| Quick summary
Challenge: Finding an appropriate office space in a tight market and on a short timeline to avoid a $300,000 holdover penalty and a lawsuit. Solution: We located a space that on the surface seemed small but actually had the perfect amount of usable space. We negotiated with the landlord to include the existing furniture in the lease, cutting the lengthy furniture buying process out of the move. Result: Our client was installed in an attractive space with opportunity to expand. We worked within the short timeframe and avoided a lawsuit and significant holdover costs. |
With the great recession 5+ years in our rear view mirror, the Boise commercial real estate market continues to recover. Many say we have fully recovered and begun to swing the other way.
While a few lender owned properties still hit the market and some properties in certain locations show signs of distress, most owners are enjoying rising rates and decreased vacancy. Our clients, who are the office and industrial tenants rather than the landlords, will likely be facing new, less favorable terms when it comes time to renew, relocate, expand, or contract. We are advising our tenant clients to start early and seek independent, unbiased professional advice when faced with an impending facility need. Here is an example of a recent transaction that almost started too late but ended well due to Tenant Realty Advisors’ thorough approach to solving our client’s problems and fulfilling their goals.
A large international Company with a Boise office was facing an expiration date in the very near future (7 months hence). Because this Company had recently acquired the local group and its parent company, the process to secure new office space options for Boise was off to a late start. The company knew they had significantly more space than they needed at the Boise office (they were in 150,000 square feet), but they were still evaluating exactly what they wanted. Based on their employee head count, they needed between 20,000 and 23,000 SF.
When we were engaged in May, our first goal was to secure a lease extension from their present landlord. We didn’t necessarily want to stay in their project but needed extra time as a cushion to avoid going into ‘hold over’ in the existing lease. That holdover clause would require us to pay 150% of our current rent if we went month-to-month. With our 150,000 SF space, that came out to a whopping $300,000 per month.
So the existing landlord had big leverage on us, and we soon found out they couldn’t extend our lease because they had found a new tenant who wanted the full space. In the past, tenants had little concern about being forced out of their space by an expanding tenant or a new tenant to the building, but things have quickly changed and larger tenants in the Boise area have fewer and fewer options. Recent lease signings have included several spaces of 25,000 SF and 50,000 SF, one of 83,000 SF and even a 167,000 SF lease. Some of these are new tenants to the market and some are local companies expanding, but what it means is large blocks of space in desirable locations are disappearing. For a business community that remembers having tons of space options offered at fire sale rates during the recession, this new supply constricted environment is sometimes hard to get your head around.
We pushed and cajoled the landlord for the extension. But the landlord’s new tenant, a large local health services organization, had already signed a lease and was ready to move in after our lease expired. The landlord really couldn’t accommodate us. The landlord was becoming concerned and impatient with delays and there were strong signals that they would sue our client for damages should we fail to vacate on time. Either way, paying $300,000 per month for space we didn’t need or being sued by our own landlord for staying past the lease expiration and “damaging” the landlord were not where we wanted to be.
Time was definitely our enemy and we were running out of it.
Tenant Realty Advisors was able to identify three buildings that could accommodate our client’s new space needs. Our options were limited because Boise has experienced strong tenant demand with very little new construction since 2008. Rents were pushing up and concessions going away. It was simple supply and demand.
This lead to some locations seeing multiple lease offers. Our first choice option quickly went away – an adjoining tenant who was ahead of us in the process committed to a lease just before we could. Our options and time were running out, and hanging over our head like the sword of Damocles was that potential $300,000 per month rent bill if we weren’t also sued by our existing landlord. It could have gone badly.
We were focused on a certain size range we needed (20-23,000 SF), but another building with less space and “wow factor” became a solution. We found a space that had less overall or “rentable” square footage than we’d been looking for, but the “usable” square footage was right on target. The lost “rentable” space was in the building’s shared hallways, lobbies, stairwells, etc.
In addition, the landlord had very lightly used furniture and was agreeable to including that in our offer to lease. With our uber-short timeframe, having that existing furniture could save us the time needed to order and receive the new furniture we would need for the new location.
Everything fell into place (though that doesn’t mean we were relaxing). Before the end of August, a lease was negotiated and signed with some time to spare for planning and executing an orderly move.
In keeping with our client’s needs and goals, we secured an attractive , competitive lease in a good location with a landlord who, with a 1.6 million square foot inventory, is likely to be able to meet any future growth needs. And we dodged a $300,000 per month rent bullet and the threat of a potentially ugly and expensive law suit with our existing landlord.
The take-away? Start early and know the details of your lease. Even if you have a few years left on your lease term, pull out the document and take a look at the fine print. Know the terms of your option to renew (if you have one) and be ready to make a decision on your terms, not the landlord’s. TRA can help. We offer a free “lease appraisal” in which we can summarize the terms of your lease and how it is positioned in the current rising market.
Start your evaluation and planning process early and make time your friend.
Call us to discuss!