Escalation issues

1. Well-designed office key to improving employee performance
Workplace design has a very real impact on companies' bottom lines.



"Businesses are embracing performance-focused workplace design as a strategic business initiative – as the forum that can drive employee excellence, business objectives, and ultimately, the bottom line.


In practice, many businesses seem to ascribe a low value to workplace design. Businesses that ignore the design and layout of their workplace are failing to optimize the full value of their human capital.


46% of workers surveyed do not believe creating a productive workplace is a priority at their companies, and 40% say that minimizing costs is the main reason behind their workplace's current layout. 20% rated their physical workplace environment as being only fair to poor.


The survey, conducted by Gensler, also demonstrates a link between the physical office and work processes such as innovation, collaboration and creativity. Two-thirds of workers believe they are more efficient when they work closely with co-workers. However, about 30% of workers don't think that their current workspace promotes spontaneous interaction, collaboration, or cooperation and teamwork among colleagues and direct reports. Only 50% believe that their current workplace design encourages innovation and creativity.


Topping the list of employee grievances about physical environment were:


a. Lack of space;
b. Too few quiet areas;
c. Uncomfortable workstations; and
d. Bad layout and design


Other results from the study include:


· Over 1/3 of respondents say their current workplace does
not promote health and well being;


· 62% of U.S. office workers have great respect for leaders
who work in an open plan environment with teams rather than in private offices.


· Only 42% of respondents say they would be proud to show
important customers or potential recruits their current workplaces."

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2. Escalation issues
Except for very short-term leases, almost every commercial lease executed today contains a rent escalation clause.


from Probate & Property, July/August 2006


"The trend is for landlords to create a lease in which the tenant pays a fixed return to the landlord plus reimbursement of many capital and expense items, such as taxes, insurance, maintenance, and operations. In effect, this trend applies the concept of the net lease - which formerly applied only to the leases of a freestanding structure to a single tenant- to all commercial leases.


Rent Escalation Methods


Landlords and tenants might structure a rent escalation clause in several ways.


These methods include increasing the rent by


• A fixed amount each year,


• The percentage increase in either the consumer price index (CPI)
or another inflationary index, or


• The actual increase in the landlord's operating,
maintenance, and insurance expenses and real estate taxes.


Some standard leases use a combination of 2 or more of these methods.


The most common escalation clause passes through to the tenant any increase in operating expenses and real estate tax. Landlords choose this technique for good reason. Because it is the most frequently used escalation provision, most tenants will accept it, and, of the available escalation methods, it is the most accurate reflection of a landlord's increased operating costs, because its computation should create an increase exactly equal to those costs. Yet it is the most complex of the 3 escalators.


Some leases have the tenants pay a percentage share of the total operating expenses for the operating year, but the more typical clause requires payment by each tenant of its percentage share of the increase in costs for the operating year over a base amount. When the increase is over a base amount, setting that base is crucial to the tenant.




Problems with Definitions- Property


The most significant definitional problem with operating expenses for the tenant relates to the definition of the landlord's property to which the pass-through charges apply. Normally, the landlord's property should be defined as the office, warehouse, or shopping center building or complex of buildings, any adjoining parking garage that serves the building, the real estate on which these improvements are situated, and private streets and easements, all of which are owned by the landlord. In some instances, though, the adjoining private streets or easements accessing the building are jointly owned or shared with third parties. In those circumstances, street and easement expenses should be shared proportionately with the third party.


The tenant should receive a breakdown of the real estate - that is, property descriptions, rates, and value - as of the commencement date of the lease. The tenant should determine whether the building is assessed at its full value or at a lesser sum in the event that the building is not fully completed or fully occupied. If the building is not completed, and therefore is assessed at less than its full value, the tenant will be subject to an escalation, even though the tax rate did not change, simply because the building was not fully assessed. The concept also holds true for an adjoining parking garage. Also, if any improvements are added to the building or parking garage after the commencement date of the lease or if any adjacent property is acquired, taxes on those items should be disclosed.




Taxes


A final area of concern is the tenant's liability for taxes. For example, if the landlord contests taxes and obtains a reduction or a refund, the tenant should share the benefit as a future credit or, if the term is at its end, receive a refund instead. Some states permit a tenant to contest property taxes.


With some minor exceptions, assessments payable in installments should be determined on an accrual basis. Each taxing authority has its own timetable for the payment of real estate ad valorem taxes. The taxes may be determined on a fiscal or calendar year basis and may be payable quarterly, semiannually, or annually with a penalty for late payment.
The tax reimbursement clause should dovetail with this actual timetable."

