nxtgenweb thanks for following me on Twitter! https://t.co/GCwEEQFpc1

nxtgenweb thanks for following me on Twitter! https://t.co/GCwEEQFpc1

— Nathan K Smith (@AustinTenantAdv) April 29, 2018

from Twitter https://twitter.com/AustinTenantAdv

What are Commercial Real Estate Lease Operating Expenses?

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When leasing commercial real estate it’s important to understand what is being included in the rental rate and what all you are paying for. Most commercial leases are going to be triple net leases where you pay your pro rata share of operating expenses as well as the base rental rate.

In many cases such as when renting commercial real estate in Austin Tx the operating expenses are going to be about half of what your base rental rate is. For example in Northwest Austin class A office space base rates are $30 sf and the operating expenses are estimated at $16 sf. In downtown Austin operating expenses are over $20 sf. As you can see operating expenses are a significant portion of your total rent amount.

Below you will learn what operating expenses are, what’s included, and what can be negotiated.

Definition of Commercial Property Operating Expenses

The definition of commercial property operating expenses (OPEX) is the costs associated with maintaining and operating a commercial property such as office space, retail space, and warehouse space. Depending on the building lease structure the operating expenses maybe a component of the gross rent or be in addition to the base rent. Most commercial office leases in Austin are going to be triple net (NNN) leases in which the OPEX are paid by the tenant in addition to the base rent. With multi-tenant buildings each tenant is responsible for their share of opex which depends on the rentable square footage of their space compared to the total rentable square footage of the building.

What do Operating Expenses Include?

• Property Taxes – The city is going to charge the property owner property taxes which are in turn passed along to the tenants. Taxes will typically be the largest portion of Opex.
• Insurance – All commercial property owners need insurance as required by the lender.
• Common Area Maintenance Charges (CAM) – such as maintenance & repairs, administrative fees, utilities, parking lot maintenance, management salaries, property lighting, etc. What is included varies by property type and building owner.

What is Not Included In Operating Expenses?

The short answer is they do not typically include capital expenses, debt service, commercial property marketing costs, leasing commissions, tenant improvement allowances, or capital reserves for future repairs.

Is Commercial Real Estate OPEX Negotiable?

If you are a larger tenant then landlords may be negotiable on their controllable items such as CAM charges since they can control how the building is managed. For example getting the landlord to agree to capping the annual opex increases. Landlord’s have no control over property tax increases, therefore will not agree to cap those.

How to Negotiate an Operating Expense Cap

• Year to Year (aka Non Cumulative Cap) – Cap the CAM percent that the landlord can increase year over year. For example with a 3% year to year cap the maximum increase the tenant is responsible for is 3%, even if it increases to 4% the 1st year.  If CAM’s increase by 2% then tenant only responsible for 2%. Most tenants prefer this approach
• Cumulative Compounding Cap – Again an annual maximum Cap is set however landlord can recoup previous years unused increases. For example  if CAM increases by 2% year 1, tenant pays 2%. Year 2 CAM increases by 4% and tenant is responsible for paying the 4% (3% for this year and 1% left from year before). Landlords prefer this method.

Examples of Commercial Property Operating Expenses

I pulled the info below from one of the commercial leases I was reviewing. Most have this sort of language in the lease that defines what operating expenses are AND what they are not.

Operating Expenses May Include the Following:

