CBRE’s Tom Ray: Tackling the questions of open floor plans, long lease terms and financial documents

Tom Ray

Tom Ray

Tom Ray is a first vice president with CBRE, specializing in office brokerage in the St. Louis market. He was one of the top producers in CBRE’s St. Louis office in 2004 through 2007 and 2012 and 2013. Ray recently answered several of the most common questions that office tenants have for commercial brokers. 

Why does my space measure physically less than it says in the lease?
Tom Ray: Landlords charge rent based on a dollar amount per rentable square foot. The rentable square foot in the lease includes the usable space within the walls of the tenant suite plus a common area add-on factor for the building. Therefore tenants are right that they are physically occupying less space than is shown on their lease. This is common throughout office buildings in the St. Louis market.

When comparing different buildings, it is important for tenants to take into account the different common-area factors for each building to better understand each building’s efficiency. 

I am going to use an open floor plan for my new office so I can accommodate more employees. How does this affect my search for office space?
Ray: The number of employees you are attempting to add into a space can significantly change how you search for space. Most buildings are built to accommodate three to four people per 1,000 square feet leased. Many open plans allow tenants to increase this to five or more people per 1,000 square feet leased.

Office users need to take into account five factors when looking to change to an open floor plan with more employees per thousand square feet: Look for buildings that have adequate parking. Consider locations near major public transportation including bus and MetroLink. Consider how many employees are actually going to be working in the office on a daily basis.  Consider whether the landlord will lease additional parking spaces as part of the deal. Consider whether the building’s air conditioning can accommodate the extra heat load of the additional employees. 

What is the meant by “Additional Rent” in the lease? Why do I have to pay it?
Ray: “Additional Rent” in a lease usually refers to the portion of the building operating expenses that are passed through to the tenants. Operating expenses include the cost of utilities, janitorial, snow removal, building maintenance, property insurance, real estate taxes, real estate insurance, landscaping, etc. Landlords pass through to tenants the portion of the operating expenses that exceed the value of their base year.

Tenants should make sure that their office lease includes a base year at least equal to the year that they move into the building. 

Why do landlords want such long lease terms?
Ray: Landlords need longer lease terms — longer than one to two years — to provide a reasonable payback period for the cost of building out a space for a new tenant. Landlords also typically need a minimum lease term of three to five years to maintain and improve the value of their building.

The cost of a tenant’s build-out will have a large impact on how long of a lease term the landlord needs. If a tenant is willing to pay for the build-out, this will help them negotiate a shorter lease term.

Why does the landlord want to see my financial statements?
Ray: The landlord will request to see a potential tenant’s financial statements for three reasons. The most important reason is for assurance that the tenant will be able to pay rent in a timely manner over the lease term. Second, the landlord is going to invest capital into the build-out of the space, so they have to make sure that their capital invested will be paid back through the rent. Third, a tenant’s financial strength affects the value of the building.

Before going to market to look for space, tenants should plan ahead by meeting with their accountant to prepare at least two years worth of financial statements to share with potential landlords. Tenants can selectively share these financial statements with the landlord at a time that gives the tenant negotiating leverage or at the time when the lease is being prepared.

How does the age of a building affect my use of the space?
Ray: Usually, older buildings have more columns, which can limit the space for office furniture. Newer buildings have fewer columns and wider space, making them more flexible for furniture placement and more efficient. Older buildings often struggle to accommodate today’s higher employee loads because of parking ratios, air conditioning and electrical power.

An older building may work really well for an office tenant. The tenant should evaluate different buildings to consider if the value trade-offs of leasing space in an older building is worth the discount. In addition to column spacing, tenants should consider an older building’s available space, the available parking, the building’s air conditioning and electrical power.

Why does it take so long to have my space ready for occupancy?
Ray: Building out an office space is a complex process. Typically, construction in the new space includes building new walls, moving electrical wiring, moving air-conditioning distribution lines, installing voice and computer data cabling, and installing cabinets and other kitchen appliances for the break room. A trend we are seeing, particularly in Class-A buildings, is that tenants are looking for high-end, custom finishes. Many of these items such as bamboo floors, glass doors and wall coverings take more time to order and install than the standard finishes of paint and carpet.

Additionally, landlords have to take into account building codes. Many of St. Louis’s municipalities are very thorough in their review of tenant plans and very strict in their interpretation of the building code. It’s not uncommon for a local municipality to spend four to six weeks reviewing a set of blueprints before construction can begin, regardless of the size of the space.

The most important thing a tenant can do in regards to having the space ready on time, regardless of the size of the space, is to plan ahead. Ideally, tenants should start their planning process 12 to 15 months before their lease is up, and no less than nine months before their lease is up. Tenants should begin touring the market seven to 12 months prior to lease expiration depending on their size. 

The lease has a “Landlord Relocation Right” section. What is that about
Ray: The “Landlord Relocation Right” clause gives landlords the flexibility to accommodate larger tenants’ growth by relocating other tenants, almost always at the landlord’s expense. Landlords typically keep this clause in the lease of tenants that occupy less than a full floor. 

Note that it is terribly expensive for a landlord to exercise its rights to relocate a tenant. However, to ensure business continuity in this special circumstance, tenants should verify there is language included in the lease stating that the landlord has to give ample notice for a move and will only move the office over a weekend.

I want to bring my pet into work with me. Is that a big deal?
Ray: Generally, bringing a dog or other pet into work is not accepted by landlords. While some co-working spaces do allow pets, most office buildings have written rules that prohibit bringing pets unless they are service animals. Pets need attention and care throughout the day, and can be disruptive to the building.

If pets are critical to company culture, identify immediately if a building will allow tenants to bring pets into the office.

I think high ceilings are really cool. How can I make that work in a suburban office building?
Ray: When converting a suburban office building with a drop ceiling into an exposed-duct style ceiling, building code requires spraying a fire retardant where there may be sprinkler lines, electrical wiring, voice and data cabling and air conditioning ducts overhead. Other code requirements will also be triggered by the open ceiling. Tenants should note that while this is possible to do, it will be costly and might not achieve the desired look because of the fire retardant spray.

Instead of converting the whole office space to have exposed ducts and higher ceilings, tenants may choose to select a limited section of the office such as the break room or the lobby area to convert. This way tenants can achieve the modern, industrial look while controlling cost.

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