130. Casey Godwin On the Proposal Process for a Commercial Lease
Resources Mentioned in this Podcast:
Everything Coworking Featured Resources:
Masterclass: 3 Behind-the-Scenes Secrets to Opening a Coworking Space
Creative Coworking Partnerships: How to negotiate and structure management agreements from the landlord and operator perspective
Transcription
130. Casey walks through the elements of a proposal and his recommended watch-outs
00:00:01 Welcome to the everything Coworking podcast, where you learn what you need to know about how the world wants to work. And now your host, co working space owner and trend expert Jamie Russo. Welcome to the everything Coworking Podcast Happy Holidays. If you are listening to this podcast when it launches, were getting serious about the holiday season here. Almost there. Hope you are listening to the podcast on your way to spend some time with friends and family or get some skiing. And, like we're going to dio,
00:00:37 I cannot wait. Huge. Welcome to the founding members of Community Manager University we launched last week. We've got a great group of folks in for the founding member launch slack groups up. We're doing our first Q and A on Wednesday, and lots of content loaded into the core modules with more to come. If you are interested in getting involved when it opens back up in 2020 you can go to everything coworking dot com forward slash community managers to get notified. Also, if you are thinking about or working on opening a co working space,
00:01:15 I launched an e book Eight steps to creating a profitable Coworking space that you love to run. I wanted to condense a lot of the things I talk about on the podcast into a written version. For those of you that like to read in addition to listen so you can find that on Amazon, you can search for co working or my name is probably fastest way to get to it. Jamie Russo really looking forward to sharing today's episode with you? Casey Godwin is a repeat guest. I tryto repeat folks that just bring a ton of practical value to you.
00:01:50 And if you are looking for a space, this is a great episode for you or if you already have a space. But our thinking about expanding, also some great detail to help you work through the proposal process for a commercial real estate space. So Casey walks through the elements of her proposal for a commercial office base and his advice and watch out points. He gets super detailed, which I personally love, because he's really demystifying a process which most of us have never gone through before. And he has such a solid lens on our business model.
00:02:30 So he is a broker by training but now does a lot of kind of is a consultant wrapped up into a broker. So he still does brokerage work. But he's really tuned into our business. Model, understands the unique implications of what we're doing with space and overlays that on his process. And he just really wants folks who are starting spaces to be successful. So he puts a lot of passion behind what he does. And so we get along really well in that sense. So he is on the show today,
00:03:02 walking through the elements of a commercial real estate proposal, and it's a bit of a lengthy episode. So without further ado, let's dive in. Hey, there I am back on the podcast with Casey Godwin, who is the president of Flex Space Advisors. He was on Episode 1 18 If you love what you hear today, definitely go back and listen to him. He's one of my favorite people to chat. Within the Coworking industry, he is out and about and helping folks find space. He is brokered by training,
00:03:36 I guess, but also like business plan guy perform a guy a little bit of everything. Yeah, he broke her about training and consultant by necessity, right? So I mean, but that's one of the things I love about Casey. He just he dives in and he gives, gives, gives and really wants his clients to be successful. And he understands the co working industry like very few out there. So he's one of my favorite folks to catch up with, and we are gonna talk today about the proposal process.
00:04:09 So he's gonna dive in case I'll let you do in true here and get into our topic. But we thought this would be useful. Thank you for joining me again today. Excellent. Thank you for having me. I afford this for a long period time and that it's been a long time coming, and I do appreciate your invitation to come down here more often. Sure, my input of what I've seen out in the streets and with Law and Order are doing with tenants were doing at Cuff. It's constant evolution,
00:04:38 so the more we can't stay in test better and we'll keep the speed. So I thought today would be a good time to talk about just some key things. You know that most of my clients in the co working world. There are different levels. Some have limited exposure to real estate. Some have a broad experience. Eso this discussion will kind of be higher level. A lot of time. Talk to the group is if there's one basic understanding of what their real estate terms are, you know in certain areas and you if it's on your students,
00:05:13 your feedback. If you want me to kind of give a glossary, you know, definition of what's with Inez, or give a little bit more meaning there. I could do that to you freely. Yeah, we'll talk about just high level. You know what are some of the key things to get in to make sure that you have in a proposal, when you're negotiating business terms with laying the word or a official property owner, and then we can talk about the most important things first and then we'll just go down.