1. Costs incurred by Landlord or Landlord’s agents and contractors in connection with the provision of services pursuant to Section 7 of the Lease (but excluding the cost of utilities consumed in the Premises and the premises of other Occupants of the Building and Project to the extent Tenant or any other Occupant is separately paying for the cost of utilities);
2. Costs incurred by Landlord or Landlord’s agents and contractors in connection with maintaining the Project in accordance with Section 9.3 of the Lease;
3. Professional building management fees and the fair rental value of any management office space in the Project;
4. Costs of capital improvements, structural repairs and replacements to the Project (collectively, the “Permitted Capital Improvements”): (i) that are intended to reduce (or avoid increases in) Operating Expenses, (ii) that are required by a governmental authority subsequent to the Commencement Date (except for capital repairs, replacements or other improvements to fix an existing condition before to the Commencement Date which a governmental authority, if it had knowledge of such problem prior to the Commencement Date, would have required to be fixed pursuant to then-current government regulations in their form existing as of the Commencement Date and pursuant to the then-current interpretation of such governmental laws or regulations by the applicable governmental authority as of the Commencement Date), or (iii) that that are replacements, retrofits or refurbishments of nonstructural items which serve the Building and/or the Project in the whole or in part (including, without limitation, Building Systems, and items in Common Areas; provided, however, unless required by Law or in order to comply with Landlord’s repair and maintenance obligations under the Lease, in no event shall Permitted Capital Improvements include (1) purely cosmetic capital improvements to the Building or the Project or (2) the replacement of any Building Structure (other than sealants for any part of the Building’s envelope, including curtain walls and windows). Expenditures for Permitted Capital Improvements shall be amortized at a market rate of interest over the useful life of such Permitted Capital Improvement (as determined by Landlord’s accountants in accordance with GAAP);
5. Costs of supplies, including, but not limited to, the cost of all building-standard lighting as the same may be required from time to time;
6. Costs incurred in connection with obtaining and providing energy for the Project, including but not limited to costs of propane, butane, natural gas, steam, electricity, solar energy and fuel oils, coal or any other energy sources;
7. Costs of water and sanitary and storm drainage services;
8. Costs of janitorial and security services;
9. Costs of general maintenance and repairs, including costs under HVAC and other mechanical maintenance contracts; and repairs and replacements of equipment used in connection with such maintenance and repair work;
10. Costs of maintenance and replacement of landscaping; and costs of maintenance of parking areas (including, without limitation, the Project’s parking facilities) and other Common Areas;
11. Insurance premiums and deductibles, including fire and Special Form coverage, together with loss of rent endorsement; public liability insurance; and any other insurance carried by Landlord on the Project or any component parts thereof (all of such insurance shall be in such amounts as may be required by any Superior Rights Holder or as Landlord may reasonably determine);
12. Labor costs, including wages and other payments, costs to Landlord of worker’s compensation and disability insurance, payroll taxes, welfare fringe benefits and all legal fees and other costs or expenses incurred in resolving any labor disputes;
13. Reasonable legal, accounting, inspection, and other consultation fees (including, without limitation, fees charged by consultants retained by Landlord for services that are designed to produce a reduction in Operating Expenses or to reasonably improve the operation, maintenance or state of repair of the Project) incurred in the ordinary course of operating the Project;
14. Costs incurred by Landlord or Landlord’s accountants in engaging experts or other consultants to assist them in making the computations required pursuant to the Lease;
15. Costs of subsidized food service that is made available to all Occupants;
16. Costs necessary to comply with any REAs or any ground or underlying lease of all or any portion of the Land;
17. Seasonal and holidays displays; and
18. Events, parties and celebrations that are available to all Occupants.

Operating Expenses Do Not Include the Following

In no event shall Operating Expenses include any of the following (collectively, “Exclusions”):

1. Costs of repair or other work caused by windstorm, fire or other insured casualty to the extent of insurance proceeds received;
2. Costs of repairs or renovation necessitated by condemnation to the extent of any award received;
3. Any interest or principal on borrowed money or debt amortization, except for Permitted Capital Improvements;
4. Depreciation on the Project;
5. Any costs incurred by Landlord associated with payment of damages as a result of any breach of this Lease by Landlord;
6. Landlord’s payment of damages for personal injury resulting from the negligence or willful acts of Landlord’s Responsible Parties;
7. Costs and fees associated with the sale or refinancing of the Project or any associated debt;
8. Penalties for Landlord’s failure to pay taxes, assessments, debt services or any other charge, unless such failure arises from Tenant’s breach of the Lease;
9. Costs for which Landlord is reimbursed (other than Operating Expenses paid by Tenant);
10. All costs associated with the operation of the business of the entity which constitutes “Landlord” (as distinguished from the costs of Project operations) including, but not limited to, Landlord’s general corporate overhead and general administrative expenses;
11. The cost of services provided by any affiliates of Landlord to the extent such costs exceed the costs of such services rendered by unaffiliated parties on a competitive basis for Comparable Buildings;
12. Costs of installing any specialty service, such as an observatory, broadcasting facility, luncheon club, or athletic or recreational club;
13. Costs (other than maintenance costs) of any art work (such as sculptures or paintings) used to decorate the Building;
14. Interest and penalties due to late payment of any amounts owed by Landlord, except such as may be incurred as a result of Tenant’s failure to timely pay its portion of such amounts or as a result of Landlord’s contesting such amounts in good faith;
15. Costs arising from Landlord’s charitable or political contributions;
16. Rental loss, bad debt or capital expenditure reserve accounts (other than escrow accounts for the payment of property taxes and insurance premiums);
17. Promotional gifts; entertainment, dining or travel expenses;
18. Salaries, wages and benefits of personnel above the grade of property manager (unless equitably allocated); or
19. Reserves for bad debts or for future improvements, repairs, additions or otherwise.
20. Costs, including marketing costs, space planners’ fees, legal fees, advertising and promotional expenses, and brokerage fees incurred in connection with the original construction or development, or original or future leasing of the Project, and costs, including inspection costs and permit, license, incurred due to the installation of new tenants improvements in the Project after the Commencement Date or otherwise painting, decorating, improving or redecorating vacant space for tenants (excluding, however, common area costs of the Project or parking areas);
21. Costs or amounts paid as ground rental for the Project by the Landlord;
22. Costs to the extent arising from the gross negligence or willful misconduct of Landlord or its agents, employees, vendors, contractors, or providers of materials or services; or
23. Costs incurred to comply with Laws to remedy a condition existing prior to the Commencement Date (including, the removal of hazardous materials in existence in the Building or on the Project prior to the Commencement Date).

