Untapped Asset Value in Your Office Lease, Tenants. AKA The Market Wants Your Space. Give it Up!
Dan Mihalovich
The majority of you, tenants, are sitting on office leases with asset value -- not liability. Current market rates in and around San Francisco far exceed whatever rental rates you committed to 3-5-7 years ago.
The questions are:
(a) What is the value?
(b) How do we leverage that value going forward?
This is a great opportunity to assemble your core leasing Team -- led by your tenant-representation broker (our sole specialty) -- to review your lease document to confirm your existing rights; explore your company's spatial aspirations for the next 3-5-10 years; discuss your financial wherewithal to achieve those aspirations vis a vis current market opportunities; and juxtapose your remaining leasehold asset value versus those market (or early renewal) opportunities.
The Asset Value
• In San Francisco, where direct space rates are generally exceeding $55-$60/square foot/year, your under-market fully-escalated rates (including your landlord's pass-through increases for taxes and operating expenses) establishes the starting point for discussions.
• Don't forget to address any unamortized improvements you may have financed from the inception of your lease.
• Consider your lease's Assignment/Subleasing net-profit split to be shared between yourselves and your landlord -- likely a 50/50 split for most of you, after first deducting your reasonable transaction costs.
• Confirm any "recapture rights" given to your landlord, which would allow the landlord to terminate your lease as to that space -- or your entire Premises -- you may wish to assign/sublease…..which could scrub any profits for your account.
• If considering a sale or other transfer of ownership of your company, confirm any rights given to the landlord which could trigger recapture….and the potential loss of profit.
• We may advise a consultation with your real estate counsel to affirm your rights prior to entering any negotiations.
Leveraging Your Lease Asset Value
• The bidding war to acquire buildings is intensely hot in and around San Francisco. Underwriting requires a crystal ball pointing to significantly higher rental rates than today. So, the prospect of your space becoming vacant represents a huge opportunity for your landlord to rake it in when you renew -- or turn over your space. Under current market conditions, it would literally pay the landlord to buy you out of your lease right now.
• If your landlord refuses to engage with you prior to the normal advance period, you may leverage the conversation by putting your space on the market for sublease. In this tight market, even short term subleases are faring well -- compared with direct space pricing.
Salesforce, for example, is beginning its consolidation into its core buildings…..and subleasing other large blocks of short-term space for $60+.
• If what's driving you into the marketplace early is the need to expand, consider tying a lease assumption to your acquisition of new space. Since your current space is under market, allow the new landlord to assume your positive-asset-lease as a means of capturing your much larger tenancy at the new building.
• If your renewal or relocation is essentially a lateral decision – committing to the same square footage -- consider talking with us about the variety of strategic space decisions which could make an early decision most compelling. Think about consolidating your space; separating Operations from everyone else; relocating people to areas outside San Francisco; or wiring your employees to encourage telecommuting/hoteling.
If your lease expiration is coming up and your landlord is considering selling your building, let's talk. Buyers can be irrational, meaning that some would actually prefer to have your space sitting vacant at purchase time rather than having your renewal commitment -- along with the creditworthy substance of your well-aged tenancy.
MIHALOVICH PARTNERS
655 Montgomery Street, Suite 1490
San Francisco, CA 94111
T: 415-434-2820
C: 415-999-9244
T: @MihalovichCRE
E: [email protected]
W: www.TheSpacePlace.net
License # 01376000
About the Author
Mihalovich Partners, a San Francisco based commercial tenant-representation firm, was formed in 1998 by Dan Mihalovich, then a 16-year Industry veteran and Director of Office Leasing at Cushman & Wakefield. Mihalovich brings to the firm 35 years of business experience, focusing on Market Analysis, Negotiation Skills and Project Management expertise. He has managed over 200 office-leasing and project management assignments for many of San Francisco's most prestigious tenants. His career, and the focus of Mihalovich Partners, is solely driven to advocate the interests of San Francisco tenants in leasing negotiations of all types—renewals, relocations, renegotiations, and terminations. Mihalovich Partners never represents landlords, avoiding conflicts of interest, unlike most firms in the leasing brokerage business.
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