00:05:42 And some other miscellaneous things I think are important and you know especially to are now on the front end. So probably the first thing to explain is the process. So it wants you selected a property and you've toured it and you'll like it when the first steps is sitting and our request for proposal and typically ill state you know who the client is and put in billy information and talk about some information that you'd like to receive from the landlord or the Bill Antlers broker went preparing proposal so you don't have to go in this order.
00:06:19 But, you know, if you are going extremely horrible, this is how it works. Start on the tent breath broker would send out an R P laying the response, but the proposal simply in their form and all brokers have their own forms. I'd like to use God's own their own language, said they would respond back with their proposal. And then you start proposal exchanges so we would mark up on the proposals and backs a landlord and you 22 or three exchanges until you get some charms. They're mutually agreeable.
00:06:48 And then at that point, there's typically a signature block at the bottom. You could is easy as just changing the terminology of top and the bottom of the proposal from a proposal to a L. A. Y. Our letter of intent and then both parties particularly sign now I was kind of clarify for everyone and l y is not. And that's Stu. You don't have to have it nor to just move on to a lease. In fact, you know, some non binding. So you're not bound to any of the terms that you agreed is essentially a handshake agreement on.
00:07:22 Here's what we agreed to Let's take this document handed over to the attorneys. And so they're being brought up to speed on what the terms be agreed on. And they could use that for drafting the lease. S o. That's the intent of a lever in 10 you know, Typically, I don't see a point of it. I typically just keep it as a proposal. He f it and dated and say, This is the date that week Read on this proposal and let's move this forward. So that's kind of how I operate,
00:07:49 but I'm starting for the top of somebody's CMA to jump into. The purpose of going through this phase of the process is to make sure that you're basically a line done. The high level deal terms before you spend a lot of money on attorneys to do an actual least right, so you're gonna walk through what's included in there, but it's really to make sure. Okay, this is a deal that both parties are willing to do, and then go ahead and and then you probably will get into this. But once you start actual lease negotiations,
00:08:22 then the landlord is negotiating with you and good faith. Is that correct? So he can't be negotiating and writing leases with two different people at once? No, that's not true. Oh, good. Uh, correctly, they could be negotiating with another 10. It would be as may be, borderline unethical, and it would be frowned upon for sure. But there's no law that says they can't. Okay, I like a mall. If you're you have a purchase agreement, Okay? Changing those. That's a different thing.
00:08:53 This is just a proposal. And so I want you to the least and the only only reason What? The landlord would not like you, that is. He doesn't want to spend here. She does not want to spend attorney fees twice. Sure, Dan, take the person to the dance. Will see if they will make it work. Not Then they go back into the party and figure out about another tenant Work up another date.
00:09:16 Okay? Yes. Okay. Perfect. So yeah, in the proposal that the main point of it is,
00:09:24 let's figure out that one of the main things that are important to us and then pass over to the trace a lot times going to tow attorney attorneys only handled illegal items of the least,
00:09:35 and they do not really deal with the business items. That's what the brokers and the principles that the deal are intended.
00:09:43 So I think it's important to iron everything out of front and then pass it on to the trace. And so the cast creates a separation there for responsibilities,
00:09:53 plus timing. I think time is more important than than even the cost. Fraternities, as at least couldn't take you,
00:10:00 Frida, say four weeks. Easy says the best case. Yes. So it would be a shame to get through all that and then find out that there's a major key item that you could have been ironed out a proposal,
00:10:15 and then that's a deal breaker and yet startle over So you don't get your money back. There's no refund.
00:10:20 If you don't actually signed the lease, you're still paying your attorney exactly. And I always advise my clients that you're gonna get the most leverage with all these business terms while you're negotiating proposals after that point,
00:10:34 once you get into a lease, you lose leverage. And so what you want to do is have everything documented in any way that we seducing.
00:10:41 Don't tow landlord and so they could drop the lease. You can always have the Ref River back. And,
00:10:47 you know, look at this proposal. This is where exactly we hired this out to start points and so they won't re trade on.
00:10:53 So you need to have a precedent in there. Yeah, So while you're working through the proposal, they're sort of trying to win you over.
00:10:59 And they're in that mindset of, like, we want this to work. And then as soon as you go to the lease writing,
00:11:05 they don't want to give anymore. So they're trying to protect, and not exactly exactly. So while you're in the dating stage,
00:11:12 you know, proposals. I think that's when you take a much no leverage is so personal. I think it's important to note that my proposals are weren't in death then that your run of the mill proposal to put the average proposals come meet.