 

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Garza Ranch Office Space

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Garza Ranch is a new 34 acre commercial development in Southwest Austin that will include 400,000 sf of office space, a 140 room, five story Aloft boutique hotel, a 370 unit apartment complex and a 2.2 acre park. The new project is located off of South Mopac Expressway in Southwest Austin, really close to William Cannon. Software House International (SHI) has already announced plans to build and move into 1 of the 2 buildings to be built. The remaining 150,000 sf has not been spoken for at this point.

Brandywine Realty already has contractors doing the infrastructure work to build roads and utilities to the property that is expected to be completed by the end of 2018. The office buildings are expected to be complete by the 1st quarter of 2020.

For more information about office space for rent in Southwest Austin  at Garza Ranch give us a call at 512-861-0525

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What are the Different Types of Commercial Real Estate Property & Buildings?

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When looking at the different types of commercial real estate property investors and tenants have different objectives. Investors look at commercial real estate (aka commercial property) as a way to make money by generating profits from land or buildings. The primary ways investors make money with commercial real estate properties are through one or more of the following: appreciation, cash flow, and principal build up by having tenant rents pay down the loan. Many investors are looking hard at investing in Austin Tx commercial real estate.

Tenants on the other hand are looking to rent commercial property in prime locations for their businesses. Since there are many different types of  commercial property tenants have to thoroughly evaluate their needs to determine which type is best suited for their company. To help below I have listed the different types of commercial real estate. 

Office Space

Office buildings consist of multistory buildings in the suburbs or downtown high rises and skyscrapers with common area lobbies, hallways, and bathrooms. These larger buildings can be up to 300,000 to 500,000 rentable square feet. They also can be single tenant properties, smaller professional office buildings and condos. Short term serviced executive suites and coworking spaces would also fall into this category.

Traditional office space are typically classified as A, B, or C. Class A office buildings will be the newest, nicest and most expensive buildings in the best locations, and with the best amenities. Class B offices are nice but typically a little bit older and without all the amenities. Class C buildings are the oldest, less maintained, and least expensive office buildings, and in less desirable locations.

Industrial Space

Industrial spaces have multiple categories as they are designed to service different types of users. They will range from small Flexible or R&D properties to larger warehouse and distribution centers. Companies that rent industrial space may need a little bit of office space however a large portion of it will be warehouse space used for bulk storage, retail warehousing, manufacturing, distribution, light assembly, etc. They typically equipped with loading docks that can be grade level allowing vehicles to drive in or dock high allowing 18 wheelers or box trucks back in to deliver product.

Retail & Restaurant Space

If you are looking for visibility for your company than retail space will typically have the best locations for your store or shop. Retail shopping centers, pad sites located on highway frontages, small neighborhood shopping centers, single tenant retail buildings, large big box shopping centers (aka power centers) with stores such as Petsmart & Best Buy, grocery store anchored centers, and regional outlet malls.