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3. Landlord's consent to sublease
Whether a landlord's refusal to consent to a sublease to a bank was unreasonable when tenant was a grocery store and landlord had reserved a spot in the shopping center.


from Recent Developments and Trends in Shopping Center Law, 2008 U.S.
Shopping Center Law Conference


"Carr-Gottstein Foods Co. (Tenant) leased space in a shopping center to be used as a grocery store from Norville (Landlord). The lease provided that Tenant must obtain Landlord's written approval prior to subletting and that Landlord must not unreasonably withhold such consent.


Tenant requested Landlord consent to a sublease to a bank.


Landlord withheld consent by demanding 75% of the bank's rent.


Tenant sued Landlord, alleging that Landlord's withholding of consent was unreasonable and in violation of the lease. Tenant argued that Landlord could not withhold consent to a sublease to a bank because under the lease, Tenant was permitted to operate a bank in its store.


Landlord consented that banking was a permitted use under the lease.


The trial court granted summary judgment for Tenant.


Norville v. Carr-Gottstein Foods Co., 84 P.3d 996 (Alaska 2004)


Holding:


Reversed. The Supreme Court of Alaska held that material issues of fact remained as to whether Landlord's withholding of consent to the sublease was unreasonable. Tenant's argument that under the lease Landlord must consent to any sublease that was for a use that would be permitted the Tenant's Use Clause if conducted by Tenant was incorrect as a matter of law. Reasonableness was the only limitation specified regarding the right of the Landlord to withhold consent.


Furthermore, Landlord's proffered reasons for withholding consent – a bank would interfere with Landlord's plan to lease space in the shopping center to another bank, and gross sales, and therefore percentage rents, would be impaired – are legitimate reasonable not impermissible under the lease's terms.


Whether Landlord's reasons for withholding consent were genuine and reasonable under the circumstances were questions of fact to be determined by the tried of fact.


The court also ruled that material issues of fact remained as to whether Tenant's lease permitted general branch banking."

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4. Breathing new life into former big box properties
Flexibility and patience are key to re-tenanting vacant big box facilities.


from Shopping Center Business, November 2008


"Many of the big boxes, including pet stores, discount retailers, electronics and sporting goods retailers of the 1990s have disappeared, often dragging the rest of the shopping center down with them. But when these facilities close, they leave behind opportunities for profit in an interesting real estate market niche: the acquisition and leasing of vacant or partially leased former big box retail locations.


These opportunities are often overlooked by larger developers and owners. It takes a certain kind of investor with specific skills, resources and patience to take advantage of these value-added opportunities successfully.


Big box properties for sale nationwide


No single driver fuels the recent trend of big box properties closing their doors. Mergers and bankruptcies play a key role. In some areas, demographics and market dynamics change, prompting retailers to seek new locations. Retail stores may follow the pull away from historic business core areas to more promising locations. Some retailers may decide to leave a regional market altogether.


Transforming undervalued properties into profit centers


A key advantage of these properties is that existing buildings, with full entitlements, can be acquired at a much lower cost than it takes to build a new facility in today's market.


The greatest challenge is to determine what to do with the building.


The successful buyer must be willing to buy quickly without having to identify a replacement tenant before closing. Further complicating the process is problematic acquisition financing – conventional underwriting standards will usually frown on a vacant big box with its negative cash flow.


With the capability to hold on to and carry a vacant or partly leased property for as long as 18 to 24 months, a buyer can seek potential users and try to anticipate the ways in which the market will develop.


Finding the right use for a former big box store


The first prospects to look at are the retailers who are similar to the former tenants. After that, flexibility is the key.


A typical challenge of big boxes: their extreme depth. Because the majority of retailers do not want depth of 350 to 400 feet (not atypical), owners may simply wall off the back part of the building, tear it down, or find alternative uses for it, such as storage.


Community issues figure in big box property re-use


Vacant big box properties can become problematic for a community. Their visibility can create a perception that the area is not a good retail market. The absence of retail tenants interrupts sales tax revenues.
Facilities can also become eyesores, inviting vandalism and trash dumping.


Some communities can impose complicated or unrealistic requirements on buyers and redevelopers, who must match the desires of the local communities with what is most practical and the best solution for an old location.


Success and profitability in a range of different markets


Many of these vacant big box transactions are one-off deals, too small to interest larger investment companies who have no appetite for risk.
As a nimble, niche operator in smaller markets, with the ability to close transactions fast, a specialist firm can acquire distressed, vacant and even stigmatized properties from different sellers and revitalize them successfully in different ways. To find the best opportunities, the buyer must be looking for properties in several different secondary and tertiary markets that show promise. The important ingredient is the understanding that patience will be required for success in all of these types of acquisitions. That is where the opportunities lie."
For more information see http://www.houstonrealtyadvisors.com/ or http://www.houstonrealtyadvisors.net/