How Office Tenant Brokers are Helping with Today's Crisis (Part II)
As we deal with COVID 19’s effect on a business day to day and even hour to hour, I thought I would share today’s version of events affecting executives tasked with workplace strategies.
Specifically, we are receiving a lot of emails with questions pertaining to leases and office buildings. Formerly office dwelling CEOs, CFOs, and Corporate Real Estate execs are asking about economic relief, back up plans, variable vs. fixed expense, facility hygiene among many other inquiries. Before I get into our recommendations, in a time of crisis it is important to understand the facts as of today, March 18, 2020.
1. Landlords have office buildings open.
2. Tenants have closed their doors.
The confluence of buildings being open, and businesses being shut down creates a clear problem of landlords expecting rent and tenants not having the utility of the space. Many of our clients are requesting rent and parking relief in a somewhat knee jerk, yet expected, response. While landlords keep doors open, they cannot be expected to waive rent unless it is just pure sympathy. We must remember that the landlord also has expenses such as a mortgage and I am certain a faceless mortgage holder will not offer a sympathy waiver.
On the other hand, there is a middle ground whereby certain variable expenses may be relieved. Let’s address variable expenses by first reminding ourselves how FSG, MG, and NNN leases work as well as address “must lease” vs. “may lease” parking.
1. A Full-Service Gross (FSG) lease is where the tenant pays base rent and the Landlord pays for all operating expenses such as common area maintenance, utilities, property insurance, and property taxes.
2. A Modified Gross (MG) lease is where the tenant pays base rent and utilities directly to the utility company and the Landlord pays for property taxes, property insurance, and common area maintenance.
3. A Triple Net (NNN) lease is where the tenant responsible for the base rent, utilities, property taxes, property insurance, building insurance, and common area maintenance.
In the scenarios where the tenant pays utilities directly, the tenant should shut down all utilities while the business is dark. This could dramatically lower the electrical, janitorial and other costs. In a FSG lease, the tenant should request that the landlord shut down any variable costs function of the building and pass along the pro-rata incremental savings to the tenant. Additionally, office buildings could furlough certain workers given the lower occupancy in the building. If tenants’ partner with their landlords in a communicative way, the net result could be immediately lower costs.
Parking is an easy one. If your lease states that you “must” lease parking from your landlord, then it is a fixed expense. However, if it says “may” lease than you should immediately call the building’s parking office and cancel all parking. Just make sure it isn’t a “use or lose” scenario in the cases of tight parking situations.
Should you want to discuss these strategies further, I can be reached at erik@crea-la.com.
I will be back in touch next week because, as I said, this requires day to day/hour to hour monitoring!
Erik