Multifamily

Multifamily includes anything larger than a fourplex such as apartment complexes or downtown high-rise apartment buildings and condos. You will also see mid-rise, manufactured housing communities (e.g. mobile home parks), and special purpose housing.

Land

Any raw, undeveloped or rural land in the path of future development. You will also see pad sites for sale on many highway frontage roads.

Other Types of Commercial Property

Any other nonresidential property including hospitality, hotels, self storage units, & medical space such as nursing homes and hospitals

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Akua Tiwaah thanks for following me on Twitter! https://t.co/xt9bwH2puI

Akua Tiwaah thanks for following me on Twitter! https://t.co/xt9bwH2puI

— Nathan K Smith (@AustinTenantAdv) April 24, 2018

from Twitter https://twitter.com/AustinTenantAdv

What Are the Different Types of Office Space?

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Office Space for lease comes in all different types, sizes, building classes, and shapes. Many companies right now are favoring open office space layouts, however those are not for everyone. Maybe you like eclectic old houses zoned for commercial use or prefer an office in a downtown high rise. Whatever your needs there are many to choose from. When searching for office space for rent in Austin Tx you will come across many different types of office space. Below are a few to consider to see which ones are the best fit for your company.

Traditional Office Space

Traditional office buildings are typically multistory office towers in the suburbs or downtown that have common area lobbies, bathrooms, and hallways. In most situations landlords handle all of the repairs, maintenance, and cleaning. Parking is on a square footage basis (2-5 per 1000 sf depending on the building). So if you lease 5,000 sf you may get 10-25 parking spaces. In downtown areas parking will be an additional charge.

For most law firms, financial services companies, accounting & investment firms, etc the traditional office layout works the best. Traditional office space allows your employees to have their own private rooms to work and meet with clients since confidentiality is key. Common features of traditional professional office spaces are

• Reception
• Conference room
• Private offices
• Bullpen
• Break area.

Most traditional office space leases require that you sign a multi year lease that is typically 3-5 years or longer.

Creative Office Space

Creative office space is also thought of as office space with an open layout. They all share a similar decor, layout, style, etc however creative offices share a few common traits such as

• High ceilings
• Floor to ceiling windows
• Wood floors or nice carpet tiles
• Big break areas
• Fewer private offices and walls
• Lots of glass walls

Creative offices encourage functional collaboration. With fewer walls between departments there is typically more transparency, collaboration, and communication between leadership, managers, and employees.

Office spaces that are creative also tend to be more efficient allowing you to fit more employees per square foot. You can get more people in a space when you have fewer rooms and more rows of tables or cubicles.

Startups, tech companies, creative agencies are typically drawn to creative open office space, however large companies and even law firms and financial companies are exploring this type of space to encourage communication and collaboration within and across departments and teams.

Downtown High Rises

These are basically traditional offices spaces found in high density downtown areas. You will see downtown skylines painted with large class A office buildings typically 20 to 30 stories with 300,000 to 5,000 sf of rentable office space. Most of them come equipped with all of the class A amenities as described in the office building classification below. 

Coworking Office Space

These are basically shared office situations. You have the flexibility of doing shorter term leases and they come furnished. Shared meeting rooms, break areas, and desks are common. These are best for small companies or tech startups who need short term work space. You can either rent a desk, a room, or a suite of rooms. Along with the flexible commercial lease terms you get to enjoy socialized events and interaction with other tenants and companies. 

Executive Office Suites

These are typically plug n play work spaces complete with furniture, phones, internet, and reception services. Regus for example will lease a full floor of a building and lease them out in smaller parcels to other companies for short flexible terms typically month to month or 3, 6, 9, 12 month increments.

Old Houses Zoned For Commercial Office Use

These are basically houses that were once residential now zoned for office space use. You typically find these in or around downtown neighborhoods. These are great for those wanting their own entrance and cool eclectic space. Lot’s of creative users and tech companies like these for their proximity to downtown.

Flexible Office Warehouse Space

For those that needs a little bit of office and a little bit of warehouse space these are perfect. It allows you to have some office space with your own entrance and an overhead door in the back for shipping and receiving. Flexible offices spaces are typically single story buildings found in semi industrial areas. You will have your own entrance and bathroom that you must maintain. You are also typically responsible for the cost of maintaining the HVAC unit.

