The Dallas area is still seeing remarkable commercial real estate activity despite rising rents. High office demand, declining vacancies and rising construction costs are causing significant increases in rental rates. In addition, property values are escalating and in turn, property taxes are going up, which are then passed-though to tenants. All of these factors are pushing rent costs to an all-time high.

Now, more than ever, it is advisable to manage your expectations when working on a facility lease transaction. As if high rents were not enough, landlords, leasing agents, architects, and construction companies are less responsive because business is good and they are all very busy.

Given the fickle nature of the market, you may find yourself negotiating business points until the very last minute or even get your terms re-traded. You may also find space is getting leased out from under you. If you feel like you are on shifting sands…it’s because you could well be.

Even after you get a deal done, the actual construction of the tenant improvements (depending on the scope of work) can take a long time…just getting a building permit can take weeks! In addition, the lead time to order materials (carpeting, glass, etc.) is taking longer than ever.

This is not an exaggeration. It’s really happening.

How can you get an upper hand? Here are some thoughts:

• Keep your options open and make sure you have multiple back-up space alternatives. Don’t put yourself in a position where your only option goes away.
• Be sure you understand the time it takes to get a lease deal done. Discuss time-lines and give yourself ample time to finalize a transaction.
• Keep your ear to the ground and stay updated on market conditions. Rate quotes and construction estimates can change in a matter of weeks.
• Know your current or prospective landlord’s tendencies. Know in advance if they are service oriented, if they care about their relationship with you and if they have the financial capability to deliver as promised.

No matter what, don’t get frustrated because you are not alone. Whether you want to hear it or not, the fact is it’s a landlord’s market right now…but the good news is, it won’t last forever.

This discussion is not intended as legal advice. Please consult with your attorney on all legal matters.

It is absolutely critical to get a good estimate of the lead-time needed for each step in your particular lease transaction. So, when clients ask when they should start renewal negotiations or when to start exploring the market for new space…we suggest calculating the time-frame by starting backwards.

For the purpose of illustration, below are approximate time estimates for each step. Please note that some transactions have fewer steps and some may have more. Keep in mind that each step and corresponding lead-time, will be subject to the complexity of your particular lease transaction.

Step 12. Moving Day (~ 1 — 3 days)
In most cases, Tenants will want to move into their new office space on a date to coincide with existing lease expiration in order to avoid a holdover penalty at their old office building. Moving day is stressful enough when all goes smoothly! Pre-planning will help avoid delays and potential holdover costs.

Step 11. Construction & Punch List (~ 2 weeks — 4 months)
The time it takes to build-out space (and finalize the punch-list) will vary significantly depending on the size of your office space and the scope of work. If the build-out is as simple as installing new paint and carpet, construction may only take a few weeks. On the other hand, if you are building-out space from shell, this could take months.
[Carpet & Paint; ~ 2 weeks | Build-Out from Shell Space; ~ 4 months]

Step 10. Building Permit (~ 3 — 4 weeks)
Obtaining a building permit in certain municipalities can take weeks and weeks. Often, this is such a variable that even the most experienced Construction Manager can be sidelined. NEVER underestimate how important it is to build-in time to obtain a building permit in your lead-time planning.

Step 9. Telecom/Data Vendor Installation (~ 1 — 6 weeks)
At some point prior to completion of the tenant improvements, you will need to coordinate your telecom/data vendor(s) to install your required telecom and data infrastructure. Telecom/data installation is usually done 1 -2 weeks prior to construction completion. It is also absolutely critical for you to know when your vendors will be able to activate service to your space. This particular step often stymies the most organized Tenants because at times, telecommunication providers don’t “turn on the juice” when they say they will or will need time to bring service into your new building if they are not already in place.
[Telecom/Data Installation; ~ 1 week | Service Activation; ~ 3 — 6 weeks]

Step 8. Formal Construction Bid Process (~ 2 — 3 weeks)
Once Construction Drawings and MEP’s are completed, the plans can go out for bid to the general contractors selected. Once again, depending on the scope of work, the time required to obtain bids will depend on market conditions/time of year, etc. For example, if it’s an active market and contractors are really busy, it will take much longer to obtain bids. Your Construction Manager will be instrumental in advising you on the necessary time required for this step.

