Too often, this is how tenants (and some brokers) handle their real estate.

Fire
Tenants are eager to get the space they think they need, so they start by looking around. Landlords market their buildings well and say what they need to say to get tenants interested. Tenants focus on what they know–like rental rate, lease term and “turnkey” buildouts–while landlords leave the important costs and risks out of sight and out of mind. Tenants, in turn, sign letters of intent based on vague terms, psychologically commit to the space and lose leverage to negotiate anything beyond page 1 of their leases.

The tenant was never ready and didn’t have the expertise to aim, but they fired. And now, they have a lease representing their second largest expense and possibly their biggest liability.

Ready
Following the lease, tenants may have to “negotiate” what is to be included in their buildouts, under what conditions they may perform subsequent alterations or sublet, or how to avoid getting overcharged on operating expenses. Tenants find themselves lacking leverage, because none of the above was properly evaluated or negotiated long before a lease (or renewal amendment) was drafted. The building services may also be deficient, partially because the building was not well-evaluated, but also because the lease didn’t protect the tenant.

Aim
Was the tenant’s space ever properly programmed? Were all operational needs relating to the space and building identified? How well does the overall financial structure of the transaction align with the tenant’s financials and business plan? Were potential business plan changes accounted for in the lease? Does the facility align well with the tenant’s organizational culture? Each of the above questions must be answered to avoid taking on undue risk or overcharge.

Of course, the right approach is:

- Defining the existing lease/expense situation and aligning your real estate plan to meet your strategic, operational, cultural and financial priorities (ready);

- Evaluating the facility, building infrastructure and landlord long before you ever get to a lease (aim);

- Implementing the lease, or renewal, to ensure that it comports with the lease terms you thoroughly negotiated at the proposal stage and effectively managing the design, construction and relocation, whether its performed by you or the landlord (fire).

Earlier this month, I wrote a white paper guiding medical practices on the lease issues that must be addressed when considering a conversion to electronic health records.  It was published in the monthly newsletter of Business Engineering, Inc., an IT services company that provides meaningful use consulting to area practices, and it can be found here: http://www.beinetworks.com/Documents/HealthcareIT_Whitepapers/Lease_Issues_EHR_Conversion_11.11.pdf

Landlords have done a good job over the years getting tenants to focus on their per square foot rental rate. It’s good marketing on the part of landlords, as it trains tenants to think of their facility lease as a commodity. The problem with this simplified approach for tenants is that it often leaves out the myriad of other factors that comprise the true cost of a lease.

Here are a few questions to ask yourself to gauge whether or not you can calculate your true lease costs:

-What method of measurement was used to calculate the rentable square footage you’re paying on and was that measurement confirmed?
-When you receive your annual operating expense reconciliation statement from your landlord, do the charges comport with your lease and are they in-line with market?
-Does the landlord have the right to require you to restore alterations, and how much will restoration cost you?
-How much in fees and “profit” splits will you incur to sublease?
-If you try to sublease a portion of your facility, can the landlord terminate your lease?
-How much will landlord oversight fees or a performance bond cost you to make changes to your facility?
-Can the landlord relocate you and what costs would you face if you had to move?
-What are the landlord’s obligations regarding the existing conditions of the premises, code requirements and who’s responsible for hazardous materials?

In short, for tenants, real estate is a process, not a commodity. Tenants who focus in on the rental rate while not professionally evaluating the other factors impacting their upfront and long-term costs and liabilities at the appropriate times expose their organization to unforeseen costs. By following the right process, tenants can minimize their true costs of occupancy and rest assured that they are protected from undue complications.

HyperV Technologies Corp., which is developing high performance plasma guns for advanced plasma physics and nuclear fusion research, has received a significant reduction in their facility costs and will enjoy better lease protections and flexibility due to a lease renegotiation completed by The Ezra Company.

Mike Norris, LEED AP, a Vice President with the Washington, DC-based Ezra Company, one of the leading commercial real estate firms in the nation that exclusively represents tenants, negotiated on behalf of HyperV in an 8,800-square-foot lease of office, R&D and conditioned warehouse space at 13935 Willard Road, a 46,000-square-foot industrial building owned by Kol-Bio Medical, in Chantilly.

In addition to saving money, HyperV will also enjoy a stronger lease with greater flexibility. Doug Witherspoon, HyperV’s CEO, spoke about the importance of having built-in flexibility negotiated into the lease, especially during these uncertain times:

“Mike negotiated a termination clause that takes effect after the first year of our renewal, so we will know exactly what it will cost, if our needs change.”

Privately-held HyperV, which Witherspoon founded in 2004 in his basement, first established itself at 13935 Willard Road about six years ago, when it leased 4,400 square feet. Then, three years ago, the company expanded to 8,800 square feet. The most recent lease contains expansion and renewal options, among several other key provisions that Norris, who has represented HyperV since its inception, was able to negotiate.

Witherspoon also offered some advice for other companies facing a pending lease decision. “Make sure you have a really good tenant representative. I’m a scientist; the ins and outs of leases, to a large extent, seem Greek to me. I’ve got to rely on Mike to explain what clauses mean to me. Without Mike, we would be lost.”