00:11:28 You were from 2 to 3 pages, minds closer to seven pages when you get to the end. So some of these things are pretty definite.
00:11:35 In fact, I do remember one landlord I love asked me questions is okay, Well, when I sign this lease of your tent when y'all been doesn't know this is not the least in the lease is gonna be about 60 pages.
00:11:48 So yeah, it's just a matter of perspective. But this is intended to be a watered down version of the key points on,
00:11:56 so it's easier for everyone to explain. It's just, you know, watered down to the most important things.
00:12:01 And then we pass it on attorneys, adult colorful languish, and that makes and really hard to understand.
00:12:07 So in first you always start with. The premise is you always want to find what the space is that you're negotiating for,
00:12:14 and if there's sometimes that's a divine promises or it could be open ended. If you're taking a partial Ford,
00:12:20 you might arrange there, so it's always important to kind of set that apart, but in doing that,
00:12:27 I think is important. Really important. Fork over being Groups toe to figure out what the common factor is well known for the building,
00:12:34 but it's for the specifically the floor, and so different parts of the country will define commentary factor. Definitely.
00:12:41 Sometimes they call it Adam Factor a building factor, but ultimately what it does is it separates a usable spur foot and that is contained within your princess.
00:12:52 And then the rentable square feet is what you actually pay for so that Delta equates to common areas in the building.
00:13:01 Whether it's the lobbyist downstairs, the elevator banks, you're on multi. 10th floor. It could be the corridors and restrooms their shared with other tenants on that floor.
00:13:10 So if you're on a single tenant floor, you'll have a lower culinary factor, which is important because you want that common a factor to be his lowest possible.
00:13:21 Because in the cork and business, you look at Brendan and produce his face for a person on road being produced in space.
00:13:27 So you add to the non revenue producing space years paying on an expense that you're not compensating for covering up with revenue and so you will be less profitable with really high commandeer factor.
00:13:40 So older buildings there were built in, say, the 60 seventies eighties with really large atriums. Andi,
00:13:47 think of diehard, huge Adrian. There were, I mean, that's probably like a 20% common area factor for that building.
00:13:55 So, ideally, you don't want to be in a building like that because it's gonna be really, really high.
00:14:00 But if you could take a full four of the building, then that's gonna help minimize it, so to please some rules of thumb.
00:14:07 If you're single tenant floor, you'll be around a single digits so you won't be under 10% for a single.
00:14:14 It's intendant floor of a coronary factor, and for a multi tent floor, you're gonna be somewhere between 14 and 18%.
00:14:23 As a rule of thumb, their term is important thing to consider when you're negotiating, because a lot of times you may have multiple terms,
00:14:30 you may have seven year term for a 10 year term, and you're wanting them to get proposals for two different scenarios.
00:14:38 So always identify which in turn, but you're looking for in the space. It was because my clients to go for a longer term because this is a commitment and you want to lock in the rental rate so you could look in and guarantee what your expenses are gonna be for your performer,
00:14:55 but also to protect the asset. You're creating a beautiful space. You're putting a lot of fixtures and equipment into it,
00:15:02 and you want to sure that no one could come in sweeping in underneath you and take away your biggest asset,
00:15:08 which is, Yeah, all your businesses, your you so and supporting to define what the term is.
00:15:14 Commencement date. Another important thing. So someone, the words will say once you signed the lease that you need to start paying Brett and then that's kind of a kind of sleazy,
00:15:26 in my opinion, because you haven't even started construction yet. So how are we supposed to start paying friends if you can't use the space?
00:15:33 So what do you define? A construction period? And so you should not start the commencement date of the lease until you finish construction and you were,
00:15:43 see if the keys and the CEO a certificate block C so you can start opening for business, so that's really important.
00:15:51 It's critical. I mean because in our business you don't have revenue until you have space. And so you want to avoid using your working capital on rent.
00:16:01 That's not. There's no revenue to be made on it. So right. Another important thing here is and trick that landlords will say,
00:16:08 Okay, we'll give you up to 90 days for construction. And if it's beyond that and on the triggers,
00:16:15 the rich of commits, well, that's what you do not want because you had a construction delay or their scan it delays in permitting that Sounds totally I don't write exactly.