Step 7. Construction Drawings & MEP’s (~ 3 — 5 weeks)
Depending on the scope of work, you may not need to have full-blown CD’s and/or MEP’s (engineering drawings). If you do require full blown plans and engineering drawings, then this process can take up to 5 weeks or more. Construction drawings/MEP’s will typically only begin AFTER a lease is fully executed, unless, the Tenant agrees to sign an indemnification letter agreeing to cover the cost of the plans if a lease does not get signed.

Step 6. Lease Document Finalization (~ 2 weeks — 2 months)
Again, depending on the complexity of the lease transaction, a Lease Agreement could take several weeks to several months to be fully executed. Holidays, vacations , etc. can slow down the process of lease approval, therefor it is important to get a realistic time frame allocated for this step.

Step 5. Test Fits/Pricing Plans/Preliminary Construction Bids (~ 1 — 3 weeks)
Preliminary space planning (test fits) are necessary to determine if the proposed space will work for your company. Architects typically can turn around a preliminary space plan within a week. Once a space plan is approved, a preliminary pricing plan and bids should be obtained. This can take another several weeks as well. Although some may elect to skip the Pricing Plan step, we strongly recommend that you obtain a good estimate of your construction costs BEFORE agreeing to lease terms.

Step 4. Negotiation of Business Points (~ 1 — 3 weeks)
Following review of the lease proposals and corresponding financial analyses, you will require time for the back-and-forth negotiations of the business points on one or more of your “finalist” buildings. The time required for this step will also depend on many variables such as market conditions or complexity of the deal, etc.

Step 3. Lease Proposals/Financial Review (~ 2 — 3 weeks)
Once you have selected your short-list of buildings, you will want to obtain lease proposals to evaluate the economics of the various offers.

Step 2. Building Tours (~ 1 day — 2 weeks)
After reviewing a Market Survey of viable options, you will want to tour select buildings to identify your short-list of ideal properties. This process can take a day or more depending on whether you like what you see or if your broker needs to go back to the drawing board and find additional options.

Step 1. Preliminary Market Review/Survey (~ 1 — 2 weeks)
Once you have provided your Broker with your ideal search parameters, your Broker will provide you with a Preliminary Market Survey, with corresponding office building options. This process can be quick or it can take a long time depending again on what you are looking for and the current availability of suitable alternatives.

Conclusion
By starting backwards, you can get a good “feel” for how long it will take to finalize your lease transaction. Your Construction Manager can prepare a schedule based on your particular situation that will show each step, and the anticipated time required to complete each task.

Keep in mind, however, that unforeseen situations can always creep up during the process that can cause delays. For example, did you know that something as simple as the carpet you select can have a long lead-time depending on whether or not it’s in stock? Also, what if you encounter a worst-case scenario such as getting way “down the road” on a transaction, and it falls apart, for whatever reason? Do you have a back-up plan or a back-up alternative property to re-visit?

In my 29 years as a Tenant Representative, I have seen it all and believe me, anything can happen. You may not totally avoid “issues” on your lease transaction, but if you plan properly, have a great Tenant Advisory team, a great Construction Manager and a motivated Landlord, then you can have a better chance of avoiding problems and enjoy a smooth, efficient and pleasant lease transaction experience.

This discussion is not intended as legal advice. Please consult with your attorney on all legal matters.

This year, my clients and prospects have been shocked when they have seen what landlords are quoting. Rental rates for office space are at an all-time high (in certain submarkets) within the Dallas/Fort Worth Metroplex. Making matters worse, many Landlords are now quoting rates on a “triple-net” basis. This means that the quoted rent is “net” of all operating expenses and electricity. Any company with a lease expiring in the near future must be prepared for the reality of the situation.

5 Stages of Grief
It’s as if our clients and prospects are experiencing the 5 Phases of Grief! Here are some examples of what may be going through their minds:

1. Denial – “What??? They want what to renew???”
2. Anger – “Well…I’m going to move!”
3. Bargaining – “OK…so…what if I take less of a tenant improvement allowance? I wonder if that would lower the rental rate?”
4. Depression – “I can’t believe there are no good space alternatives out there!”
5. Acceptance – “OK…maybe I should take the deal we have on the table.”

In my 25+ years as a tenant representative, I have never seen rates this high. With the exception of a very few office properties in the Uptown/Preston Center submarkets, rental rates in Dallas, Texas have never before broken the $30/sf barrier, and certainly not in the suburbs. Rental rates of $30+/sf may not be a shock for companies relocating to Texas that see Dallas as a great value, but local firms are not in the same boat and are feeling shocked and overwhelmed.

