Office Space Classes – Tips for First-Time Commercial Landlords

By Gary Richetelli

Even if you’re brand-new to the commercial real estate industry, you’ve probably heard of office space classes—the broad categories by which commercial offices are evaluated against one another.

Office space falls into one of three classes: Class A, Class B, and Class C.

Contrary to popular belief, these classes don’t hew to standardized definitions. There’s no national or international standard for Class A office space, for instance.

Rather, office space classifications are locally relative. Though Class A office space is always more desirable than Class B space, which is in turn more desirable than Class C space, each class is only as good as its cohort. Class A space in the Boston area looks very different from Class A space in Dallas, which looks very different from Class A space in Seattle or Salt Lake City or Grand Rapids, Michigan.

Amid all the relativity, is there anything we can say for sure about the three classes of office space?

Yes—and it’s required learning for novice commercial real estate investors looking to cut their chops in an overwhelming and often high-stakes field.

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Tips for Commercial Landlords – How To Spot & Get Rid of Bad Tenants

By Gary Richetelli

Seasoned commercial property investors have a sixth sense for spotting problematic tenants: inconsiderate neighbors, financial deadbeats, nonconforming users.

Landlords newer to the business don’t have the benefit of experience. If you’re worried about unwittingly allowing foxes into the henhouse, look for tenants that exhibit these red-flag behaviors:

1. They’re using a sham company. Unscrupulous tenants sometimes use sham companies to disguise their true identities. Before formalizing a lease, do your due diligence, up to and including confirming the identities of all named officers and cross-checking state business registers.

2. They struggle to pay utilities. Unfortunately, this only occurs once problem tenants are safety ensconced at your property. But it’s nevertheless an important early red flag that no commercial landlord should ignore. Unless it’s impractical to do so, avoid folding utilities into your tenants’ rent—you’ll have an easier time spotting cash flow problems this way.

3. They resist personal guarantees. Require commercial tenants to personally guarantee their lease, period. This is a basic but crucial legal step that can save you thousands of dollars on a broken lease. Principals who resist very likely have their reasons—and not good ones.

4. They haven’t been in business very long. Be wary of companies that haven’t been in business very long, even if the principals provide personal guarantees and pass their credit checks with flying colors. Young businesses are inherently unstable, and therefore more likely to skip out on a commercial lease.

5. They have shoddy or spotty references. Avoid tenants who can’t produce positive references on demand.

Limiting the Damage From Bad Tenants

The best way to avoid dealing with bad tenants is to thoroughly vet all prospective tenants.

Unfortunately, this is easier said than done. In challenging commercial markets with low occupancy rates, it’s tempting to look the other way and rent to anyone who can come up with a security deposit. Likewise, landlords with multiple properties, competing obligations, or thin staffs often struggle to keep up with the administrative side of their profession, including tenant vetting.

For the sake of argument, let’s assume that even the most careful landlords allow the occasional problem tenant to slip through the dragnet. Once you have a bad tenant on your hands, what can you do?

Draft an Ironclad Lease Agreement

Your first move—even before the first indication that you have a problem tenant on your hands—is to hire or retain an experienced commercial real estate attorney to draft an ironclad, owner-friendly lease agreement. The added expense is well worth it. If you’re able to prevent even a minor financial loss with a well-drafted agreement, the contract will likely have paid for itself.

If you’ve retained a competent attorney familiar with the laws in your jurisdiction, your lease should include every realistic eventuality. In other words, it should provide you with every opportunity to formally evict a problem tenant.

That said, commercial tenants enjoy robust legal protections in most states. Evicting problem tenants is therefore not a straightforward matter. For simplicity’s sake, let’s look at the most common way to incentivize bad tenants to change—and to get rid of them should they refuse.

Evicting a Tenant for Unpaid Rent: Basic Procedure

1. Determine the tenant’s ability to make good. Eviction doesn’t need to be your first response. Before going any further, evaluate your prior relationship with the tenant and determine whether they’re likely to resolve the arrears. If a payment plan is realistic on any reasonable timeframe, it may be preferable to (and cheaper than) a drawn-out court battle.

2. Refuse partial payment or keys. If you judge that the arrears won’t be resolved amicably, resist the urge to cut a partial-payment deal or accept the tenant’s keys prematurely. Either step may preclude you from collecting additional rent.

3. Provide a notice of default. Serve your tenant with a written notice of default outlining the full amount owed and the date by which that amount must be paid in full.

