|
An office building has always ranked as one of the favorite real estate investments of large institutional investors. It follows, then, if they are that attractive to institutional investors, they should be of interest for the average investor now.
March 01, 2007 -- The second hottest investment(second only to apartments) is the office building. That is the suburban office building rather than the ones in downtown areas.
An office building has always ranked as one of the favorite real estate investments of most large institutions, insurance companies, pension funds, banks and foreign investors. It follows, then, that if they are that attractive to institutional investors, they should be of interest for the average investor now.
Why The Office Building?
The income in a well-operated office building can be excellent. An office building that is fully occupied has a rental income less operating expenses that compares favorably with a shopping center investment.
Office leases are not computed based on a percent of the retail sales like shopping centers. The rent in office buildings is often fixed for the duration of the lease, with a formula tied to the rate of inflation and other factors - all designed to maintain or enhance the profit margin.
Increasing the revenues from an office building has to focus on rents. Keeping rents at a proper level at the time of a lease renewal is obvious. Consider charging rents based on space used by the tenant plus a percentage of space represented by restrooms, hallways, atriums, rather than space actually within the walls of the tenant's unit. A difference of over 10% between usable space and rentable space is common.
Another saving can be in changing the leasing of the building from a gross basis to a net basis. In a gross lease, the lessor collects the rent, but is responsible for all of the operating costs, such as real estate taxes, utilities, maintenance, management, etc.
Switching to a net lease on renewals for new occupants, all of the costs are allocated to the tenants on a pro-rata based on the square footage being used.
However you compute the terms of the lease, the pressures of the marketplace may cause the rents to remain the same or go down. Not long ago, we saw reduced rents and concessions such as free rent in overbuilt areas.
Some companies continue to reduce the need for office space because of more efficient space planning and reduced home office personnel. Some have employees working from their homes, in touch with the office by computer. These trends will have some effect on the demand for office building space. Management and social realities dictate that office locations of some kind are needed for nearly all businesses.
The Terms in Leases
The lease of office space will vary widely in term. It can run anywhere from one to 25 years (in extreme cases, sometimes longer). The bargaining position of the tenant can range from practically none for a short-term tenancy for a small office to the extremely strong position of a Triple-A tenant who will occupy the major part of the building.
Of course, the owner and the tenant know that rent will be required and paid. The question always is how much will be paid and how will it be computed. Following are points that are negotiated in leases for office space.
A Flat Rental.
This lease calls for a rent amount that will be the same for the whole term and is most common in the short-term rental. The problem with the landlord is the failure to protect him against unreimbursed increases in taxes and operating expenses.
A Step-up Lease.
This contract calls for a gradually increasing amount of rent, to be stepped-up a certain amount or percentage at specified intervals. It may be used to compensate the owner for expenses as they increase, but more often it is used as an inducement for a tenant who has recently started in business and may be only able to afford a smaller rent.
Expense Participating Lease Or Escalator Lease.
Many long-term office leases are written this way. The tenant pays a fixed rent plus a specified portion of the real estate taxes, insurance, and repairs other than structural ones. The expense participating lease requires the tenant to pay an immediate share of these costs, while with the escalator lease the tenant pays only a portion of any increases in costs during the lease term.
Cost Of Living Lease.
With this lease, the tenant's rental amount is increased or decreased at specified intervals depending on the fluctuation of the dollar as shown by price indices or other agreed measures of the degree of inflation or deflation that has occurred.
Reevaluation Lease.
This lease calls for an appraisal of the property and a fixing of the rent as a percentage of the appraised value at specified intervals. The new rental may be fixed on the basis of the value of the land and building, or on the rental value of the premises occupied by the tenant.
In addition to these computations of the amount of the rent, the lease should indicate the method of payment. In some cases, the tenant's income is seasonal, and monthly payments can be of unequal amounts. The date of the first rental payment should be set forth specifically, and the intervals when subsequent payments are due. If any rent concessions have been granted by the landlord, the lease should clearly indicate the months that are to be rent-free.
Watching Some Lease Provisions
The following is a useful checklist of some of the items that should be clarified between the parties in the lease:
• What is the amount of usable space? Since the rent may be based on a square foot rate, the rate may be quoted on a rentable or a usable area. Rentable space means the actual office area, plus a proportionate share of facilities and corridors that service the floor on which the office is located. This concept is used in most buildings. Usable space is the actual space located within the walls of the office and excludes any part of the service facilities.
• Who pays the broker's commission? Maybe the broker has been working for the tenant, but the fee is usually paid by the lessor. Often the lessor has hired the broker to represent him in the negotiation. The lease should reflect the obligation and who will pay it.
• On what basis is electric current or other utilities paid? The tenant usually will pay for his own utilities. However, it can be computed in two different ways. It could be a flat rate added to the rent. Sometimes, each office is provided with its own meter and charged only for the actual consumption of the utilities.
• What services will be provided? There are a number of services in a building. There may be elevator service, air conditioning, restroom maintenance, parking that is available to tenants or will be rented. The tenant's right to use these services and the limitations should be spelled out.
• Is there a "most-favored tenant" clause? If a tenant moves into a new building that is only partially filled, he may demand a clause in the lease that will give him the benefits of any rental concessions that the landlord may subsequently make in order to obtain tenants.
Managing a Small Office Building
Office buildings usually take less of the owner or manager's time and attention than other types of property. Some office building owners are former apartment owners who didn't like handling the details of apartment ownership and management, but who do like running an office building.
Tenants in office buildings are usually much less demanding than residents in apartments, since the tenants can generally be dealt with on a much more professional level. Professional management is easy to get - competent property management companies are available in most areas. |