Given current market conditions, Tenants are being told “take it or leave it” by Landlords. What’s even worse, Landlords are maximizing their bargaining positions by putting pressure on companies to decide quickly. Some tactics used are the…“We have someone else looking at your space.” approach…or, will play the…”We just did a $$$ deal on a new space in the building and it’s a market rate.” game…naturally, all of this adds to the stress.

What can you do? Here are some ideas:

• Consider relocating to a more affordable office submarket: Many older buildings are getting renovated/revitalized and offering great deals.
• Hunker-down: Negotiate for a short term lease (12-18 months) and wait for the market to change, however, the market may not change (in the near future) and Landlords may not agree to short term deal.
• Downsize/Find smaller more efficient office space: A higher rental rate could be mitigated by eliminating excess space.
• Strengthen your negotiation leverage: Explore all viable options, get competitive back-up alternatives and negotiate hard. Now more than ever it is critical to work all the angles and push for every concession possible to get best deal.

Is there any good news for Tenants? Landlord markets don’t last forever. Has the office market reached a peak here in the Dallas/Fort Worth area? How much longer will this cycle continue? These are some questions that commercial real estate professionals are asking.

Some feel that there may be an oversupply looming in certain submarkets, and if space does not get absorbed then, rates may go down. For example, according to CoStar*, in the Upper Tollway/West Plano and Frisco/The Colony submarkets combined, there are over 2.1 million square feet of existing inventory and over 3 million square feet under construction as of the end of the 2nd quarter of 2015. That’s a total of 5.1 million square feet of inventory in these two submarkets alone.

Is there demand out there to absorb all this office space? That remains to be seen, but keep this in mind that office space rents tend to react to the classic supply and demand scenario: If there is too much supply, rates tend to go down.

Barring any major unforeseen economic downturn that would affect the economy, the Dallas/Fort Worth office market situation may stay this way for a while. Developers and Landlords are insisting that the office space market is still enjoying robust leasing activity. The DFW area alone has seen several significant corporate relocations such as Toyota, Liberty Mutual and State Farm, just to name a few. The “multiplier effect” attributed to these huge corporate relocations may also bring additional demand for office space.

Conclusion
Now more than ever, it is critical for Tenants to engage an expert real estate service provider to help with their lease negotiations. A savvy Tenant Representative will know which buildings/submarkets are offering the best deals. Also, your Tenant Representative will be aware of subtle changes in office market conditions and enable you to maximize leverage in your lease negotiations.

Office market data referenced herein was obtained from CoStar, July 15, 2015
This discussion is not intended as legal advice. Please consult with your attorney on all legal matters.

You have found the perfect space in the perfect building! Now you are excited and ready to see if you can make a deal to secure that wonderful new space. When you reach this stage in a lease transaction, it is absolutely critical to know the right steps to take in order to quantify the construction costs and negotiate an appropriate tenant improvement allowance with your landlord.

First, it is important for tenants to understand if they are really getting the full benefit of a proposed tenant improvement allowance (also known as a TI allowance). If the TI allowance is insufficient to cover the proposed build-out then one of two things can happen: the Landlord can elect to increase the TI allowance (but the landlord may increase your rental rate too in order to justify the increase in TI), or…you can come out of pocket, and fund the overage at your own expense.

Here are some facts to consider before you even start negotiating your TI allowance:

Adequacy of Tenant Improvement Allowance
A TI allowance quote from a landlord can be misleading if you are not aware of what other costs are involved in building out space. There are a number of variables that will work to reduce the allowance before any of the allowance is applied to construction materials and labor:

For Example: Are you really getting $30/sf to build out your space?

Quoted Tenant Improvement Allowance: $30.00/square foot

• <Less> Soft Costs (architectural fees, engineering fees, construction management fee (3% - 10%)
• <Less> Demo of Existing Telecom Cabling
• <Less> Contractors profit & overhead
• <Less> Permitting fee
• <Less> Asbestos certification fee
• <Less> Sales Tax (8.25%) - in Texas

TOTAL REMIANING ALLOWANCE: A lot less than you think!
“Allowance Eaters” are other fees that come off-the-top before any of the TI allowance is applied to materials and labor. For example, Landlords will deduct the cost for space planning and engineering fees from the allowance, as they have to pay for these services to third parties. The Landlord also wants to supervise the construction and charges a construction management fee to make sure the contractors do the work properly and on time (or you may also elect to hire your own construction manager if you prefer to control that process, and they will want to be paid too). Municipal codes now require that all spaces must be tested for asbestos and may also require abandoned telecommunication cabling left behind by a former tenant to be removed, and this can be very expensive. Contractors are in business to make a profit so their fees are also deducted from the total allowance. The municipality charges for a building permit and then the State charges a sales tax (on pre-existing space). In summary, the final tenant improvement allowance that you are left with is a lot less than you might think.

