As tenant representatives, we emphasize that ownership quality is a critical factor when comparing similar commercial properties. The long-term ownership and management of a property often result in better maintenance and stability. 
 
Understanding Proposition 13 and Its Impact on Property Taxes
 
Proposition 13, passed by California voters in 1978, limits annual property tax reassessment increases to 2%. However, a full reassessment to market value occurs if the property is sold, more than 50% is transferred, or significant new construction is completed. This reassessment can significantly impact tenants, as commercial landlords typically pass on property tax costs to tenants.
 
Lease Types and Their Implications
 
In California, commercial leases generally fall into two categories:

• Full-Service (Gross) Lease: Tenants pay a base rent plus increases in operating expenses (OPEX), including property taxes, over a "base year" amount, usually set at the start of the lease.
• Triple Net (NNN) Lease: Tenants pay a base rent plus a pro-rata share of all operating costs from day one, including property taxes, insurance, and maintenance.

 
Example of Property Tax Impact on Tenants
 
Consider a prominent San Francisco office building with 500,000 rentable square feet (RSF). A tenant leasing 10,000 RSF (2% of the building) would share 2% of the property tax burden. Assuming a 1% property tax rate and a base year of 2023, with an assessed value of $80,000,000 and property tax of $800,000, the scenario changes dramatically if the building is sold.
 
If sold in 2024 for $250,000,000 ($500/RSF), the reassessed property tax would increase more than 200% to $2,500,000. The tenant's share of the increase would be $34,000 annually, significantly higher than a 2% Proposition 13 increase before the sale.
 
The Hidden Risks of Property Tax Liability
 
Tenants in long-held properties face substantial tax liabilities if these properties are sold or transferred. Even with decreasing office property values, many buildings owned for decades by family offices carry significant reassessment risks for tenants.
 
The Role of Brokers in Mitigating Property Tax Risks
 
A key differentiator between similar properties can be the tenant’s potential property tax liability. We meticulously calculate this liability for every property option presented to our clients. As a tenant-exclusive brokerage, we strive to negotiate protections such as caps on OPEX increases, including property taxes. While landlords often resist these caps due to the impact on property sale value, the post-pandemic market shift has made it more feasible for tenants to secure such protections.
 
The Conflict of Interest in Traditional Brokerage
 
Many commercial brokerages represent both tenants and landlords, creating a conflict of interest that can prevent them from addressing property tax liabilities effectively. If your broker isn't discussing this critical issue, it might be due to the inherent risks to their business model.
 
Actionable Advice for Tenants
 
Before signing a lease, tenants should thoroughly assess their property tax liability by determining the property's last reassessment date, its assessed value then, and its current assessed value. This helps forecast potential increases due to ownership changes. Understanding and negotiating property tax liabilities is crucial for avoiding unexpected financial burdens.
 
By prioritizing ownership quality and understanding property tax implications, we help our clients make informed leasing decisions, ensuring they avoid unforeseen expenses and secure more favorable lease terms.

In commercial real estate, Rentable Square Footage (RSF) plays a crucial role in determining the amount of space available for lease within a building or property. Let's break down what RSF means and how it impacts cost of occupancy for office tenants:

Usable Square Feet (USF):
USF represents the actual space occupied by a specific tenant. It includes offices, conference rooms, and other areas directly used for business operations. Excluded from USF are common areas shared by all tenants, such as lobbies, restrooms, stairwells, and storage rooms.

Rentable Square Feet (RSF):
RSF combines the tenant's usable square footage with a portion of the building's shared or common space. Common areas contribute to the overall functionality of the building and include amenities like hallways, elevators, fitness centers, and lobbies. Each tenant pays for these common areas based on their leased space proportion. RSF is calculated as the sum of USF and the pro-rata share of common areas.

Load Factor (LF):
The load factor accounts for common areas and is expressed as a percentage (typically between 10% and 20%). It adjusts the usable space to account for shared amenities.

The formula for calculating rent based on RSF is:

• Rentable Square Footage = Usable Square Footage + (Usable Square Footage × Load Factor)
• Rent = Rentable Square Footage × Rental Rate

 
Why Load Factor Matters:
Load factor ensures that tenants contribute to the maintenance and use of common spaces. No two buildings have identical common areas, so spaces with the same RSF may differ significantly in usable space. Understanding the load factor helps tenants evaluate the best fit and value for their office space.

