Thursday, August 30, 2007

Operating Cost Pass-Thrus relating to disasters

Suppose your office building or shopping center were struck by a disaster, such as a hurricane, earthquake, fire, and the landlord chose to restore the destroyed building or center.

from Commercial Lease Law Insider, September 2006

"Which costs associated with restoration can the landlord pass-thru to tenants?

Most standard leases include reference to passing-thru CAM and operating expenses for the landlord's cost of making repairs. The cost of replacing destroyed property is not treated as a repair. It's usually treated as a capital improvement.

Tenants frequent try to exclude capital improvements when negotiating their leases. Most leases state that specific capital improvements may be amortized, and the amortization (and sometimes interest) may be included in Operating Costs/CAM, if installed:

a. To reduce the costs of operating, maintaining or
repairing the building or center (known as cost-saving capital improvements);

b. To comply with any law enacted after the lease is
signed; and

c. For life, health and safety.

Landlords want restoration work costs to be categorized as repair costs.
Tenants may demand that the landlord exclude any repair costs that would have been covered by insurance. At the very lease, tenants might demand that the landlord amortize restoration costs over their useful life.

During the restoration work, any upgrades made, required to comply with building codes enacted after the property was constructed, are generally not considered repairs. Nor will those upgrades be covered by property insurance, unless there is a building ordinance endorsement.

The cost of cleanup and the disposal of debris are together considered a repair. A property insurance policy may specifically exclude certain costs related to the removal of hazardous materials, such as asbestos.

CAM cost and operating expense clauses usually allow the landlord to pass through insurance deductibles to tenants. Tenants will try to negotiate for reasonable limits on those deductibles, even though reducing the amount of a deductible increases the insurance premiums."

For more information see; or

Gerald Hines unvaeil New MAINPLACE Bldg.

Hines unveils new building as MainPlace Aug 24, 2007 - The Houston Business Journal
Hines has begun site work downtown for a new office tower that's now going by the name "MainPlace."
The prominent Houston developer revealed more details this week on the planned 46-story building that was reported last month. (See "Hines to scrape downtown sky," July 13, 2007.)
The 1 million-square-foot office building will rise at 811 Main, in the block bounded by Main, Fannin, Rusk and Walker. Featuring floor-to-ceiling windows, the structure is being designed by Jon Pickard of Pickard Chilton and will be constructed by D.E. Harvey Builders.
A sky garden on the 39th floor that will reveal a five-story crystalline atrium is expected to become a recognizable landmark on the Houston skyline.
An official ground-breaking is set for April 2008, and tenants will begin moving in by late 2010.
Hines is developing MainPlace through the Hines CalPERS Green fund, and is seeking LEED Silver pre-certification. Launched in late 2006, the fund focuses on creating sustainable office buildings that are certified through the U.S. Green Building Council's Leadership in Energy and Environmental Design program. (See "Giants give fund green light," Oct. 6, 2006.) For more information see: or

Thursday, August 16, 2007

JV Purchases Former Hewlett-Packard Campus

Group To Redevelop Campus to 630,000 SF of Office Space, 4 Parking Garages

The joint venture between Macfarlan Capital Partners and Buchanan Street Partners purchased four buildings on 44.5 acres at 20455 State Highway 249. The partnership purchased the buildings from Don Hand for a reported $32 million, or about $129 per square foot. Three of the buildings are office buildings totaling 232,000 square feet and the other is an industrial building totaling 249,000 square feet. The campus will be renovated for office use and will be called Centre at Cypress Creek. It will include three four-story office buildings and the industrial building will be converted to office space. The project will include more than 630,000 square feet and four parking garages. Brenda Pennington of Brenda Pennington Commercial Real Estate represented the seller, Don Hand of Greenwood Properties. For more infomation see ; or

Monday, August 13, 2007

Tenant's Checklist of Silent Lease Issues

Do all of the tenants' percentages add up to 100%, or is the landlord being over-reimbursed for esclations? Are the anchor tenants paying their share, or is that share being shifted to the other tenants?

