It should be noted that this language applies to lease transactions as well, so in the preceding disclosure statement you can substitute Tenant for Buyer and Landlord for Seller. Getting back to that broker who is helping you find space.... who are they contractually obligated to represent? If you don't have an executed buyer's agent agreement with them, they are supposed to be representing the seller's best interests – by law. I know many of the real estate professionals here in Grand Rapids, and with few very exceptions they are both honest and knowledgeable. However, they are also in the business to make a profit, which is where human nature kicks in. Let's say you call an agent who has a sign on the side of a building which says "office space for lease." When they find out you don't have anyone representing you they will typically offer to help. Let's say they show you 8 other buildings with vacant space and you pick a space in one of those 8 buildings. Did they show you everything that might work for you, or did they (consciously or unconsciously) show you the properties their firm has listed (which, coincidentally, provide them with the highest commission)? When we represent a client looking for office space, we start with the universe of available properties – even some which may not be formally listed. That comprehensive list is narrowed down based on the criteria you provide us with in the initial assessment interview, not based on which space offers us the highest commission. This narrowing or filtering process occurs behind the scenes so that you are not overwhelmed with a multitude of options which have little or no applicability to your specific situation. As you can see, it is important to understand how this filtering is carried out. [back] _________________________________________________________________________________________ What do your services cost, and do I have to sign an agreement or contract to work with you? We never charge for an initial consultation. That meeting, which typically lasts 30 minutes to a couple hours, is designed to assess your current position and discuss your options going forward. More specifically, we focus initially on finding out whether or not we can help you. Assuming we collectively decide in our initial conversation that working together will be a good fit, you will need to sign a representation agreement with us. In the interest of not sharing the details of this agreement with our competitors, we have not included a copy of this agreement directly on our website. However, we will be happy to send you a copy to review ( click here ). As for the cost.... in most cases there is no direct, out of pocket expense to you. In fact, I can only think of one client who actually wrote us a check for the work we did for him. In all other cases, our fee has been paid by the owner. Nothing in life is really free, but this comes as close as possible to meeting that test. Assuming the property is listed and there is a commission-sharing agreement in place, our compensation is paid by the owner. Do you indirectly pay for the cost of that fee? Of course. However, if you represent yourself in the search process, is it possible for you to get our share of the commission? Not likely (see here for why you probably won't). There are only two instances where you would potentially have to write us a check for the work we are doing: (a) if you ultimately decide, after looking at a number of properties, that you don't want to move after all, or (b) if you ask us to pursue a lease agreement with an owner who does not have his space formally listed and that owner refuses to pay a leasing commission to us for leasing his space. Let's look at both situations to see what the risk really is. Scenario A (You Change Your Mind) – When we are working on a Tenant Rep assignment, we keep a log of all time and expenses associated with the job. If the job is cancelled because the client has changed their mind, we bill the client for our time and expenses to date. It is worth mentioning that this reimbursement billing is based on our actual costs, with no mark-up. Our current, actual hourly rate for executive-level work is $48 per hour, and assistant time is billed at $25 per hour. If you have ever hired a consultant you know that these rates are low. Our goal is to cover our direct costs in the unlikely event that you need to cancel the assignment prior to completion. This brings up a good point – if you are not in a position to either move or renew your existing lease and are just curious about what similar spaces are currently going for, please be honest and say so. We are always happy to accommodate such a request, and have never charged anyone to provide a summary of available space. It is only when we proceed with a full blown space search that we seek reimbursement for a cancelled assignment. Scenario B (You Lease a Space Which is not Formally Listed for Lease) – Pursuing a lease on an unlisted space doesn't necessarily mean that the Landlord won't pay us a commission, although it does increase the risk of that happening. The best way to avoid this is for us to address the issue with the owner in our initial conversation with him. Although he may not have the space officially listed for lease, chances are he has worked with a broker in the past and will be willing to pay a commission if it means getting a tenant. As long as the issue is addressed before other details are discussed, it is rarely an issue. This gives us the flexibility to pursue non-listed space, which happens more often than you might think. It is also important to note that our compensation is limited in our engagement