Surprisingly, load factor information is often missing from marketing materials and industry databases and it’s not uncommon for listing brokers to be uncertain about the building's load factor when showing spaces. 

In summary, understanding RSF, load factor, and usable space is essential for making informed decisions about office leasing. 
 

Whether you’re a startup seeking your first office space or an established business expanding to new markets, your decisions can significantly impact your bottom line.
 
The Familiar Faces
It’s common to know someone in commercial real estate: a kid’s little league coach, college roommate, neighbor, relative, or someone from the commute train. It’s natural to gravitate toward familiar faces when embarking on your leasing journey. However, the familiar isn’t always the best choice.
 
The Dual Agency Dilemma
Over 90% of commercial real estate brokers represent both landlords and tenants. However, this dual agency can blur fiduciary responsibility, leading to conflicts of interest. Tenants may find themselves at a disadvantage, unaware that their broker’s allegiance is divided.
 
Imagine hiring a lawyer who represents both you and the opposing party. Yet, this scenario occurs daily in commercial real estate. Brokers who serve both landlords and tenants face conflicting loyalties, akin to a referee supporting both teams. Tenants often find themselves caught in the crossfire.
 
Renewal vs. Relocation: Leveraging Negotiating Power
Imagine being up for lease renewal, only to discover new tenants securing better terms. This discrepancy highlights the pitfalls of dual agency. Landlords and their brokers know most tenants opt for renewal, stripping away negotiating leverage. A tenant representative treats your renewal as a relocation, exploring alternative options to restore negotiation leverage.
 
Beware of the “Scarcity Wolf”
Landlord brokers may create a sense of urgency by claiming that their available spaces are in high demand, even in a market with vacancies. Tenant representatives focus on finding the best value and exploring multiple alternatives without pressuring into disadvantageous deals.
 
The Tenant Representative Advantage

• Conflict-Free Advocacy: Tenant representatives serve as unwavering advocates, maintaining a fiduciary duty to represent your needs despite being compensated by the landlord.
• Negotiation Prowess: When negotiation time arrives, tenant reps possess in-depth knowledge of the market, key players, and lease intricacies. Whether it’s lease terms, rent concessions, or renewal options, they act solely in your best interest.
• Market Insights: Tenant representatives function like walking AI apps for the local market. They’re well-versed in which buildings hide hidden gems, which properties are well or poorly managed, emerging submarkets, and where the best deals can be found. Their insights empower you to make informed decisions.

 
Conclusion
Consider the power of exclusivity before relying on familiar faces. A tenant representative is more than a broker; they’re your strategic ally in navigating real estate decisions. In commercial real estate, having someone exclusively in your corner is essential.

At CroninCRE, we exclusively represent commercial real estate tenants, focusing solely on finding value and representing clients' best interests without conflicts of interest.

Imagine navigating the streets of post-pandemic San Francisco, eager to find the perfect office space that suits your needs and budget. Armed with newfound leverage as a tenant in a market rebalancing post-pandemic, you're ready to seize the opportunity and return to the office. Yet, as you delve into the market, you encounter a puzzling phenomenon – landlords and their brokers keeping the asking rent undisclosed.
 
But why do they do this? What's the rationale behind concealing the starting point of lease rates, leaving tenants in the dark even when they hold the upper hand?
 
If you asked a landlord’s broker why they don’t quote asking rates, most will tell you it's because they don’t know how much tenant improvements (TIs) will cost for any given tenant. That's not a very honest response because nearly all landlords have market driven TI allowances factored into rental rates. Why is it that unknown TI costs don't prevent other landlords and brokers from quoting asking rates?

Traditionally, asking rates have served as essential guideposts for both tenants and landlords, offering clarity and efficiency in the leasing process. However, in today's market, where tenants wield increased bargaining power, withholding asking rates has become a strategic choice for some landlords and brokers. Withheld rents are a good way for the brokerages and the landlords to pump up the rates they get.
 
Enter the realm of "Asking Rent: Withheld." In post-pandemic markets, where tenants hold more sway than before, this practice remains more prevalent than ever. It's a playground where tenants, despite their newfound power, are left to navigate a market with limited information.
 
In such a landscape, seeking the guidance of a tenant representative emerges as a practical solution. Tenant representatives specialize in navigating the complexities of the real estate market, advocating for tenants' interests, and ensuring transparency throughout the leasing process.
 
