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  Tenant Improvements

  Tenant improvements, which constitute the lion’s share of capital leasing costs for most commercial properties, are, in essence, the price landlords must pay to take raw or outdated space to market-ready space. Depending on the location (urban or suburban), unionized or non-unionized labor, material costs, and so on, the cost of tenant improvements can range widely. Once installed, tenant improvements are permanently affixed to the building and, as such, are considered part of the property. They usually add value assuming the improvements are generic enough that they could be used by a variety of tenants in the marketplace.

  Turnkey Versus Tenant Improvement Allowance

  Leasing professionals should understand the differences between turnkey and allowance-based tenant improvements and, ultimately, decide on the structure that makes the best sense in their marketplaces. In a turnkey arrangement, the landlord constructs the space according to an approved space plan using standardized finishes (often displayed on a physical finish board with carpet, paint, and other samples). For the vast majority of tenants in this scenario, the construction price is somewhat irrelevant as they focus on the office’s form and function. With turnkey construction, the tenant doesn’t have to worry if improvement dollars are adequate to construct the desired space, because the landlord guarantees such. Few tenants care about or have construction experience, and they prefer to focus on their primary business. Turnkey construction requires a landlord who understands building design and costs and has a reliable contractor who can construct a space on time and within budget. In addition, turnkey deals require good control over the tenant who may try to make costly (or time consuming) changes to the approved plan.

  In contrast, in a deal with a tenant improvement allowance, the landlord agrees to contribute a specific dollar amount for construction. The tenant may also contribute funds for construction of the tenant improvements in the suite. Then, although the landlord generally manages the construction, the tenant is responsible for any tenant improvement expenses over the cost of the allowance. Should the tenant improvement project finish under budget, the tenant may receive a credit. This scenario usually implies an involved tenant—with a line-by-line understanding of the construction estimate—who is responsible for any expenses over the allotted tenant improvement allowance.

  Americans with Disabilities Act Compliance

  Sometimes, in order to construct a tenant space, common area expenses—notably Americans with Disabilities Act (ADA) compliance—are incurred. Depending upon the nature of the changes, the expenses may be charged to the new tenant or, perhaps, assessed to the building as a whole.

  Expense Comparisons

  For benchmarks of capital and operating expenses across 5,400 buildings in 250 distinct markets, refer to the Experience Exchange. Report published and sold by the Building Owners and Managers Association (BOMA).

  Brokerage Commissions

  After tenant improvements, the next largest capital expenditure is usually the commission paid to the brokerage representing the tenant. Brokerage commissions are set by negotiation, according to your competitive marketplace, and typically follow one of two structures: a percentage of rent or a set dollar amount per term (e.g., $5 per square foot for a five-year term). Commissions are usually remitted one half when the lease is signed and one half when the tenant takes occupancy. Commissions are generally owed to both the listing broker and the procuring—or outside—broker. (See chapter 4, Work with Brokers, for more discussion on commissions.)

  Soft Costs: Architectural Fees and Marketing Expenses

  Known as soft costs, architectural fees, such as space planning, and marketing costs are other expenses associated with leasing space. As a general rule, space planning runs less than $1 per square foot, depending on the marketplace. Should the tenant sign a lease, full architectural construction documents add several more dollars per square foot to the leasing costs.

  Marketing expenses run the gamut and they, too, are considered soft costs, meaning that they are necessary to sell the space but can be difficult to quantify and thus attribute to any particular deal. For example, how should you assess the impact of a quality property flier? While marketing expenses may be distributed on a pro rata share basis per square foot, the reality is that marketing pieces may not benefit all vacant spaces equally. Such pieces, however, are considered the price you pay to compete in the marketplace. Now it’s up to you to decide which pieces are worthwhile to market your property.

  Chapter 3

  Develop Marketing Materials

  “There is more similarity in a precious painting by Degas and a frosted mug of root beer than you ever thought possible.”1

  —A. Alfred Taubman, retail real estate developer

  Goal: To Create Effective and Appropriate Marketing Materials for Properties

  Professional leasing personnel know they need materials that show a property to its best advantage. While a marketing package can range from fuzzy snapshots to photographs that are the envy of Architectural Digest, most owners assemble advertising pieces depending on the amount of available space, the market conditions, and their budget. Basics include online space availability listings and a bare-bones property flier, while a full marketing package contains an array of pieces that promote a building or, oftentimes, a portfolio of properties. The variety can satisfy requirements ranging from short-term leasing (by announcing space availability and amenities) to long-term industry branding. While not mutually exclusive, these short- and long-term goals do require thoughtful design, efficient production, and a consistent message. Although online resources have revolutionized production, basic good design and quality materials should underpin all your marketing efforts.

