Practical Risk of New Tenant in New Development

Is the project new construction? If so, the prospective tenant will require a candid and complete assessment of practical risks of the land development process. These include special zoning, building and fire safety, environmental, sewage and other permitting issues, or, more unusually, risks attendant to proposed phased delivery of the improvements or risks inherent in developing a project located in multiple jurisdictions.
Identity of the Landlord
Record ownership of existing office and industrial property inventory and equitable ownership of prime development sites often are held by special-purpose entities that are affiliated with large, well- capitalized real estate companies. The prospective tenant should determine early in the process whether an unconditional guaranty from a net worth affiliate of the landlord is prudent to assure timely, complete performance of the landlord's construction obligations, all within budget.
Special Building Requirements
All of the prospective tenant's representatives, including attorneys, brokers, architects and engineers, need to be fully informed of the company's unique spatial and fit-up requirements for the project, such as clear floor height, HVAC and project security systems, 24/7 vehicular and pedestrian access, telecommunications, lighting, vehicle loading and parking facilities, special sanitary sewage, and toxic waste disposal. Will the architects or engineers be engaged by the prospective tenant or by the landlord? This can be a major issue, particularly regarding the duty and loyalty of these professionals.
Signage
Significant and unusual signage requirements are often present in large-space office and industrial lease negotiations. The tenant's broker and legal team should coordinate their efforts to ascertain the client's signage requirements as soon as practicable in the process, if only to obtain a relatively painless concession by the landlord to satisfy these requirements. Quite often, the landlord is powerless in this matter, as the municipality's signage requirements can be onerous and require a long lead time to complete, including frequent resort to an appeal process.
Project Plans and Specifications
If the project's plans and specifications are not to be agreed upon at the time the lease is delivered by the parties, a fair, understandable and responsive process for review and approval of the project plans and specifications should be included in the lease, and agreed upon early in the lease negotiation process. In addition, the effect of change orders on the basic rent structure, whether proposed by the landlord or the tenant, should also be determined early in the negotiation process.
Size of the Premises
The economic return to the landlord is pegged to the area of the space being rented. The prudent user should require independent verification of the area of the leased space to be performed by a licensed professional in accordance with an agreed upon, objective written standard of measurement, such as the Standard Method for Measuring Floor Areas in Office Buildings approved 6/7/96 by the American National Standards Institute (ANSI) and by the Building Owners and Managers Association (BOMA). The lease should permit adjustment of the basic rent and proportionate share attributable to such space (for computing the user's liability for its share of common area maintenance costs and real estate taxes assessed against the project), all in accordance with such as-built measurement.
Delivery Dates
A determination should be made about when the user requires delivery of the space, and whether phased delivery of portions of the project is sensible given the project timetable and the company's fit-up and use requirements. Due consideration in the early negotiations should be given to the economic and other consequences of a delay in the project's completion, whether caused by the tenant or developer, or arising from force majeure.
Common Area Maintenance and Real Estate Taxes Corporate users are sometimes reluctant to negotiate late in the deal over such points as exclusions from or limitations on the landlord's common area maintenance charges and real estate taxes assessed against the site, or audit rights and consequences pertaining to such charges or taxes. The best way to deal with this predisposition is to resolve early in the lease negotiations the limitations and exclusions, audit rights, right to contest tax assessments for which the tenant is contractually liable under the lease, and consequences of overpayment.
Lease Term
Companies that only occasionally transact in real estate generally require more schooling on the range of realistic alternatives for the length of the lease term. In addition, these users are rarely attuned to the range of preferences to extend the term, expand the leased premises, or purchase the project. These preferences, when applied to term extension, expansion of the premises, or purchase of the property, include a firm option, a right of first offer, or a right of first refusal." For more information contact: www.houstonrealtyadvisors.net