Types of Office Building Classifications

Most office buildings are in one of the following 4 categories: Class A, Class B, or Class C, however this is not an exact science. There is not an industry wide standard on what determines a building classification. It depends on the landlord or agent, building owner, market, and other buildings in the neighborhood. Office building classes are somewhat subjective and it depends on a number of factors such as

• Building age
• Condition
• Amenities
• Location
• Rental rates
• Curb appeal
• Historical significance
• Maintenance
• Ownership
• Building infrastructure (e.g. HVAC, IT, Plumbing)
• Available technology
• LEED certification

These building classifications are not permanent as they can change depending on market trends, renovations, etc.

What is Class A Office Space?

Class A office buildings will be the nicest and highest quality commercial office properties in the market. You will see a mix of downtown high rises, historical buildings, and suburban office spaces that have the best locations, most recent technology and infrastructure, lots of tenant amenities such as building conference room, fitness center, showers, onsite deli, etc. Class A office space will have the highest rental rates. These buildings will attract image conscious companies such as attorneys and financial investment firms.

What is Class B Office Space?

Class A office buildings are a little bit older but still have nice amenities and good ownership. You will find a mix of smaller tenants looking for nice space but at a lower price. You can find class B commercial properties in prime areas but at lower prices than class A. They typically don’t offer as many amenities and services

What is Class C Office Space?

Most Class C office buildings are older with little to no tenant services. The finishes are lower quality both internal and external and they lack modern functionality and technological advances. They will also not be in the best locations. Rental rates in class C commercial buildings will be the lowest.

 

Not sure what type of office space your company needs? No worries – it varies by your company situation, size, ideal location, budget, and plans over the next 3-5 years, however we can help you find exactly what you are looking for. 

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How To Avoid Problems With Commercial Leasehold Improvements

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When you lease commercial real estate in most cases you will need to do some sort of leasehold improvements. If it’s a brand new space in shell condition then obviously it will require a lot more planning and work. If it’s 2nd generation space that has been leased before it may not require as much work (only carpet and paint in many cases) unless you need to remove or add a bunch of walls.

Regardless of what tenant improvements are needed the end result can determine your satisfaction. Below is the definition of leasehold improvements, a few common problems that you may encounter, and suggestions on how to avoid them

What are Commercial Leasehold Improvements?

The definition of leasehold improvements -Improvements done to commercial spaces that tenants rent out such as office, retail, or warehouse space. Examples are building or demoing walls and ceilings, new flooring, plumbing and electrical, cabinetry, building offices and conference rooms, etc. 

Leasehold improvements generally convey with the landlord upon the termination of a commercial real estate lease and the tenant moves out. The cost of the improvements is typically negotiated between the tenant and landlord. Depending on the landlord, your credit, market you are in, scope of work, total deal terms such as lease term length, lease rate, rent concessions such as free rent, etc you can generally negotiate to get them to pay for a portion or all of the improvements. The longer lease you sign the more money you can generally negotiate for commercial leasehold improvements.

Common Problems with Tenant Leasehold Improvements

1. Over Budget – You expect to do the leasehold improvements at or below the tenant improvement allowance you pre-negotiated and you still go over budget. Every dollar above the allowance comes out of your pocket.
2. Behind Schedule – Time = money. Delays in construction time could mean that you are in holdover in your existing space or have to delay the date you open for business. Or you could end up without a place of business until the space is completed.
3. Disagreements – Arguments and disagreements over the scope of work and timing can diminish the excitement of your project. 
4. Not meeting expectations – leasehold improvements done incorrectly that have to be redone cost time and money

Ways to Avoid Commercial Leasehold Improvement Issues

1. Constant Communication – Make sure everyone is on the same page with the scope of work, budget, and timing. Consider having weekly conference calls or onsite meetings to review progress and obstacles. Don’t be afraid to clearly communicate the bad news either. If the tenants needs a contingency plan it would be nice to know sooner than later.
2. Realistic Budget – Be realistic with the budget. Better to overestimate than underestimate. Don’t cut any corners and establish a worst case scenario.
3. Create a Schedule – Be sure to estimate a timeline from Beginning to completion and provide enough time for each task. Make sure to build into the budget some contingencies and establish worst case scenario in case there are delays and problems.
4. Know Your Limits – Don’t commit to more than you can handle. Be realistic with the scope of the project, the pricing, and the timeline. As long as you hire competent contractors you will increase the success of your commercial tenant leasehold improvements.

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