  Assemble a Suite of Marketing Materials

  The following list contains a menu of potential marketing options to consider, depending on the space available for lease and the marketing budget (in loosely descending order of importance and/or complexity):

  Space availability listing (electronic and possibly printed)

  One-page property flier (usually with photograph)

  Leasing signs

  Floor plans and stacking plans of suites (including electronic versions)

  Amenity sheet (including transit opportunities)

  Aerial photograph

  Maps

  Folder to hold it all (may have property logo or embossed label)

  Website

  Property logo

  Stationery (with property address)

  Newspaper advertising

  Postcard

  Credibility wall

  Finish board with building-standard paint colors, carpet, stone, etc.

  Space Availability Listing

  Space availabilities list current or upcoming vacancies and include the square footage and a brief description of the space. Landlords typically publish these space availabilities online via listing services as well as on their own websites. Additionally, landlords sometimes publish a printed sheet of such availabilities for brokers or prospective tenants.

  Online and printed listings, however, have limitations because of the information grapevine so prevalent in real estate. To illustrate, consider shadow space—the sublease space not formally on the market. These types of sublease spaces may be in quiet flux, with swirling rumors. For instance, companies planning to downsize may not tell their employees in advance, fearing an exodus. But brokers and owners who know of the possible available space may have prospects lined up for the pending vacancy. Boom! The deal is done before reaching the public. The inefficiencies of online listing services become pronounced in tight markets where firsthand knowledge and relationships best an electronic service. In a soft market, however, online leasing services become more relevant as landlords engage every available tool to fill vacancies.

  The Important Profile Pic

  Man
y prospective tenants, even when represented by brokers, conduct their own online searches to get a feel for the market. Make sure your property looks appealing with current information, high-resolution photographs, your property logo, etc. Some of the online listing services allow customization and design services, so ask.

  Double-Click for (Almost) Instant Fliers

  Online listing services often offer cost-effective packages such as a design template and printing for a property flier. Upload a photograph of the building, insert information into the spaces available and—voilà—you have a professional quality flier that can be posted online or printed.

  One-Page Property Flier

  The workhorse of advertisements, a single-page flier typically includes a color photograph, bulleted points highlighting the property’s attributes, leasing contact information, and occasionally, a map or floor plan (often on the back of the flier). These fliers can be printed or electronic, or both.

  Leasing Signs

  Generally four-by-eight-foot (standard size) pieces of painted plywood, these signs are placed near the parking entrance or in the exterior landscaping near the building for lease. For urban locations, leasing agents display large poster reproductions in windows. Designed to capture a motorist’s attention, the lettering must be extremely legible, so be sure to check fonts, sizes, and colors for readability.

  Is Your Leasing Sign Effective?

  Minimize text by including the basics only: Leasing or Space Available, a contact name, and a telephone number.

  Make letters at least six inches tall for legibility.

  Choose dark (or strongly colored) text on a light background for readability.

  Use applied vinyl letters with reflective material for nighttime visibility.

  Floor Plans and Stacking Plans

  The floor plan shows the tenant the boundaries of a specific suite (sometimes within the larger context of the entire floor) and illustrates the entry, private offices, conference rooms, kitchen, and so on. Floor plans typically note the suite number, building address, and rentable square footage of a particular suite. Stacking plans are numerous floor plans combined, which indicate the layout of the floors and contain a visual representation of the building’s configuration and tenants.

  In today’s market, professionals often display floor plans on backlit screens of a mobile device. With the swipe of a finger, the broker can present color images of similar suites completely finished and furnished to deepen a tenant’s understanding of how an office might look for a particular company.

  Noting the Rentable Square Footage

  Many landlords list only the rentable square footage (the usable square footage plus a pro rata share of the common areas) on floor plans because rent is based on that measurement. Noting the usable square footage prompts prospects to focus on the load factor, the differential between usable and rentable square footage, derived from common areas. There’s not much you can do about a building’s load factor, so emphasizing it doesn’t usually work to the landlord’s advantage.

  Amenity Sheet

  Amenity sheets list nearby resources such as restaurants, shops, banks, childcare, post offices, hospitals, transportation, health clubs, and so on. Oftentimes, the various categories listed above are color coded. Amenity sheets should be revised and updated twice a year (and as needed) to reflect the current neighborhood.