Multiple escalations
The lease should not allow multiple escalations that give the landlord duplicative recoupment of a cost increase, or double-count any charges included in operating expenses or elsewhere. For example, [for a shopping center,] the marketing director's salary should be either an operating expense or a charge to the marketing fund, but not both.

Lease termination during calendar year
Apportion escalations in the event that the lease terminates during a calendar year. Otherwise, the landlord could argue that annual calculation procedures obligate the tenant to contribute to an entire year's escalations. [Moderator's comment – that would be egregious.]

Free rent period
Does the free rent period apply to escalations or just base rent?

Waiver of escalations
Escalations should be deemed waived if not billed within a certain period.

Statement by professional
An independent managing agent or (better) a CPA should prepare the statement of operating expenses. Attach as a lease exhibit the landlord's operating expense statements for the preceding few years.
Ask the landlord to confirm that:

(a) these were the statements actually used for pass-
thrus to existing tenants; and

(b) future operating expenses will be calculated the
same way.

Time for revision
Set a time limit for the landlord's revisions to operating expense statements – and make that limit subject to a time of the essence qualifier.

Right to review and challenge
The tenant should have the rights to examine and question the landlord's operating expense calculations. Those rights should survive the termination of the lease. The lease should give the tenant reasonable time to:

(1) notify the landlord it wants to audit expenses;

(2) conduct and complete the audit; and

(3) specify if, & how it contests the landlord's

Avoid any schedule that requires the tenant to provide more detail than is reasonable at any particular stage of the process. If the tenant discovers egregious errors, let the tenant reopen expenses from earlier years, even if the time to do so had otherwise expired."

from, August 30, 2006

"Many people mistakenly consider brokerage and transaction management one and the same. Some have described transaction management as brokerage on steroids, others call it managed brokerage, but each of these descriptions lacks certain foundational truths. So, what is transaction management?

First, the overarching textbook definition: transaction management is a consistent, repeatable, reportable, measurable process to coordinate multiple transactions in multiple markets and oversee the field execution of real estate deals. Transaction management has 4 dimensions.

First Dimension: Consistency.
Managing brokerage resources from various real estate firms alone can be difficult. Now imagine taking all the input from these disparate resources and trying to make them look uniform. It is next to impossible. However, it is the job of a transaction manager to provide the client with a consistent process. This requires two things. First, it requires frequent interaction between the transaction manager and the client to define what's needed. More important, providing a consistent process requires the use of standardized management tools.
These tools can include formal broker-engagement letters, standard listing agreements and scope-of-services templates, uniform market report formats and financial analyses. With these tools, the transaction manager can ensure that the field broker hits the ground running.
Moreover, the TM [Transaction Manager] can then continuously improve the process in place, making sure it remains viable for the client.

Second Dimension: Coordination.
Accountability for successful transaction management does not lie solely with the TM. Rather, it requires the management and oversight of several key contributors including the client corporate real estate department, the end user, legal department and field broker, among others. No matter how tactically astute a TM is, it is ultimately his ability to herd the cats that sets him apart from the also-rans. It is more than a typical project management mentality, and in this case you have to coordinate the efforts of individuals for whom real estate is akin to visiting the dentist.

Third Dimension: Communication.
It is the value you bring to the client that will make or break you as a service provider. However, communicating value has two parts. The first is measuring your performance against a set of criteria. Most service providers do this reasonably well and with good reason; their bonuses are tied to it. Where most service providers miss the mark is in giving their clients proof of value that they can communicate upward to their senior management. To be sure, there is a lot of self-promotion when selling the service but relatively little done on a daily basis after the account has been won. Without it the old saying, "what have you done for me lately?" comes into play.

Fourth Dimension: Time.
To make effective use of your time, you need to consider the service provider's professionalism. Transaction management is about hiring the right team with the right resources and the ability to free up your time for more strategic concerns.

When evaluating transaction management services, consider whether their process will save you time or require you to micromanage their efforts.
Consider whether the designation of responsibilities is clear or whether you'll be called in too often to arbitrate a disagreement among the provider, the broker and your own staff. Consider whether the service provider is willing to live or die by the ability to save you time and money."
For more information see: or

Wednesday, August 8, 2007

Lease Error analysis is a far more uncertain task.