Existing Conditions
The cost to build-out a space for a tenant will vary depending on the existing conditions of a space. For example, a space that is in pure “shell” condition (has never been built-out) may cost substantially more to construct versus a space with pre-existing finishes. If a tenant selects a space that is pre-existing, they may be able to reuse existing walls, doors, ceiling tiles, light fixtures, etc. A space in pure “shell” condition does not have any finishes that can be reused, so construction costs are higher due to the cost of new materials.

Economies of Scale
In addition, “economies of scale” have an impact on construction costs. For example, if a tenant is leasing 5,000 square feet and has a fixed cost item, such as kitchen of $7,000, this will take up $1.40/square foot of their tenant improvement allowance. If this same $7,000 line item is spread out over a 20,000 square foot suite, it will only take up $0.35/sf of their tenant improvement allowance.

Busy Contractors & Cost of Materials
Market conditions will have a significant impact on the cost of materials and contractor fees. In a “hot” real estate market, contractors are busy and may have a tendency to charge more for their time and work. In addition the cost of materials can have a significant impact on construction costs. For example, several years ago there was a shortage of sheetrock in the Dallas/Fort Worth area. This shortage caused construction costs to increase significantly.

The Right Steps
So, how do you know if a proposed TI allowance is sufficient to cover your specific build-out? The following steps are highly recommended to help get a handle on these costs.

Detailed Pricing Plan
A pricing plan is a space plan, with detailed notes of all the required plumbing, electrical, millwork (cabinetry), finishes (such as grade of carpet and other flooring & wall coverings), appliances, light fixtures, glass, etc. that you will want in your space. A pricing plan is prepared by an architect and should have as much detail as possible on all the materials desired and the work that is to be performed. A detailed pricing plan will then allow a construction contractor to give a good estimate of what it will cost to build out the space. Also, it’s important to remember that “change orders” or changes to the scope of work after you sign a lease, can be very expensive. So, make sure you negotiate all your desired finishes early in the game when you still have leverage in your lease negotiations.

Competitive Preliminary Construction Bids
Obtaining preliminary competitive bids is absolutely necessary. In most cases, a minimum of three (3) contractors should be allowed to bid on the improvements stipulated in the Pricing Plan. Once the contractors have submitted their bids, a side-by-side comparison is then made, where all the construction costs are compared on a spreadsheet. This will allow for an apples-to-apples comparison of the proposed construction costs. This bid process will then allow you to compare your proposed TI allowance to the actual estimated construction costs.

Conclusion
Once you have construction estimates, you can then determine the adequacy of your TI allowance. The Pricing Plan and Competitive Preliminary Construction bids can be of tremendous help in negotiating with your landlord to secure the very best TI allowance possible and ensure that the Allowance Eaters did not leave you holding the bag.

This discussion is not intended as legal advice. Please consult with your attorney on all legal matters.

Do any of these scenarios sound familiar?

1. You have exceeded your business plan and have outgrown your office space faster than expected. Your current building has no expansion space for you – what do you do?
2. There is a high probability you will secure a major assignment from your biggest customer soon, and need to staff-up fast. Where are you going to put all these additional employees on such as short time frame? – What do you do?
3. You are 1 year into a 5 year lease. Your company just acquired another firm and you need to consolidate and expand. Your landlord is quoting top-dollar on expansion space and you have NO negotiating leverage – what do you do?
4. You are 2 years into a 7-year lease. You want to sell your company but have a 5-year lease obligation remaining– what do you do?
5. Circumstances have forced you to make cutbacks at your company. You now you have more office space than you need—what do you do?