Currently, HyperV is developing advanced plasma gun technology with applications in industry, fusion energy and plasma physics research. This technology will support research in several approaches to fusion energy development and has a variety of near term industrial applications.

Many of you have received the latest edition of my favorite summer novelty item – the bottle of sunscreen pictured below.

Besides its practical purpose this time of year, it’s the best metaphor I can make for tenant representation. It must be applied thoroughly and repeatedly to be effective. When getting involved with a facility or lease, tenants generally think to cover themselves in the most obvious areas like the rental rate and general buildout needs, but they don’t think about the scores of other areas that they leave unprotected. Here are just a few of the areas tenants leave themselves unprotected:

PREMISES
1. Use of Premises
2. Warranty of Use
3. Common Building Facilities
4. Measurement of Office Building Premises
5. Usable Area
6. Rentable Area
TERM
7. Defining the Term
8. Existing Premises
9. Early Occupancy
10. Landlord’s Failure to Deliver Possession
11. Holding Over
RENTAL RATE
12. Base Rental
13. Fixed Rent
14. Free Rent
15. Cost of Living Adjustments
16. Direct Metering, Sub-metering,
and Electric Rent Inclusion
OPERATING EXPENSES & TAXES
17. Operating Expense Escalations
18. “Grossing Up” Operating Expenses
19. Operating Expenses / Capital Expenditures
20. Operating Expense Exclusions
21. Operating Expense Audit
22. Management Fees
23. Taxes and Assessments
24. Real Estate Tax Exclusions
CONSTRUCTION
25. Substantial Completion
26. “As-Is” Condition
27. Tenant Move-In
28. Tenant Delays; Excusable Delays
29. Long Lead Item
30. Punch-List Penalty
31. Removal
32. Holding Over / Construction Delay
33. Landlord Allowances
34. Construction Drop Dead Date
35. Construction Schedule
36. Workletters
37. Building Standard Specifications
38. ADA Compliance – Premises
39. ADA Compliance – Building
40. Code Issues, Fire & Life Safety, Sprinklers
41. Completion of New Office Premises
OPTIONS
42. Right of First Offering to Lease
Additional Space
43. Right of First Refusal to Lease
Additional Space
44. Options to Purchase
45. Right of First Refusal to Purchase
46. Option to Contract
47. Option to Extend or Renew a Lease
48. Termination Options
CONDITIONS OF PREMISES
49. Alterations
50. Landlord’s Inspection of Premises
51. Damage and Destruction
52. Damage to Premises
53. Landlord Agrees to Repairs
54. Mechanics’ Liens
55. Surrender
56. Early Termination of Lease
57. Redelivery at End of Term
58. Fixtures
SUBLEASING & ASSIGN
59. Provisions for Assignments
and Subleases
60. Consent Standards
61. Redefining the Assignment and Sublease
62. Recapture and Profit Sharing
63. Sublet to Affiliate
LANDLORD SERVICES
64. Rules and Regulations
65. Landlord’s Services
66. Common Areas
67. Electrical Usage
68. Utilities
69. Landlord Failure to Furnish Services
70. After Hours Services
71. Chilled Water for Supplemental AC
72. Repairs and Maintenance
ENVIRONMENTAL COMPLIANCE
73. Landlord’s Warranty of Compliance
74. Compliance with Environmental Law
75. Air Quality (ASHRAE)
76. Temperature Specification
77. Landlord Hazardous Material
Representation, Warranty and
Indemnification
INSURANCE
78. Landlord Insurance
79. Tenant’s Insurance
80. Insurance Increase due to Tenant
81. Indemnification
82. Liability Insurance
83. Property Insurance
84. Waiver of Subrogation
DEFAULT
85. Events of Default
86. Tenant’s Cure Rights
87. Tenant Default Notice
88. Late Charges
89. Landlord Mitigation of Default
90. Default by Landlord and Tenant’s Remedies
91. Landlord’s Lien
LEGAL SECURITY
92. Security Deposits
93. Letters of Credit
94. Joint and Several Liability
95. Personal Liability Elimination
CONDEMNATION
96. Condemnation and Eminent Domain
97. Total Taking
98. Partial Taking
99. Temporary Taking
100. Landlord’s Restoration of Premises
101. Allocation of Condemnation Award
INDEMNIFICATION
102. Waiver and Release
103. Mutual Indemnification
104. Landlord Indemnification
105. Landlord Negligence
GENERAL PROVISIONS
106. Access Provisions
107. Subordination/Non-Disturbance
108. Arbitration
109. Submission of the Lease
110. Lease Execution Drop Dead Date
111. Time is of the Essence
112. Consents and Approvals
113. Estoppel Certification
114. Notices
115. Attorney’s Fees
116. Waiver of Jury Trial
117. Representation and Warranties by
Landlord
118. Equipment Allowed in the Premises
119. Consent and Approval
120. Signs
121. Covenant of Quiet Enjoyment
122. Succeeding Party to Landlord
123. Force Majeure
124. Building and Premises Security
Management Weekly
125. Parking

Before you engage with landlords over what you may believe to be a simple lease or renewal, think about all of the areas that you need to cover. Are you protected? Don’t get burned by landlords.