Armed with knowledge and a trusted advisor by your side, you can navigate the intricacies of the commercial real estate market with confidence. In a post-pandemic environment where transparency is paramount, leveraging professional guidance becomes essential for leveraging your newfound power as a tenant and securing the ideal space for your business.

At CroninCRE we are a tenant-focused, conflict-free commercial real estate advisory that maximize your leverage in every transaction. In the world of commercial real estate, fortune favors the informed and empowered tenant.

Like the Pirates code, asking rents are guidelines that landlords and their brokers give tenants as a customary starting point for rent negotiation. But don’t confuse asking rent guidelines with reality.
 
On March 17, 2020, San Francisco issued a stay-at-home order. According to CoStar, average office asking rents on that date in the San Francisco metro market were $64.55/RSF and total availability was near market equilibrium at 9.9%. Three years later, San Francisco has the highest sublease availability rate in the country. On St. Patrick’s Day 2023, market uncertainty caused by the pandemic had more than doubled total availability to a staggering 23.7%.
 
In the slow recovery from the pandemic San Francisco, with a large population of work-from-anywhere friendly companies, sits at the bottom of major metros nationwide in return-to-office rates. That, together with tenants moving to cheaper markets translates to lower demand for office space now, and potentially fewer office workers in the future.
 
Yet, contrary to the market reality caused by the pandemic, landlords have held on tightly to pre-COVID asking rents. On March 17, 2023, asking rents in the San Francisco metro market were down only 4.7% from the stay-at-home order of 2020 to $61.50/RSF. ​
 
The Market Reality
 
For the first time in a decade, tenants have gained negotiating leverage created by two years of pandemic. As tenant representatives we work exclusively with tenants. Never landlords. We recently negotiated a $32.00/RSF direct lease for Class B office space in San Francisco that had a 2020 starting rent of $56.00/RSF. Now, a 42.9% drop in negotiated rent from pre-pandemic may be an outlier but unlike some San Francisco asking rents, it’s to be believed. 
 
Why are Asking Rents out of sync with Market Reality?
 
One of the dirty little secrets of the commercial real estate industry is that most big national brokerages represent both landlords and tenants. It is in the best interest of the brokers representing landlords to keep perceived rental rates as high as possible. Like the Pirates code, these asking rents are guidelines that aren’t to be trusted.
 
Brokers that specialize in tenant representation are only focused on finding value and multiple alternatives for their clients. Properties with unrealistic asking rents tend to come in with higher rent proposals than equal and comparable buildings. Fortunately, some San Francisco landlords are starting to break ranks with their peers and are setting more realistic asking rents. If you find a landlord looking to gouge you on rent before a lease is negotiated, consider yourself lucky to have identified the bad news early. Then, move on to a more realistic alternative.

Whether you are right-sizing or downsizing your office space to support a hybrid working model, there is no easy answer for how much space you’ll need. If we’ve learned nothing else from the pandemic, it’s that we can’t predict the future. An office that supports hybrid working should allow for the flexibility to adapt and change as your needs evolve.  
​
It might feel tempting to downsize your square footage to support a hybrid workforce but downsizing and right-sizing are not the same things.
 
Hybrid Workspace Guidelines
 
Prior to the pandemic, open design had replaced cube farms which years ago replaced enclosed large office designs. Companies pivoting to hybrid working models are faced with modifying their open office designs to support more collaborative and flexible workspaces. 
 
A recent HqO report forecasts that by 2025, the need for corporate workspace will flip from 70% individual workstations and 30% collaborative space to 30% individual and 70% collaborative space. The hybrid office design will transition existing office space to flexible desk layouts and hot-desking areas, lounge areas, and meeting rooms designed for videoconferencing with remote working staff, clients, and partners. 
 
Large conference rooms are like dinosaurs in the hybrid office and are being swapped out for more sensible alternatives such as Zoom rooms, huddle rooms, phone booths, and private workspaces that can be made available on an hourly or daily basis.
 
But that doesn't necessarily mean less space.
 
Average Square Footage Approach
 
Prior to the pandemic, organizations would multiply the number of employees by the rule of thumb needed per individual to estimate how large their offices should be. But this calculation no longer works.
 
Today, you may only have 30% of your staff in the office at a given time. A simple 1:1 ratio of desks or square footage per employee is no longer a useful calculation for hybrid office space needs.
 
Space Allocation Approach
 
The Space Allocation Approach is based on how space is used and is more suitable to help estimate the amount of “usable” office space required for your hybrid workspace. Each organization will require a unique blend of these collaborative and individual space elements to support their hybrid working model.