"Even in the times when tenants are king, the landlord-tenant relationship is a delicate one. Neither party can afford to gratuitously irritate the other. Tenants should think twice before hiring a gunslinging stranger to challenge the income stream which the landlord is getting from his property… This is particularly so if the stranger has a contingency contract which means the consultant may claim a vested right to continue a challenge with which the tenant may not agree. It makes sense that the higher the contingency fee, the greater the risk for dispute between principal and agent.
Other issues which make contingent fee lease error challenges riskier
· Consultants have significant incentive to oversell the no risk
aspect of the arrangement.
· If landlord wants to settle, the landlord may prefer a
non-cash quid pro quo as relieving tenant from burdensome lease covenant, resulting in a potential fee dispute with a contingent fee consultant.
· Even in cases when a landlord tries to settle a tenant
complaint with cash, which can be easily divided between the tenant and the consultant, it may be unclear as to whether the cash is new money or is money which landlord budgeted for tenant to induce renewal of the lease, or for some other purpose.
· The decision of how hard to push and when to settle can easily
be skewed in a contingent fee situation where the consultant has an incentive to score quickly and often – even if the amounts are less than might be obtained if the incentives were placed differently. The risks may go either way: a consultant may push too hard or not hard enough.
· A contingent fee consultant's aggressive assault may breed a
counterclaim by the landlord, resulting in the potential that the consultant recover 50% of his client's positive recovery, while the client is responsible for 100% of any liability which the party uncovers."
From Lease Audits: The Essential Guide, by Theodore Hellmuth, Esq.

For additional information about Lease Audits: contact or

Tuesday, August 7, 2007

Checklist considers lease negotiations from a landlord's perspective.

"The checklist is intended for major commercial space leases.

Off-Site Costs
Avoid limiting "operating costs" to those incurred physically within the particular building. The landlord may incur off-site operating costs, such as in a multi-use project (e.g. holiday decorations in a central plaza) or for off-site equipment, installations, traffic improvements, shuttle bus services, or the like to benefit the building.

Avoid the term CAM because operating cost escalations far more than common area maintenance.

Major Repairs
Do not necessarily limit multi-year amortization of large repair costs to capital items. Particularly if leases limit escalations or if the landlord is concerned about base years for new leases, the landlord may want the ability to spread major noncapital repair costs over multiple years.

Condition for Audit
The tenant may audit operating costs only if those costs increase more than a specified percentage over a specified prior year or base year.

Prohibit contingent fee auditors. If the landlord agrees to reimburse audit costs (such as if the tenant's audit reveals a certain level of mistakes), then negate any reimbursement to contingent fee auditors.
Consider requiring a national CPA firm. Insist that such firm agree to notify the landlord of any undercharges or errors in the tenant's favor that the audit discloses.

Costs of Audit
Ask the tenant to pay for the landlord's out-of-pocket costs in connection with any audit of operating costs (e.g. photocopying, staff time, document retrieval, accountants' time spent answering inquiries).

Require the tenant to sign a confidentiality agreement satisfactory to the landlord for any audit and its results before disclosing any records or information to the tenant or to a lease auditor. The agreement should, among other things, prohibit the tenant and its advisors from disclosing the existence of any audit or any of its results, particularly to other tenants in the building. Breach should be an incurable default under the lease.

Threshold for Payment
If overcharges (net of undercharges) total 3% or less of total annual operating costs (a general definition of materiality), then the tenant should not be entitled to any correction or any reimbursement of its audit costs. Define carefully the factor to which the 3% is applied. Use as large a number as possible. For example, refer to 3% of gross annual operating costs rather than 3% of the tenant's escalation payment.

Liability for Refunds
The landlord's liability for any refund of overpaid escalations should terminate after a specified number of years (and automatically upon any sale of the building?) to prevent open-ended obligations or issues upon a sale of the building.

Survival; Timing
Limit the time during which the tenant may challenge any escalation. Be careful – the tenant may try to make this reciprocal for the landlord's billings. All the tenant's obligations regarding escalations should survive the expiration or sooner termination of the lease." for additional information see: or