contract to what is reasonable and customary in the market. Commission rates are not fixed, and will vary from property to property and market to market. Let's say that we look at 10 different properties and the shared commission rate (the commission paid to a buyer's rep) ranges from 2.5% to 3%. This is normal for West Michigan, and is not significant enough to influence our decision regarding the suitability of a particular space. However, Landlords with in-house leasing agents will occasionally offer a higher commission to a cooperating broker as an incentive to generate interest. Going back to the example, what if one of the 10 owners was paying a 5% commission? We would include in our final offer to the landlord a provision that the excess commission (in this case, 5% - 3% = 2%) would be rebated back to you as a rent or tenant improvement credit. [back] _________________________________________________________________________________________ How long before my lease expiration do I need to call you? There is no precise answer to this question, although we can certainly offer some general parameters. Office/Retail Space - less than 1,000 SF: 3 months minimum (4-6 preferred)
Office/Retail Space - 1,000 to 5,000 SF: 4 months minimum (4-6 preferred)
Office/Retail Space - 5,000 to 10,000 SF: 5 months minimum (5-6 preferred)
Office/Retail Space - over 10,000 SF: 6 months minimum (6-12 preferred, and longer (15-24 months) if new construction is an option) Industrial Space – less than 5,000 SF: 3 months minimum
Industrial Space – 5,000 to 20,000 SF: 4 months minimum
Industrial Space – over 20,000 SF: 5 months minimum (15-24 if new construction is an option)
If you are currently in a leased space, you probably either have an expiration date or a renewal option. If you have an expiration date in the next year with no contractual renewal option in the lease, does the Landlord want you to stay? That may sound like a dumb question but you won't know for sure unless you ask. The Landlord may be anxiously awaiting your lease expiration so they can move you out and let the adjoining tenant expand. Conversely, they may have nothing planned for the space and would love to have you stay, assuming you can work out the details. If the Landlord wants you out, you won't have much flexibility for holding over if your replacement space isn't available on time. This can result in costly penalties (which are normally spelled out in the lease). Without a formal renewal option, you should contact the Landlord well in advance of the expiration date – use the guidelines listed above. If you do have a renewal option, it will typically have a notification date associated with it. The notification deadline is typically 3-6 months before the expiration date, although it can be as long as a year or more. You should contact us at least two months – preferably three – before the notification deadline so we can adequately research your alternatives. [back] _________________________________________________________________________________________ What exactly does a Tenant Rep do? Every tenant rep assignment is custom-tailored based on the tenant's specific situation. However, all such assignments share a number of common steps. The following is a typical representation assignment outline (note - "WTR" is Waters Tenant Representation). - Initial meeting to discuss client's needs and determine whether we can help them
- Client fills out needs assessment survey
- Client and WTR review needs assessment and decide on search criteria
- WTR searches market for listed and unlisted properties which meet client's search criteria
- WTR reviews universe of qualified opportunities with client to decide which to tour (target is 4-8 properties)
- WTR sets up the site tour and prepares detailed tour package for client
- Client and WTR meet to review tour notes and narrow prospect list town to 2 or 3 options.
- WTR submits RFP (Request for Proposal) to 2-3 finalist landlords.
- WTR reviews Landlord proposals, prepares comparison grid, and meets with client to review options
- WTR confirms final list of required improvements to suite
- WTR requests draft lease from Landlord at preferred location
- WTR reviews draft lease with client and forwards to client's legal counsel for technical review
- WTR coordinates communication between client and Landlord until client occupies leased space
- WTR attends post-construction walk-thru and assists client with any follow-up required
- WTR provides lease documentation package to client for future reference
Based on our previous assertion that a typical tenant rep assignment takes 40-70 hours of our time, you can see that the preceding list is fairly abbreviated. It also does not touch on the various ancillary services which might be required or appropriate (see here for a list of some of those services). The key benefit to our process is that it segregates responsibilities based on expertise – we do the all work and bring you filtered, qualified results, while you spend your time doing what is most productive - making the decisions. Also not mentioned above is the specific process we use to help you understand what your out-of-pocket occupancy costs will be. I am a big proponent of analyzing available options on an "apples to apples" basis. This is done by adjusting all properties for items of dissimilarity. The best way to illustrate this method is by example. Let's say you are considering two different spaces for lease, with the following characteristics: Space #1 – 2,645 rentable square feet, $8.00/SF rent. Space #2 – 2,530 rentable square feet, $12.00/SF rent. On the surface, Space # 1 appears to be preferable – it is larger and has a lower rent/SF. However, the devil is in the details. As it turns out, Space #1, has 2,645 rentable square feet but only 2,300 useable square feet and is being quoted on an "as is" basis with expenses paid on a triple net basis. Space #2 encompasses 2,300 useable square feet and is located in a new building so the quoted rent is "turn-key". Moreover, expenses are allocated on a gross basis. What does this all mean? See the definitions page for a better explanation of what some of these terms mean. Adjusting these two listings for items of dissimilarity would result in the following comparison: Space #1 – Adjustments are necessary for expenses, improvements, and the common area factor. Expenses paid by the tenant will include taxes, insurance, common area maintenance, janitorial and utilities. These expenses are estimated to total $6.00/RSF. The cost to improve the suite to suit the tenant's requirements is $12.00/SF, which, if amortized over the 5 year initial base term, would add $3.00/SF annually to the base rent. The common area factor is 15% (2,645 RSF divided by 2,300 USF = 1.15). The full gross occupancy cost per rentable square foot is then calculated as follows: $8.00/RSF base + $6.00/RSF for expenses + $3.00/SF for improvement amortization = $ 17.00 per rentable square foot. Converting that to a useable rent is calculated as follows: $17.00/RSF multiplied by the rentable factor of 1.15 = $19.55 per useable square foot. Space # 2 - Adjustments are necessary for expenses and the common area factor. Expenses paid by the tenant will include only suite electrical use, estimated to be $1.00/RSF. The cost to improve the suite to suit the tenant's requirements is zero, since this is a new building and the space is being offered on a "turn-key" basis. The common area factor is 10% (2,530 RSF divided by 2,300 USF = 1.10). The full gross occupancy cost per rentable square foot is then calculated as follows: $12.00/RSF base + $1.00/RSF for expenses + $0.00/SF for improvement amortization = $ 13.00 per rentable square foot. Converting that to a useable rent is calculated as follows: $13.00/RSF multiplied by the rentable factor of 1.10 = $14.55 per useable square foot . As you can see, the unadjusted rents suggested a highly favorable rate for Space #1, while adjusting each for items of dissimilarity reveals that the opposite is true. This is just another example of why it makes sense to be represented by a qualified and experienced professional in your search for rental space. There are several other things we do to add value to a tenant rep assignment. One thing we pride ourselves on is being able to take a potentially complicated process and break it down into easily understandable terms. Our passion for doing so has evolved over the years as we have been involved in a number of meetings with high-level executives. The assumption is often made that an executive is knowledgeable on all subjects. As a result, people making presentations or communicating with a group of executives will often times make broad assumptions regarding specific knowledge and, as a result, end up "talking over the head" of some or most of the participants. The bigger problem in this scenario is that many executives are embarrassed to admit that they are not fully knowledgeable on a particular subject. As a result, they don't speak up, and potentially miss out on an important message. Another valuable byproduct of working with a Tenant Rep is that we can do a good job of insulating you from sales pitches. The real estate brokerage industry can be a very lucrative career path. As a result, it attracts its fair share of aggressive salespeople. Once it becomes known that you are looking to rent space, you will be routinely contacted by agents wanting to show you the space they have listed. These calls, if answered, can be very disruptive and time-consuming. If you are working with us, a simple statement regarding our status as your representative will serve to route all calls through us (and away from you). [back] _________________________________________________________________________________________ I have a long time left on my existing lease – what are my options? Contractually, your option is to pay your rent until the end of the lease. However, that may not be your only option. Let's say you are 8 ½ years into a 10 year lease and you occupy a fairly large space. Let's also assume that your rent has increased every year based on CPI increases, while the market has remained relatively flat. When the lease was initially written, the landlord was taking the risk that CPI wouldn't keep up with market rents, while your risk was the opposite (that contract rent would increase faster than market rates). We are not advocating that you should seek relief from the landlord simply because your rent is above market – what would your response be if the landlord asked to increase your rent mid-lease because their expenses went up unexpectedly? However, you may have something to offer in return. Let's go back to the example – this is actually very similar to a transaction we were involved in as a Landlord's representative three years ago. Assume that your contractual rent has increased to $20/SF while the market is at $15/SF. What do you have to offer? If you occupy a reasonably large block of space, chances are the landlord would hate to see you go at the end of your 10 year term. If you (we) approach the landlord now and offer to extend the lease for another 3 or 5 years if they are willing to reduce your rent to a market rate now (1 ½ years early), they will probably accept that offer. This is obviously only a good