Tenant Favored Lease Strategies for 2011

The Office Diggs recently sat down with prominent, Chicago attorney James Moorhead of Thompson Coburn to discuss tenant leasing. Following our conversation James was kind enough to put together a recap and his top strategies for 2011. Please check out this information below…

James P. Moorhead

Although the national leasing market generally stabilized in 2010, leasing has been hit by the economy like virtually every other area of real estate. The beginning of the year, as landlords and tenants begin to reconcile their 2010 operating expenses, is a good time to examine leasing strategies for the new year.

Proactive thinking will remain the winning strategy in 2011. Listed below are basic descriptions of a handful of tenant-favorable lease provisions that might be useful, both for tenants to use and landlords to note, as part of negotiations this year for a new or amended lease. 

Alternate Term Length: A tenant concerned about a long-term commitment for a new business or in a new market may desire a shorter initial term with more renewal terms. The tenant that once agreed to a ten-year initial term and 2 five-year renewals now may want an initial three-year term and 5 three-year renewals. With a structure like this, the tenant can get out of the lease if the business does not support the space, but also has reserved rights if the business does well. 

Termination, Contraction, and Expansion Rights: If business is slow, reducing the space or exercising an early termination right (both often with a landlord fee) might be a cost-effective way to reduce the lease obligation. Alternately, if business is better than expected, a right to expand into adjacent vacant space may be useful for a tenant who initially leased a smaller space due to economic uncertainty.

Permitted Uses, Assignment, and Subleasing: Having sublease or assignment provisions with minimal landlord conditions is ideal in case a tenant wants to quickly unload an underperforming site. The permitted use clause also should be as broad as possible because it will maximize the audience of prospective subtenants and assignees that may be able to take the space.

Delayed Delivery of Space: It normally is critical for a tenant to have new premises delivered by a landlord on time so that the tenant can open for business as scheduled and begin to generate revenue as budgeted. To this end, consider providing in the lease that, in the event the premises are delivered late, then tenant receives one day of rent abatement for each day of delay, two days of rent abatement for each day over thirty days of delay (this credit is in addition to pushing back the rent commencement date), and a right to terminate if the delay is beyond 90 days. 

Retail Co-Tenancy: For retail tenants, a co-tenancy provision allows a tenant to pay reduced rent when certain conditions are not met. Usually, the condition is that certain other stores, such as anchors, or a certain percentage of stores in the center, have to be open for business. The reasoning is that a tenant is spending a lot of money for a particular site and center, and if that center is not operating as it should due to the economy or other reasons, then tenant should receive a remedy.

Preempting Landlord Problems – Self-Help and Rent Abatement: Tenant protections from landlord financial difficulties are useful in a weak economy. Self-help provides a tenant the right to fulfill landlord’s lease obligations if the landlord does not do them and then deduct the cost from rent. A rent abatement provision provides for rent abatement if landlord fails to fulfill its lease obligations after a certain waiting period.

Lease provisions like these may provide flexibility and peace of mind to a tenant and will help keep the tenant’s focus on its most important goal for 2011: the success of its business.

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Is This Really A Law Firm?

The Office Diggs was recently given a private tour of what might be the most creative law firm space in Chicago. In 2010, Childress Duffy ditched their corporate space at the AMA Building and relocated to a 13,000 square foot loft space located at 500 North Dearborn. Partners of the firm now share offices, while associates sit in an open-work environment. The dress code is casual and additional features of the office include desks made from old sewing machines and doors, a great lounge area to watch a game and even a private massage room. Don’t believe me? Check out the pictures below:

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Along with the great physical environment, the firm is completely paperless and also offers employees a Dream Management Program. Hats off to Childress Duffy for building such a unique office space.

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Identifying Chicago’s Trophies

I just finished up having a conversation with Howard Ecker regarding the Chicago and New York City office markets. Always one to offer a unique perspective, Howard posed an interesting question. He challenged me to name an office property in Chicago that offers the same cache as New York City’s trophy buildings. I have to admit I struggled with this. New York has a hand full of office properties that are over thirty years old and nevertheless, even in soft markets, demand three figure rents. Buildings like 9 West 57th, the General Motors Building and Lever House offer tenants a certain “it” factor that I am not sure can be found in Chicago. Keep in mind this is not an architectural competition. Architecturally Chicago has some of the most iconic buildings in the world. This unique situation is based on the ability of an office building to garner top of the market rents in a soft market and a company’s strong desire to be located in a building, not because of cost and efficiency, but rather because the property offers a cache and exclusivity that cannot be found elsewhere.

It is difficult to name a building in Chicago that fits this description. The first one that comes to mind is Willis Tower, however from a pure image standpoint, I do not think Willis offers tenants the same cache as New York’s Lever House or Seagram Building and the building certainly does not demand top of the market rents in any market. Then there is the Wrigley Building. Arguably, one of Chicago’s most famous buildings, this iconic property currently sits close to 60% vacant with rents far below market.

I am really at a loss to name an office building and need your help. If you had to name an office property in Chicago that can be considered a trophy, meaning the property can garner top of the market rents in a soft market and companies desire to be located in the building, not because of cost and efficiency, but rather because the property offers a cache and exclusivity that cannot be found elsewhere, which one would it be? Please send in your comments.

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The Shrinking of Office Space

As companies explore ways to reduce their operating expenses and professionals continue to become more dependent on mobile devices, one thing is for sure, the workplace landscape is changing. According to the International Facility Management Association, in 1994 the average office worker had 90 square feet of office space and is now given 75 square feet. Senior office workers have shrunk from 115 square feet to 96 square feet of office space.

With mobile technology gaining incredible popularity among a workforce that is now dominated by Generation X and Y, I am left to ask, does today’s professional really care if their office space is shrinking?

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LEED Certification and Building Selection (Part 6 of 6)

For part 6 of our discussion Partners By Design sat down with The Office Diggs to discuss  LEED certification and building selection….

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Creating a Timeline for LEED CI (Part 5 of 6)

To learn more about how Partners By Design structures a timeline when planning to build LEED CI space, this is a must see video…..

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Budgeting A LEED CI Project (Part 4 of 6)

For a glimpse into Partner By Design’s proprietary budgeting software known as The Autoprogram and to learn more about Leopardo‘s instrumental role in AHA’s project please check out the video below….

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