2B — March 30 - April 12, 2012 — Commercial Office Spotlight — Mid Atlantic Real Estate Journal
www.marejournal.com
C OMMERCIAL O FFICE S POTLIGHT
By Jeffrey L. Silberman, Esquire, Kaplin Stewart Meloff Reiter & Stein, P.C. Commercial Office Leasing Update
T
he market for develop- ment and acquisition of office properties re-
see is variation of “extend and pretend” in the lending market. Office tenants find themselves with more leverage than in prior years (even though many of these tenants do not realize it). Many tenants are finding that they are paying over-mar- ket rates, and they have either kick-out options or expiration dates in the near future. This presents an opportunity to the tenant to renegotiate their leases to better their deals, either in terms of reduced rents, reduced space, additional improvements or other incen- tives. Landlords, not wanting to brave the open market in
search of new tenants, are mak- ing deals to keep their buildings full. Since this transaction is similar to a work-out of a loan (even though not always pre- cipitated by a defaulting ten- ant), landlords should consider making concessions contingent upon the tenant remaining in good standing under the lease. Another important quid-pro- quo is reviewing the landlord’s position, and including rights that may serve the landlord well when the market does pick-up, such as relocation rights, parking allocations (discussed below) and chang- ing fixed-price renewals to fair
market value renewals. With reduced occupancies, operating expenses become even more important, since not recouping a tenant’s full pro rata share of operating expenses only compounds the owner’s problem of subsidizing vacant space. Themost common problem we see is setting base year expenses too high. Many leases simply provide that a tenant pays its share of operat- ing expenses over the costs in the base year. Consider a base year with heavy snow fall, or an extremely dry summer in which landscaping and irriga- tion costs are unusually high.
a section of the MARE Journal P.O. Box 26, Accord, MA 02018 781-871-5298 • 800-584-1062 fax 781-871-5299 www.marejournal.com Publisher/CEO Linda Christman lchristman@marejournal.com Michael Campisi mcampisi@marejournal.com Elaine Fanning efanning@marejournal.com Section Editor Karen Vachon editor@marejournal.com The base year lives forever, so it is important to provide that a base year can be adjusted for unusually high expenses. The manner in which those costs are adjusted is a matter of ne- gotiation, but recognizing and dealing with the issue up front is the first, critical step. Finally, to reduce space costs, tenants are attempting to mini- mize their space needs, with- out necessarily reducing the number of occupants. This leads to parking nightmares in under-parked projects. The parking lot is often the first im- pression made on a prospective tenant. Pulling into a prospec- tive building and finding no parking is a sure way to lose a tenant. Therefore, it is critical for landlords to understand their parking supply and, if necessary, impose the right to allocate parking among ten- ants. Often, there are entire sections of parking lots not be- ing used because of proximity to entrances/exists. Landlords need to deal with this up front to protect the marketability of their projects. Even in a down market, it is important to stay ahead of the game. The sun will rise again, hopefully soon, and owners need to be prepared. Jeffrey Silberman is a principal in the Real Estate, Business & Finance group of Kaplin Stewart in Blue Bell, PA. ■ Co-Publishers Commercial Office Property Spotlight
mains slow. H o w e v e r , owners must s t i l l l e a s e their exist- ing product as leases roll over, tenants move and va- cancies are
Jeffrey Silberman
created. Since the turbulence of a few years ago seems to have calmed, now is a good time to a step back and review the cur- rent environment. The most common activity we
Contact: Jeffrey L. Silberman 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-260-6000 • www.kaplaw.com Other Offices: • Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart A t t o r n e y s a t Law Real estate law from the ground up. Experience Counts. Count On Us.
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