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Don’t Let Your Lease Kill the Sale of Your Business

Post By : admin 3 October 2018 Leave a comment

As an asset manager, in the late 90s, working for a large owner of office buildings, I got a phone call from a guy who said he was buying one of the companies in a Dallas building we owned. He said his company planned to close on the sale the next day and he wanted the landlord to consent to the assignment of the lease to him. After checking the lease, I told him that he should have come to us much sooner because the landlord had up to 30 days to approve or reject the assignment. But that wasn’t the bad news. The bad news was that the landlord had a right of recapture – the right to terminate the lease if the tenant requested an assignment or sublease. The tenant was paying rent of only $14.50 per square foot (SF), but the market rent had increased to $20.00/SF since the lease was signed. So, you guessed it, the landlord decided to exercise its recapture right. The buyer of the business was a savvy guy and recognized that the landlord was recapturing the space, so it could lease the space for a lot more money and, thus, increase the value of the building.

He asked at what rental rate the landlord would allow the company to remain in the building. I told him $18.50. That additional $4.00/SF for the remainder of the lease term would cost an extra $60,000. He then went back to the seller of the business and gave him a choice – reduce the sales price by $60,000 or the business sale was dead. The deal went through.

What can you do to make sure your landlord doesn’t have the power to affect the sale of your business? Negotiate the assignment and sublease clause in your lease properly. Here are a few things to negotiate or consider.

1. Remove Recaputure – at the time you negotiate a lease, make sure there is no landlord right to recapture or terminate. This may be difficult if you are a small tenant in a big building.
2. Add Conditions – at the very least, limit the landlord’s right to recapture only in the case that you no longer need the space and sublease it. Prohibit recapture in the case of an assignment associated with a business sale. In some cases, you can negotiate under what conditions you can assign the lease – a related entity, an entity with higher net worth, etc.
3. Be reasonable – make sure the lease adds that the landlord’s approval “shall not be unreasonably withheld or delayed.”
4. Tenant remains fully liable even if the lease is assigned or subleased. If selling the business, you may be able to waive this liability if the landlord gets something new that it wants – more leased space or a longer lease term.
5. A transfer of stock qualifies as an assignment in most leases where the tenant is not publicly traded.
6. Explain why – it always helps when the landlord understands the reasons for something you request. Explain the structure of the transaction and why it is good for them.
7. Give notice early but avoid false alarms. Let the landlord know as soon as you have high confidence the sale will go through. But don’t go to them every time you have a tire-kicker.
8. Consent – ask for the landlord’s preferred consent form and ask about their approval process. Landlords rarely will sign a consent form created by you or your broker. Get their form and have it signed by the primary tenant and the subtenant when the sublease is signed. This will speed things up.
9. Be aware of the rights of other tenants. Some tenants may have an exclusive use clause. This means the landlord gave them the right to be the only bank, or mortgage company or whatever in the building. This is more common in retail properties but will occasionally be a factor in an office building.
10. When possible, have the acquiring company sign a new lease. To sign a new lease for the same space, the landlord must terminate the current lease. That’s usually the goal of the seller. But the landlord must be getting something it wants in return which usually means stronger credit, more space leased or longer lease term.
11. Expect Fees – most leases now give the landlord a right to charge to review a sublease or assignment. In many cases, they can charge attorney fees on top of their fees. All this is negotiable when creating a new lease though.
12. Indemnity – if the landlord doesn’t allow you to be removed from future liability, make sure your business sale documents include a buyer’s indemnity of the seller. Of course, if they can’t pay the rent, the indemnity probably isn’t worth much either.
Business sales often occur with no notice to the landlord. What happens then? This is probably a technical default on the lease and the landlord may be able to exercise its rights including terminating the lease. However, that rarely happens as long as the rent is being paid on time. I don’t advocate this approach, of course, because it’s an unresolved, outstanding risk to the business.

As always, you should seriously consider your future business goals and objectives before you sign a lease and make sure the lease document is compatible with those goals. It’s easier to negotiate these issues when the landlord is trying to get you in their building than when they already have you and you want to sell and leave.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

Categories: Uncategorized

Feeling Cramped in the Office?

Post By : admin 28 September 2018 Leave a comment

Have you ever noticed how food manufacturers sometimes shrink the size of your favorite candy bar or bag of chips? The price stays the same, of course, but you just don’t get as much.

Well, offices have been getting smaller for a long time at the same time that prices have been going up. The Dallas Morning News reported last month that the average amount of work space per person was 225 square feet (SF) in 2010 and only 7 years later in 2017, the average had fallen 33% to only 151 SF. That’s a shocking drop in such a short period of time.

I’m not sure I believe those numbers. Not because I have data to dispute the numbers, but because I have seen reports from other sources that show a drop, for sure, but not nearly that dramatic.

There is no doubt that office densities have increased. Just in my own practice as a tenant rep, I have seen clients reduce the number of offices and increase the number of people in cubes. That reduces the average SF per person which increases density.

However, there is no standard for all companies, industries, or even within an industry. Each company has its own culture and office configuration is a part of that.

I did an analysis of the leases for One of my clients recently. They had acquired 3 companies with offices within 5 miles of each other. The average SF per person went from 126 in one to 229 in a second and 269 in a third. We are now combining those offices into one which will require some deft management since some people will be going from an office to a cube and a smaller work space. They will also be moving most of the offices to the interior of the space with the cubes on the exterior windows as many companies are doing these days and that will be a shock to some of the old guard.

So while I don’t necessarily agree with the exact numbers of the article. I definitely agree that densities are increasing across all industries and that is only expected to continue.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

Categories: Uncategorized

Open Plan Office Configuration – Productivity Killer?

Post By : admin 9 September 2018 Leave a comment

Open plan offices have been taking it on the chin for a while now. And now Harvard is piling on with a study that says open plan configurations actually reduce face-to-face interactions instead of increasing them as commonly thought.

Inc. did an article in which their headline goes further to say open plans are the “dumbest management fad of all time.” They say this because of the reduced interactions Harvard claims.

They go on to say that the only reason left to justify an open floor plan is to save space and, therefore, money. In fact, the author of the article says that companies should just allow people to work from home since that’s less expensive than open plan offices.

I haven’t seen the Harvard study or the data that supports their claim, but from my own experience with clients in office buildings, the trend is still toward open offices. There are still offices, but they have a a lot of glass and are moving to the interior leaving the “cubes” to enjoy the windows.

In terms of working from home, some companies are moving employees home, but I see just as many bringing employees back into an office from home. They tell me they want their employees to feel like they are part of something. They want them to see each other and talk to each other. They feel that is more likely in an office.

I don’t see the open office trend ending anytime soon. I expect it will continue, but we will continue to see innovation in furniture design that provide better privacy and sound control while allowing for greater density that companies need to control costs and preserving openness. The open aesthetic is more pleasing than the old way of a bunch of offices blocking the windows and tall cubes in the “open” areas.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

Categories: Uncategorized