option if you are fairly comfortable that you want to stay. Even though you are staying and the space isn't officially listed for lease, we can normally convince the Landlord it is appropriate to pay us a commission given the added contractual rent they have realized (which means you don't pay us directly for our involvement). [back] _________________________________________________________________________________________ What type of properties and geographic locations does Waters Tenant Representation specialize in? Our "sweet spot", based on experience and familiarity, is the West Michigan office market. In addition to our involvement with leasing, we also have extensive experience as former owners of several multi-tenant office buildings in the Grand Rapids area. This experience on the owner's side gives us insight into the negotiations process that cannot easily be derived simply from being a leasing agent. Ninety percent of our representation assignments – including office, retail and industrial space searches – have been performed in the West Michigan area. However, we have also performed several multi-location space searches out of state, including 3 Midwest locations for a furniture retailer and 4 national locations for an industrial (distribution) client. While no one relishes the thought of spending time on airplanes and in hotels – at least not for work – we are committed to offering our clients with a single source solution, even if it involves securing space in out-state markets. A word here about our capabilities is appropriate. Even though our goal is to be able to offer a one-stop solution to our client's space needs, we are also realistic enough to know that we are not qualified to perform all brokerage-related tasks that arise. If we feel that someone else is better qualified to service a client's specific needs, we will not hesitate to recommend a solution that has little or no involvement on our part. [back] _________________________________________________________________________________________ Why should I care who owns and/or manages the Property I am leasing? Most people who are looking for rental space want to focus on the bottom-line cost, which is certainly understandable. However, this focus on economics ignores a very important component of the equation which has a direct impact on how satisfied you will be as a tenant – ownership and management of the property. As former owners and managers of the historic Waters Building, we placed primary emphasis on being responsive to our tenant's needs. While everyone in the management business would probably say that if asked, we actually followed through and did it. As a result, our direct management cost per square foot was higher than typical. One example of added service which leads to increased cost was our inclusion of a Tenant Services Representative on our staff. The primary role of this employee was to stay in constant contact with tenants – to be proactive and seek out opportunities to address tenants' needs and concerns rather than waiting for tenants to call with their problems. Obviously we didn't choose to spend more money on property management because we sought a lower return on our investment. On the contrary, we found that it was much more cost-effective in the long run to spend a little extra to keep tenants happy because a happy tenant tends to renew their lease rather than looking elsewhere. When we sold our ownership interest in the Waters Building in 2007, we had over 70 office tenants. A full 10% of those tenants had been in the building for over 40 years, and over 30% had been with us for 20 years or more. That level of tenant retention doesn't happen by accident, it takes a lot of hard work. One of the biggest challenges we had when marketing space for lease in the Waters Building was trying to convince prospective tenants of the relative worth of high quality ownership and management. An economic comparison is easy – if you have one space available at $10.00/SF and one at $11.00/SF, there is no argument regarding which one is better (more affordable). The question is, what is superior management worth? This is not a space attribute which is readily quantifiable. Often times the only prospect who understands the relative worth of a good manager or owner is one who has had the unfortunate experience of dealing with a unresponsive manager or with an owner who was unwilling (or unable) to correct facility deficiencies. We have enough experience in the West Michigan area to be able to give you input regarding the ownership and management of most buildings in the area. When working outside of West Michigan, we rely on both tenant surveys and secondary data sources to gauge customer satisfaction. [back] _________________________________________________________________________________________ What other services does your firm offer besides Tenant Representation? The basic Tenant Representation process was described in some detail here. During the performance of a base representation assignment we might identify the need for additional services. Examples of such ancillary services include: - Buyer Representation – applicable if the initial assessment reveals a preference to own rather than lease
- Lease Review – review existing agreement for Landlord's compliance with economic provisions
- Tenant Improvement Management – coordinate construction of initial space improvements
- Move Coordination - relocation of people, furniture and equipment
- Space Planning (through a partner vendor)
- Programming Study (through a partner vendor)
- Industry Rent Analysis – what are others in your industry paying as a % of sales?