These are but a few possible scenarios companies can face. How do you handle these circumstances without making hasty decisions or costly mistakes? The best way to prepare some of these events is to plan ahead. Proper planning in your initial lease negotiations may help avert stress and financial expense resulting from these unforeseen business situations.
Having some of the following built-in precautions in your lease can put a little more “muscle” in your lease negotiations with your Landlord going forward:

The “Must Take”
A “Must Take” clause is designed for a tenant to lease a predetermined amount of future space at a predetermined rate at an absolute future date. This clause is designed so that a tenant can pay on their initial space and then expand into the “Must-Take” space after a given number of months. The advantage is you have a guaranteed space waiting for you. The disadvantage is if you don’t need the space, you still are contractually obligated to pay for it.

Right of First Refusal
A first right of refusal (ROFR) is an expansion option where a defined space/suite in a building will be first offered to you, at rates and terms that the space is being offered to another tenant that wants the same space. You have the option of accepting the terms (within a short time frame) or passing on the deal. The good news is the Landlord has to run the deal by you first and give you “first dibs” on the space. The bad news is the ROFR could come at a time when you may not need the space. Once you pass on the space and the Landlord leases it to another party, your expansion option is permanently gone. A Right of First Opportunity (ROFO) is similar, except the terms that the Landlord offers you may not be the same terms that are being offered to the other tenant. These two clauses can be further modified to be “on-going”, so that if the other tenant does not lease the space, your expansion right is still in place and the landlord must come back to you if yet another tenant wants to lease the space. This is a very common lease clause.

Guaranteed Expansion Option
This is not very common, but in some cases, you can get this in your lease. A Guaranteed Expansion option identifies a specific space in the building that you must agree to lease at a specified date in the future. Once the option date comes, and you pass on the opportunity, then your expansion option terminates. If the Landlord agrees to do this, they typically will only allow this option to be in place for a short period. Essentially, the Landlord has to keep the space off the market until you decide to take it, and this is something Landlord’s do not like to do…but some will agree to it.

Option to Terminate
Options to Terminate are a good way to take on a block of space on a longer term basis (5-10 year term). If your company outgrows your space, if your company is bought out by another group (or you just don’t need the space for any other reason) you can terminate your lease and get out from under the long term existing lease obligation. Typically if you exercise an option to terminate, there are penalties that can include repaying the landlord their “up-front costs” which can include unamortized tenant improvements, brokerage commissions, and sometimes a fixed amount of additional rent. The good news is you have an escape clause, the bad news is the termination option may not come at the right time during your lease term. In most cases options to terminate expire after a set date. If you do not have any of these mechanisms in place in your current lease, don’t despair. You can still find solutions to your growth needs. Here are some quick-fix solutions that may work in a pinch.

Swing Space
“Swing Space”, or short-term lease space, can be found to house staff on a temporary basis. Some landlords will agree to short-term leases (12 to 24 months), but will typically not provide any tenant improvement dollars. These spaces are usually quoted on an “as-is” basis. The key with this solution is to have all your leases co-terminate with your original lease.

Short-Term Sublease Space
Short term sublease space can also be a great quick-fix for growing companies. These spaces are also usually quoted on an “as-is” basis and in most cases will not have any tenant improvement dollars available. The rates for sublease space also tend to be more competitively priced if there are less than 36 months remaining on the term.

Executive/Professional Suites
In an absolute pinch, companies can lease executive/professional suites that offer furnished offices, administrative services, etc. The benefit is you can ramp-up quickly if they have space for you. The drawback is that this type of facility, although convenient, can be very expensive in most cases.

Conclusion
The status of the real estate market will have a great deal of influence on whether Landlords will agree to some of these lease clauses or solutions. Naturally, in softer markets, Landlords tend to be more flexible, because they will want to attract your business into their vacant buildings. In tight markets, where space is in short supply and demand for office space is high, Landlords will tend to be less agreeable to some of these structures, as Landlord’s prefer not to be encumbered and Tenant options can affect the landlord’s ability to lease their vacant space in a timely manner.

An experienced real estate broker specializing in Tenant Representation can help you structure the best lease terms to plan for your future growth and help you find the right building and the right Landlord. Some Landlords are not encumbered by lenders or may have a more entrepreneurial mind-set and the ability to agree to more creative solutions for your company’s particular needs. It is also critical to engage the services of a knowledgeable real estate attorney to properly draft the most pro-tenant lease language to protect your interests in the future.

In the end, proper planning is the key. No one has a “crystal ball” or can predict every possible business situation in the future. Having said that, a well-structured/crafted lease agreement can pave the way to smoother negotiations between you and your Landlord and protect against unforeseen challenges that may lie ahead for your company.

This discussion is not intended as legal advice. Please consult with your attorney on all legal matters.