  Aerial Photograph

  An aerial photograph of the property, enlarged and mounted on one-half-inch-thick poster board (or projected onto a large screen in your conference room while you provide details), is one of the most effective marketing tools in the industry. Lightweight and portable, it also travels well to accompany a tour group meeting in the lobby or to an easel in the marketing office.

  Maps

  Leasing personnel use maps to identify a particular building’s location and to call attention to the surrounding amenities and transportation access. By highlighting restaurants, banks, post offices, shopping centers, trains, bus stops, and freeway access in various colors, landlords underscore a wealth of services for prospective tenants in any given location. Use an editor’s eye to make the map informative and legible.

  Folder

  Create a polished, professional look by inserting printed marketing materials into a quality folder. Emboss folders with your company name or the property name. As an alternative, some landlords create a large label with the property’s address and logo, print it in color, and adhere it to a generic folder, which is now customized.

  Presenting Marketing Materials

  When presenting marketing materials, hand your business card to the prospect separately. Business protocol will encourage prospects to give you their card in exchange, in the event they have not handed you one already.

  Website

  Landlords routinely establish websites for individual properties as a way of promoting the property and its virtues. If your company does not have a webmaster, freelance vendors offer inexpensive and effective services to advertise space and collect prospects. Even the most basic websites boast a building photograph, property description, amenity list, and contact information.

  Additionally, websites can display a virtual tour to show visitors the available space. Although a seasickness sensation continues to plague virtual reality technology, many architectural firms and landlords (especially those catering to international businesses) now use this option to introduce a space to prospects.

  I love the creative virtual tour of one San Francisco high-rise. From the comfort of an armchair, prospective tenants enter the lobby, ride the elevator, and walk to the window to see the panoramic penthouse view.

  More recently, I watched a one-minute time-lapse video of the San Francisco Museum of Modern Art’s renovation—from dirt excavation to sculpture installation—if only real-life construction moved that quickly!2 It was an inspiring piece, set to music, and I can imagine other property development sites using a similar approach to captivate tenants and prospects.

  Property Logo

  Marketing plans can include a logo, designed to create a distinctive identity for a property or real estate portfolio. When a property has its own logo, it is usually placed on multiple pieces, such as the letterhead, property flier, leasing sign, and other marketing collateral. Additionally, the logo may be printed on the walk-off mat at the entry, the building directory, and so on.

  Stationery

  Using quality paper stock and letterhead creates a consistent look, particularly when various marketing pieces are assembled into a package. Remember that the envelopes should match the paper. In general, ivory or white (considered more modern) paper creates a professional appearance and contrasts against dark text for maximum legibility.

  Newspaper Advertising

  When advertising in a newspaper, consider size, placement (business section, upper part of page, etc.), frequency, and rate. Inexpensive spot color works especially well on newspaper print. Try surrounding your ad with a color border or use spot color to call attention to your logo and company name. Also, discuss placement with the newspaper representative to ensure that your single- or one-color image does not play runner-up by being placed near a four-color “beauty queen” advertisement.

  Spot Color: An Inexpensive Alternative

  Many newspapers and other advertising media offer spot color (one color in addition to black and white) at a minimal cost. Cheaper than full color, it’s usually more effective than black and white alone.

  Tombstone Ad

  Tombstone advertisements are smallish ads surrounded by a border, oftentimes commemorating a lease deal or sale. They are generally used by landlords to announce the tenant and acknowledge the transaction team (usually the procuring and listing brokers) for significantly sized leases.

  Postcard

  A long-standing and cost-effective (because postcards qualify for inexpensive bulk mailing) ma
rketing tool, most postcards contain a photograph with contact information. By displaying a high-quality photo and using standard fonts, landlords can avoid the hallmarks of cheap postcards—numerous fonts, too-small photographs, and excessive punctuation.

  Credibility Wall

  Credibility walls include framed displays of property photographs with building names and locations identified on accompanying captions or plaques. The real estate company’s name (or the building’s name) might top the frame, often etched in stainless steel, chrome, bronze, wood, or Lucite. The wall typically hangs in a reception area and demonstrates a quality property portfolio and management to prospective tenants.

  Finish Board

  Finish boards display building-standard paint colors, carpet, baseboard, stone, and so on. The board both shows a building’s commitment to quality finishes and makes it easier for tenants to decide on finishes using a visual, curated array.