4. Serve a formal eviction notice. If the stipulated due date passes without payment, serve your tenant with a written notice of eviction. Work with your attorney to schedule an eviction hearing in court.

5. Ask the court to lift the bankruptcy stay (if applicable). If the tenant files for bankruptcy, the bankruptcy court may grant a temporary stay of eviction. Consult with your attorney about petitioning the court to lift this stay. In many cases, the petition will be granted, and your tenant will be required to leave in a matter of days.

Have you ever evicted a problem tenant? How did the situation conclude?

Redesigning Your Office Property to Maximize Your Investment – 5 Tips

By Gary Richetelli

Commercial landlords are not passive investors. Anyone who tells you otherwise is either willfully ignorant or working an angle.

Maximizing your commercial office property’s value—and income potential—takes a lot of work. You can delegate a great deal of the day-to-day to your office management team, but the big stuff requires closer attention. You can’t afford to get it wrong.

Redesigning and renovating part or all of your commercial office property is a great way to boost its value. Unfortunately, it’s a pretty high-stakes affair. Poor or incomplete work can actually reduce your property’s assessed value and income potential.

These five tips aren’t the final word on successful office redesigns, but they’re a helpful starting point for first-timers. Before you tear into any walls, you’ll want to consult an office design pro (if you don’t already have one on staff) and study comparable projects in your area.

1. Consider the Property’s Purpose and Promise

Start by evaluating your property’s strengths, weaknesses, and purpose, beyond the basic stuff that you can answer in your sleep. Consider:

  • The property’s current utilization: occupancy rates, tenant activities, urgent issues (structural problems, mechanical system issues)
  • The property’s location and relationship to the built environment: where it’s located relative to comparable properties, local zoning codes and the pliability of zoning authorities, parking, transportation connections, access to amenities
  • The property’s tangible and intangible assets: historic value, noteworthy interior or exterior amenities
  • The property’s suitability: how well it serves the needs of current and future tenants
  • The property’s flexibility: potential financial or logistical constraints (if any) on ambitious renovations

Your answers to these and other questions will determine the scope of your project.

2. Focus on Curb Appeal

First impressions matter. Though the meat of your renovation project is likely to take place inside, beyond the public’s gaze, the value of an attractive, coherent exterior can’t be overstated. This is especially true in pedestrian-oriented districts, where everyday passersby study facades up close.

Even if it means simply updating your signage and refitting street-facing windows, an exterior spiff-up can pay dividends. And you might not have to pay the full cost out of pocket. Popular tax deductions for landlords may apply to exterior work, particularly if it’s energy-efficient. Many municipalities and business associations offer facade grants too, reimbursing part or all of the cost of street-facing upgrades.

3. Emphasize Existing Assets

Exposed brick? Antique lighting? Ornate tiling? Vintage steel or woodwork?

Put assets like these to work in your favor. Rather than knock out an exposed brick wall or update old-school lighting with sterile, energy-efficient alternatives, work your redesign around the building’s singular features. There’s little downside to finding out once and for all what’s above that drop ceiling.

4. Don’t Skimp on Repair and Replacement Work

Attractive facades and appealing interior design elements might get prospective tenants in the door, but practical improvements actually lock down the lease. Leave more than enough time and money to address the urgent issues you identified before beginning your project. Pay special attention to problems that could impact tenant safety or comfort, such as failing mechanical systems, rickety flooring, non-compliant accessibility features, and the like. If your primary concern is bringing your property in line with comparable office spaces in your area, take care of this stuff before addressing aesthetics.

5. Delegate to Your Tenants

If you lack the resources or attention to manage a major office renovation project (or manage the contractors responsible for that project), consider delegating some or all of the work to your tenants.

You can do this in a number of ways. One of the most common is a tenant improvement allowance (TIA), a per-square-foot allowance that tenants can use to update their floor space as they see fit. This is an effective strategy for small-scale and partial redesign projects, and the work required on your end is minimal. You can also adopt a more informal rent credit strategy, though this approach is vulnerable to cost overruns and after-the-fact disputes.

Remember: You Answer to Your Tenants

No matter where your office property renovation takes you, never lose sight of the most important part of the equation: your tenants.

If you’re undertaking improvements while your property is partially occupied, you need to go above and beyond to accommodate your tenants. Don’t assume that the long-run promise of first-rate office space is enough to divert their attention from the inconvenient here-and-now. The last thing you need to deal with during a complicated and expensive renovation project is a gaggle of disgruntled tenants.