• Open Collaborative Workstations - 60 to 110 sq. ft. per workstation
• Hot-desking areas - 150 sq. ft. per desk
• Huddle Rooms (2-6 people) - 150 sq. ft. per person
• Phone Booths - 30 sq. ft. per booth
• Informal Lounge Areas - 80 to 100 sq. ft. per person
• Video Conference Rooms - 50 sq. ft + 25 sq. ft. per person 
• Large Office - 250 to 400 sq. ft.
• Medium Office - 150 to 250 sq. ft.
• Small Office - 90 to 150 sq. ft.
• Reception Area - 100 to 200 sq. ft. + 10 sq. ft. per person waiting
• Mail Room - 125 sq. ft.
• File Room - 200 sq. ft.
• Lunch/Break Room - 75 sq. ft. + 25 sq. ft. per seat
• Halls/Corridors within the space - 20% to 30% of the total usable area 

 
Note: Any common area load factors (typically between 10% and 20%) will need to be added on to determine the "rentable" area.
 
The Pirates Code
 
Estimate your office space size requirement by the Space Allocation Approach. Then, make sure that you are accounting for planned growth. Make headcount projections for the expected term of the lease. Then, lease space so that around 2/3 or 3/4 of the way through the term you start reaching the occupancy limit.
 
Keep in mind that no two spaces are alike. Look for spaces that are more efficient, like rectangular spaces versus angled corners of a building. No two spaces with the same rentable square footage are the same. Load factor, floor plan and layout matter.
 
These space allocations are mere guidelines. While there are definitive trends in hybrid office design, every organization is different, and you will need to determine the best mix of flexible spaces, collaborative spaces, and private workspaces for your needs. 

         “The code is more what you’d call ‘guidelines’ than actual rules.”
                                – Barbossa, Pirates of the Caribbean

#cre #commercialrealestate #hybridworkspace

As tenant representatives we are often asked by our clients what the difference is between a Request for Proposal (RFP) and a Letter of Intent (LOI). 
 
Reduce Misunderstandings
The RFP and LOI are very similar in that both are merely a discussion of some of the business terms and conditions that a tenant and landlord will need to reach agreement on in advance of executing a commercial lease agreement. The terms and conditions may include but not be limited to: 

• Base Rent (including, escalation, concessions, free rent, and pass-through expenses)
• Base Year
• Term
• Commencement Date
• Delivery Date
• Security Deposit
• Tenant Improvement Allowance
• Assignment and Subletting
• Renewal options
• Signage
• Parking
• Other conditions

RFPs and LOIs are non-binding and will typically go through multiple rounds of back-and-forth negotiations. Upon agreement of terms, the landlord will present a draft of a formal lease agreement to memorialize the transaction. Only a fully executed lease, reviewed, and approved by both parties’ management and legal counsel becomes binding. The benefit of both the RFP and LOI is the reduction of misunderstandings between parties.
 
Maximize Negotiating Leverage 
RFPs are submitted by tenant brokers on behalf of tenants and are often presented in the earlier stages of lease negotiations. LOIs tend to be submitted or exchanged by either tenants or landlords and their brokers closer to final lease negotiation. It is not uncommon for a tenant broker to submit an RFP to a landlord, and the listing broker to respond by presenting an LOI as their response.
​
The most significant difference is that a Request for Proposal is a signal from the tenant to the landlord you are considering multiple alternatives and are asking them to put forth their best offer. Submitting RFPs and getting proposals from a select few number of buildings will give you an “apples-to-apples” comparison of alternatives and help you negotiate the most competitive terms and conditions possible with the landlord. There is no negotiation leverage without options and the ability to walk. 
​
Unlike the RFP, when a tenant initiates a Letter of Intent, it is a declaration that the tenant intends to enter into a lease with the landlord for their specific premises. Landlords know that nearly all tenants that initiate lease negotiations by submitting a Letter of Intent have vetted their short list and will end up leasing their space.  
 
As tenant representatives we represent commercial tenants only. Never landlords. We utilize RFPs to develop a Plan B in case we are unable to work out an agreement with the landlord. If you don’t put landlords on notice that you are considering other options by submitting a Request for Proposal, you’ve lost the ability to maximize your negotiating leverage.

