The office landlord's biggest secrets
By Bill Driscoll
When preparing to buy a car, it's great to know exactly what the dealer's real costs are before starting negotiations. That's what Consumer Reports provides with their "Car Buyers Guides." When armed with this information, you start on a much more level playing field. You may be spending $20,000-$50,000 of your money on a car. You don't want to unknowingly give any of it away to a sophisticated and highly experienced dealer.
Now consider the following: You're about to enter into a new lease for office space. You need approximately 5,000 square feet and you're willing to sign a five-year lease. Your landlord (the "dealer") is telling you that rent for your space is $2.50/SF plus separately metered utilities which you're also expected to pay. If you accept the landlord's deal "by the end of the week," he may even be able to get you one month of "free rent."
Here's his offer:
Size: 5,000 square feet
Rent: $2.50 plus utilities
Rent Adjustment: 4 percent per year
Tenant Improvements: $40 per square foot (anything over $40 is paid for by you as additional amortized rent i.e. the "car loan")
Free Rent: One month
Total Cost: $800,000
With the $800,000 you're about to spend on rent, you could buy 23 $35,000 cars. Naturally, you hear the "wail of the Irish banshee" as the landlord laments his ever-escalating costs. (There is a slight modicum of truth to this). With a straight face the landlord tells you: "We're not making any money on this deal." Is that true? Here's the Consumer Reports Guide for his office building:
Parameters
Lot Size: 4.5 acres
Coverage: 35 percent
Parking: 4/1,000 square feet leased
Land Cost: $19/square foot
Building Size: 68,607 square feet
ITEMCOST PER
SQUARE FOOT
ILand at $19 and 35 percent coverage$54
IIBuilding Shell$75
IIITenant Improvements$45
IVIndirect costs (architect, soils, title, escrow, etc.)$6
VBuilding Fees$7
VIConstruction Interest (8 months to build)$7
VIICarry at 7 percent and 15 months to lease$16
VIIIProfit (12 percent of cost)$25
Total Cost:$235
Now let's consider how this equates to rent.
IRent: $235 at 7 percent amortized over 25 years$19.95
IIVacancy: 5 percent $21.00
IIIPro forma rent:$1.75 NET
IVMarket Rent: $2.00 NET or $2.50 + utilities
In our example, if you signed your five-year lease with the parameters described above, here's how to calculate the landlord's profit. His asking rent is $.25 above his Cost to Build, equating to $84,000. He already has a 12 percent profit in his construction costs, equating to $125,000. REMEMBER: After the landlord makes his mortgage payment with your money, he realizes a nice profit with your money as follows: $84,000 + $125,000 = $209,000. Not bad. And this is before any tax benefit of mortgage interest, building depreciation or property costs, all of which benefit the landlord, are calculated.
That $209,000 profit equates to $.70 per square foot. You should negotiate tenaciously to receive part of that $.70. It's your money. Be proactively creative by asking for the following:
1. Free Rent (one month per year of lease term is a minimum –
5 months in our scenario) $62,500
2. Above-standard Tenant Improvements ($5/square foot) $25,000
3. Lids on expenses (use "inflation" as the guideline with a 3 percent lid) $25,000
4. Lower annual rent adjustment, use 3 percent not 4 percent $16,000
TOTAL SAVINGS $128,500
There's nothing wrong with the landlord making a "fair profit." (In our example, you saved yourself $128,500. That's four new cars.) However, fair is always in the eye of the beholder. Before you commence negotiations with your landlord, have a clear understanding of his costs. Back those up with recent office lease comparables. Do your homework. Be prepared. Only you can level that playing field. Good luck.
