly Barilla and Acco Brands.  Growing firms like Groupon and Google have decided to stay in the city in order to draw from the large engineering and advertising talent pool.   

This shift is partly a result of changing demographics, with people waiting longer to get married and move to the suburbs, and also increased vacancy in buildings downtown, which currently stands at 18%, or 24 million square feet.  Read more about this here.

Mid Year Office Leasing Report

CoStar released its Mid Year Office Leasing Report today and you can find it here.  Among its conclusions were that despite 1) slower than expected job growth, 2) concern about the U.S. debt-ceiling crisis and 3) the European debt crisis, the office leasing market continues to make improvements.  While this seems counter-intuitive, given that the unemployment rate still stands at 9.2%, they cite businesses “gradually add(ing) workers and absorb(ing) space” as contributing factors.

Their data shows tenants “trading up” spaces in the down market.  With the price of Class A space 10% lower than in 2008, many businesses are taking this opportunity to improve their image.  This is reflected in an uptick in vacancy of Class B buildings. 

The report goes on to conclude that if companies start expanding again, office rents may start increasing ahead of demand growth.  These speculative increases in rental rates would reflect landlord’s hope that the lack of new development (of office space) will support the higher rates, despite the data from the New York market which shows that an increase in rental rates (7.3%) resulted in negative absorption (of space) around 1 million square feet. 

Another conclusion that landlords probably aren’t thrilled about is that the number of square feet per employee is dropping precipitously.  From 2003-2008, for each new employee added, companies increased their office footprint by approximately 233 sq ft.  Reflecting changes in the way offices operate–including “hoteling”–this number is now just 88 sq ft.  

If you have any questions on this report or how it translates into negotiable information,  contact me at stuart@byobroker.com.

LEED Certified vs. Energy Star–what’s the difference?

To outsiders, the Green building movement and it’s dueling designations—LEED and Energy Star—can be very confusing.  You may have seen that your dishwasher has an Energy Star rating, but you’re not sure how that relates back to your office building.  Well the BYOBlog author, being a LEED Accredited Professional, is going to be starting a multi part primer on how these designations compare, what the costs of green space are and finally, just who is moving into these buildings.

Energy Star: http://www.energystar.gov/index.cfm?c=home.index

Created in the early nineties by the EPA, the Energy Star program provides  a benchmark on the energy efficiency of commercial buildings (amonth other things)  and ranks buildings on a 1-100 scale.  Buildings must earn a 75 or higher to be listed, indicating that they operate more efficiently than 75% of all similar buildings nationwide.  Energy Star buildings are less expensive to operate, use less energy and emit less greenhouse gases than their peers. 

In 2010, over 6200 office buildings earned the Energy Star designation, an increase of almost 60% over 2009.  Because the process is more straight forward and less expensive than LEED certification, the growth of Energy Star designated buildings has outpaced LEED.

LEED Certification: http://www.usgbc.org/DisplayPage.aspx?CategoryID=19

Developed in 2000 by the U.S Green Building Council, LEED provides, “building owners and operators with a framework for identifying and implementing practical and measurable green building design, construction, operations and maintenance solutions”*.  It takes into account air quality, reuse of existing materials, use of materials that don’t release toxic gases, access to natural light, and transportation, among other things.  LEED ratings takes into consideration bottom line operational efficiency of the building, but then also evaluates  how it affects the environment and the people who work in it, giving rise to the Triple Bottom Line concept.

The process of getting LEED certification is a lot more complicated and expensive than becoming Energy Star rated, and as a result many building owners pass on the certification to save money.  Most LEED certified buildings also Energy Star rated, but not necessarily the other way around.

The bottom line is that Energy Star buildings benefit  their owners and the environment but LEED certified buildings extend those benefits to their tenants and the surrounding area as well. 

*USGBC website

Downtown vacancy lowest since end of 2009?

Faithful BYOBlog readers (okay, I’m hoping the masses will find this site soon), when you see headlines like this you can be sure of two things:

1) You need to read the details, where you will find that although direct vacancy for downtown space dropped to 14.5% from 14.9% in the second quarter, most of the demand for new space was driven by a handfull of firms like Groupon and McKinsey & Co, as opposed to broader demand from small to medium sized firms, which would signal a more optimistic outlook

2) This is little like putting a bow on a pig.  While Net Absorbption, which measures the change in leased and occupied space from quarter to quarter, was positive for the fourth quarter in a row (549,090 sq ft), the positive trend seems limited to Class A buildings.  Class B buildings actually saw vacancy edge up, while Class C buildings had a small drop.  The general concensus is that there is still downward pressure on demand for office space.

The takeaway from this article is that landlords are looking for any good news to signal a bottom on rental rates.  When tenants approach them without a broker—or BYOBroker–they can justify higher rates with articles like these.  Without the credible market information we provide, you will be negotiating on heresay which in the end will cost you dearly.

“We have a really good relationship with our landlord”

Among the many reasons  tenants have for not using a broker, this is one of my favorites.  Landlords love it even more.  Once a tenant tells his (her) landlord that they will not be using a commercial office broker, it basically signals to the landlord that they win.  You don’t play hardball with friends, and the landlord, who is in the business to make money, wants yo u to believe you are negotiating with a friend.  Unfortunately, his new “perspective friends”, other tenants looking at the building with brokers, will be getting dramatically more competitive proposals simply because they are using market forces to aid them.  Current market knowledge specific to your building and the kind of deals are being made in comparable buildings force a landlord to compete with the market and ensure better terms for you.  As we’ve said before, a straight renewal of and existing lease should result in a reduction in rent.  Depending on the current market and the amount of construction in the original lease this reduction could be between 5-40%.  If you’re negotiating without a broker–or in this case without BYOBroker—you’re not going to get this reduction.  With our help you’ll be able to present your friend with a compelling, well documented proposal that will save you money and help your buisness succeed.

Why BYOBroker….

Over the last decade of representing office tenants in commercial real estate leases, one of my biggest frustrations has been every time I hear, “we don’t need a broker–we’re going to do it ourselves“. Eighty-five to ninety percent of tenants will always use a broker and recognize the value we bring to the table. The remaining ten to fifteen percent just can’t be convinced that we add anything other than a commission. As a seasoned veteran, I know the value that brokers bring to the table, whether on a lease renewal or searching out and negotiating a lease in a new space. Business people, who negotiate contracts every day, naturally assume that they can do as good of a job as a commercial real estate broker–and possibly better if there is no commission involved.

Unfortunately, with only a few exceptions, this is not the case. Landlords are in the business of making money, and when they come across a tenant trying to negotiate a lease without a broker, they are more than happy to tell them they might get a better deal on their own. Lawyers have a saying that goes,” a lawyer that represents himself has a fool for a client“. Ninety-nine percent of the time the landlord wins and it’s only after the deal is done that the tenant finds out that they could have made a better deal if they had better information.

That’s where BYOBroker comes in. Go ahead and do it on your own, but give yourself the best chance of winning. We level the playing field and give you access to the same information that landlord’s use. We provide lease templates that allow you to present your proposals in a format that landlords are used to working with and alert you to potential pitfalls. We identify cost-savings and show you how to build flexibility into lease terms.  In short, we help you Be the Best Broker you can be.  I look forward to sharing more thoughts in the future.