Many office Tenants focus on the first year “Base Rent” when evaluating their cost of occupancy. Or, as Tenants consider alternatives, they compare the “Rental Rate” per month or year between competing alternatives. However, negotiating the lowest Base Rent doesn’t always guarantee the lowest cost of occupancy. There are many other factors that contribute to calculating the total cost of occupancy. 
 
Calculating Base Rent
 
Tenants tend to look at space requirements in terms of the actual and exclusive space they require inside a suite to conduct business. In commercial real estate terminology this is known as “Usable Square Footage”. However, Usable Square Footage (USF) does not include common areas of a building such as lobbies, shared restrooms, stairwells, storage rooms, and shared hallways.
 
To account for these common areas Landlords add-on a “Load Factor” to the Usable Square Footage to arrive at “Rentable Square Footage”. Load Factor (LF) varies between buildings but commonly ranges between 10% and 20%. If you require a set certain amount of Usable Square Footage, understand that not all office spaces with the same Rentable Square Footage (RSF) include the same amount of usable space that you may require to conduct business.
 
The formula Landlords use to calculate your Base Rent looks like this:

• Useable Square Footage + Load Factor = Rentable Square Footage
• Rentable Square Footage X Rental Rate = Base Rent

 
What’s Included in Base Rent?
 
Most leases in multi-tenant office buildings are “Full-Service” or “Gross”, typically defined as a lease that has one, all-inclusive Rental Rate which includes both the base lease rate and the building standard services which are paid by the Landlord combined into one figure.
 
In Full-Service (FS) and Gross Leases, specified operating expenses “pass through” from the Landlord to the Tenant. These expenses can include any combination of property taxes, insurance, and common area maintenance (CAM). The operating expense amount for the “Base Year” (typically the year of lease commencement or the first calendar year of tenancy) is the maximum amount of expenses the owner will pay over the life of the lease per year. Any expenses over the Base Year amount are passed through to the Tenant in addition to the Base Rent. 
 
In California, buildings that have been owned by the same entities for a long period of time carry a large property tax liability for Tenants. Buildings like these may not have been reassessed at market value for years and in some cases decades. Proposition 13 currently limits property tax reassessments (increases) to 2% annually but allows for full tax reassessments if the building is sold, more than 50% is transferred, or substantial new construction is completed.
 
If a transfer occurs during the lease term, these property tax increases are passed through from the Landlord to the Tenant. It is important to consider that two alternatives with the same negotiated Base Rent may not be the same when you factor in property tax liability and the potential impact on the total cost of occupancy.
 
Escalation Clause
 
It is common practice for Landlords to include an escalation clause in the lease which increases the rate of rent over the term of the lease, usually on an annual basis. The most frequently used types of escalations are Fixed Percent (%), Monetary ($/sf), and Index (CPI). Most leases with a term longer than one year will have escalation. While most tenants want to focus on the first year Base Rent, negotiating a lower escalation clause can have a significant impact on the total cost of occupancy on a long-term lease. The larger the Rentable Square Footage and the longer the lease term, the greater impact the escalation clause will have on the total cost of occupancy. 
 
Concessions
 
Landlords offer concessions to a tenant to make a lease more enticing. These most often take the form of free rent and tenant improvement allowances but may also include free parking, reduced security deposit, and/or consent to sublease. When Landlords offer free rent, it may not actually be free. It's common for Landlords to add the free rent to the end of the lease term which would make a sixty-month lease with three free months a sixty-three-month lease. And, with an escalation clause the Base Rent in months sixty-one, -two, -three will be higher than the initial three months of free rent. 
 
Calculating Total Cost of Occupancy
 
It’s natural for Tenants to focus on the Rental Rate when evaluating their alternatives but as we’ve pointed out there are important other factors that contribute to the total cost of occupancy. The calculation of total occupancy cost is the Base Rent paid by a Tenant over the lease term, adjusted downward for financial concessions paid by the Landlord (such as free rent), and upward for rent escalations and costs that are paid by the Tenant (such as operating expense pass-throughs). 
 
The most effective way to negotiate the lowest cost of occupancy is to hire a broker that exclusively represents Tenants. Why? Because Landlords are focused and experienced negotiators. Landlords that deal directly with a Tenant knows the Tenant may overlook or underestimate the importance of concessions, escalations, and pass-throughs. Like Landlords, Tenant representatives are experienced in complex lease negotiations. But unlike Landlords, Tenant representatives have a fiduciary duty to solely represent your needs.