Bill Driscoll has been a commercial leasing agent in CB Richard Ellis' Carlsbad office for the past 24 years. He has negotiated more than 2 million square feet of office and industrial leases and sold more than 630 acres of commercial land. He has also been the top salesperson in the Carlsbad office on five different occasions, most recently in 2004. He can be reached at [email protected]
By Bill Driscoll
When preparing to buy a car, it's great to know exactly what the dealer's real costs are before starting negotiations. That's what Consumer Reports provides with their "Car Buyers Guides." When armed with this information, you start on a much more level playing field. You may be spending $20,000-$50,000 of your money on a car. You don't want to unknowingly give any of it away to a sophisticated and highly experienced dealer.
Now consider the following: You're about to enter into a new lease for office space. You need approximately 5,000 square feet and you're willing to sign a five-year lease. Your landlord (the "dealer") is telling you that rent for your space is $2.50/SF plus separately metered utilities which you're also expected to pay. If you accept the landlord's deal "by the end of the week," he may even be able to get you one month of "free rent."
Here's his offer:
Size: 5,000 square feet
Rent: $2.50 plus utilities
Rent Adjustment: 4 percent per year
Tenant Improvements: $40 per square foot (anything over $40 is paid for by you as additional amortized rent i.e. the "car loan")
Free Rent: One month
Total Cost: $800,000
With the $800,000 you're about to spend on rent, you could buy 23 $35,000 cars. Naturally, you hear the "wail of the Irish banshee" as the landlord laments his ever-escalating costs. (There is a slight modicum of truth to this). With a straight face the landlord tells you: "We're not making any money on this deal." Is that true? Here's the Consumer Reports Guide for his office building:
Parameters
Lot Size: 4.5 acres
Coverage: 35 percent
Parking: 4/1,000 square feet leased
Land Cost: $19/square foot
Building Size: 68,607 square feet
ITEMCOST PER
SQUARE FOOT
ILand at $19 and 35 percent coverage$54
IIBuilding Shell$75
IIITenant Improvements$45
IVIndirect costs (architect, soils, title, escrow, etc.)$6
VBuilding Fees$7
VIConstruction Interest (8 months to build)$7
VIICarry at 7 percent and 15 months to lease$16
VIIIProfit (12 percent of cost)$25
Total Cost:$235
Now let's consider how this equates to rent.
IRent: $235 at 7 percent amortized over 25 years$19.95
IIVacancy: 5 percent $21.00
IIIPro forma rent:$1.75 NET
IVMarket Rent: $2.00 NET or $2.50 + utilities
In our example, if you signed your five-year lease with the parameters described above, here's how to calculate the landlord's profit. His asking rent is $.25 above his Cost to Build, equating to $84,000. He already has a 12 percent profit in his construction costs, equating to $125,000. REMEMBER: After the landlord makes his mortgage payment with your money, he realizes a nice profit with your money as follows: $84,000 + $125,000 = $209,000. Not bad. And this is before any tax benefit of mortgage interest, building depreciation or property costs, all of which benefit the landlord, are calculated.
That $209,000 profit equates to $.70 per square foot. You should negotiate tenaciously to receive part of that $.70. It's your money. Be proactively creative by asking for the following:
1. Free Rent (one month per year of lease term is a minimum –
5 months in our scenario) $62,500
2. Above-standard Tenant Improvements ($5/square foot) $25,000
3. Lids on expenses (use "inflation" as the guideline with a 3 percent lid) $25,000
4. Lower annual rent adjustment, use 3 percent not 4 percent $16,000
TOTAL SAVINGS $128,500
There's nothing wrong with the landlord making a "fair profit." (In our example, you saved yourself $128,500. That's four new cars.) However, fair is always in the eye of the beholder. Before you commence negotiations with your landlord, have a clear understanding of his costs. Back those up with recent office lease comparables. Do your homework. Be prepared. Only you can level that playing field. Good luck.
Bill Driscoll has been a commercial leasing agent in CB Richard Ellis' Carlsbad office for the past 24 years. He has negotiated more than 2 million square feet of office and industrial leases and sold more than 630 acres of commercial land. He has also been the top salesperson in the Carlsbad office on five different occasions, most recently in 2004. He can be reached at [email protected]