- Buy vs. Lease Analysis – typically part of the initial assessment
- Demographic Studies – particularly suitable for retail tenants
- Competitor Mapping - particularly suitable for retail tenants
- Aerial Photography (through a partner vendor)
[back] _________________________________________________________________________________________ Can you give me common-sense definitions for some of the real estate terms I hear as I am out looking for leased space? Gross Lease vs. Net Lease: This refers to how operating expenses are allocated between the tenant and the landlord. The easiest way to remember this is to put the phrase "to the owner" after the lease type. For example, a Gross lease becomes "Gross to the owner", which means the owner has to pay all the operating expenses out of the rental income they receive. Conversely, a Net lease is "Net to the owner", so the owner keeps all the rent collected and the tenant pays the operating expenses. This would be simple to remember if industry participants – brokers, lenders, appraisers, etc. – consistently used the same terms. Unfortunately, that is not the case. Depending on the property type and geographic location, you might hear one or more of the following terms used to describe a lease: Gross, Modified Gross, Net, Triple Net, or Absolute Net. When verifying the expense allocation for a proposed lease, I prefer to make a list of all possible expenses and then ask the owner how each is allocated. This eliminates any errors caused by incorrect assumptions. [back] _________________________________________________________________________________________ Rentable vs. Useable Building Area (or SF): It is important to understand the distinction between these two measurements and to continually be aware of which of the two is being referred to. The simplest way to differentiate between Rentable and Useable is to remember that Useable is the area you can use exclusively – i.e., within your 4 walls – while Rentable is what you pay rent on. Your lease agreement will always include a reference to the rentable area of the premises you are leasing, but frequently do not mention the useable area. If you want to know what that is, you will probably need to ask the owner or owner's agent. In the illustration shown at right, the shaded areas represent "common areas" – those portions of the building that anyone can use. The un-shaded areas – Tenant Suites 1 and 2 – can only be used by the tenant and their guests. The definition of useable vs. rentable area is further illustrated by the following calculations: Tenant Suites 600 SF (84.5%)
Common Areas 110 SF (15.5%)
Total 710 SF (100%)
Common Area Factor: 710 ÷ 600 = 1.183 Useable Area – Suite #1: 300 SF
Useable Area – Suite #2: 300 SF
Rentable Area – Suite #1: 300 x 1.183 = 355 SF
Rentable Area – Suite #2: 300 x 1.183 = 355 SF | |
Common areas are most often found in multi-tenant, multi-story office buildings. Since most retail and industrial buildings are one story high and the tenants have separate entrances, the useable and rentable areas in those building types are the same. Calculating the rentable and useable building areas in a large multi-tenant building is a task which can be very complicated and is best left to an architect. Most architects will perform these measurements based on a set of standards published by the Building Owners and Managers Association ("BOMA"). Further information on the process can be found here. [back] _________________________________________________________________________________________ Tenant Improvement Amortization: If you lease a space that requires improvements prior to your occupancy, the cost of these improvements is often referred to as a "Tenant Improvement Allowance". A Landlord will often quote base rent for a space in its current or "as is" condition. If the Landlord has to spend additional money to prepare the space for your occupancy, he will reasonably expect to be reimbursed for the cost of those expenditures. The landlord will either borrow the money to fund Tenant Improvements or he will (more likely) take the funds out of working capital. If he borrows the money, the funds must be paid back to the lender with interest. If the money comes out of working capital, the Landlord will pay himself a rate of return since those funds will not be available for other projects (basically, he is borrowing from himself). Let's say you sign a 5 year lease and the Landlord has to spend $5,000 to get the space ready for your occupancy. A simple payback of this expenditure equally over 5 years with no interest would be $1,000 per year. However, the Landlord will want to earn a return on the money he is using to build these improvements. In order to accomplish this, the improvement costs are amortized over the term of the lease – that is, paid back in equal installments (the return of the funds) along with interest (the return on the funds). Using an interest rate of 5% per year, the annual amortization factor is 0.230975. Multiplying this times the cost of $5,000 results in an annual payment of about $1,155. The annual payment has increased from $1,000 to $1,155, with the difference being the return on the investment at 5%. If the forgoing expenditures were made to improve a suite which was 1,000 square feet, the added rent of $1,155 per year equates to a tenant improvement amortization payment of $1.16/SF. This will be added to the base rent payment. [back] | 