00:16:25 So you wanted to say it's completely up to the construction. Your work diligently to make sure this done on time but never commit toe a timeframe that triggers you to start the least.
00:16:38 And this is sort of the challenging part about these negotiations is the landlord wants to start collecting revenue immediately.
00:16:45 That's their mindset, and you want to not pay rent until you walk in the door and could have members paying Grint ideally and so you're really trying to find some agreement in that area,
00:16:58 and I think this is again another reason to use a broker that understands the business model because if you're not using a Casey who understands that you can't generate revenue,
00:17:09 there are tenants out there who, like this is not as big of a deal. I mean, a big company that to pay rent when they sign a lease,
00:17:15 they've secured the cost of doing business. It's, you know, some people might sort of write that off in a broker may not be as used to looking for this issue,
00:17:24 but for us, it could eat up a lot of start up capital, especially because it's toid. Exactly.
00:17:30 And one little add on to that is, you know, there's so much furniture they're giving putting into these covered in spaces.
00:17:36 Eso always gonna make sure that you have at least 2 to 4 weeks prior to completion of the work to get in,
00:17:44 install your furniture s o. You should not be paying for rent when you're just simply, you put your friendship together again and you're not making revenue,
00:17:52 so you should not be charged for bent, so that will start the commence today. Whenever you have a substantial inflation and CEO in hand and you open the doors for business you're ready.
00:18:03 Go. That's when you theoretically could start, right? I want to have clients to do. Differ,
00:18:09 elevate the base rent and operating expenses for as long as possible. So depending on which market you're in on,
00:18:17 that could be anywhere from two months to a year or even longer. That's another reason also, by buys my class and two of her longer term.
00:18:25 If sometimes if you commit to 10 years, for instance, in the L A market, they'll give you onto the market condition where there would be one month her year,
00:18:36 so you would get 10 months free and a 10 year commitment. So that helps your runway. We're getting in stabilizing,
00:18:43 Jerry. Read it or you're hit with expenses So major consideration. I think it's one of the most important things that affect your pro forma in this entire proposed.
00:18:53 Yeah, because you're gonna have a ramp up. You're not opening with your space. Cole could take 18 months,
00:18:59 two years to kind of get to your operating level, which is another reason for that 10 year lease.
00:19:04 Give must gotten to sort of your normal occupancies rates, you know, it could take 18 months or a little more,
00:19:12 And then you don't want to least to end in five years because you just don't have enough time to generate a profit and pay for all that amazing construction you just did.
00:19:21 Exactly which this is a complete site. No, but I've seen so many proposals recently are open performance where they take their revenue that they are projecting for the first year and then just automatically add a escalator of,
00:19:35 like, 3% per year. In most cases, you haven't stabilized the on the revenue s, so I don't think they should do that until the end of the second year.
00:19:45 Yeah, because their lead a lot of potential revenue on the table. So this is complete side note,
00:19:50 but through on listening, please build out that second year forever. Yeah. Good point. Okay, here's another.
00:19:57 I think you start exoticism. This is Houston. Important renewal options. So, again, you're protecting your asset here,
00:20:05 and you won't make sure that the landlord do not take this base back for any reason. They can't trump up.
00:20:12 So there's different ways you could do that most the time. It will be very loose language saying that you'll be granted a renewal option.
00:20:20 And sometimes they'll say What? The rate this and be a fixed rate? That's kind of a hard thing to do is a gamble.
00:20:26 10 years Now try and guess what the rate's gonna be. If I'm a landward, I'm gonna just keep on.
00:20:31 You know, if you have 2 to 3% escalations annually over 10 years, they're gonna want to keep on that escalation.
00:20:38 And that's not related true with market, because there stands a cycle so we might go up and down so you don't really want to play a game too far out.
00:20:45 So for tenure, at least I would say it's based on American value. And really, you wanna be at 95% a rocker value for the building or comparable buildings within,
00:20:55 like a one mile radius, and then you need to have some language that kind of dictates what happens if we don't agree on what fair market value is,
00:21:03 So that language I've seen in the least get to be three pages long. It could be something that the attorneys like toe negotiate heavily on.
00:21:12 It's something called base for arbitration, where essentially the landlord's decide comes up with evaluation of what they think they're runs worth.
00:21:19 And then the tenant's side and I comes up with valuation and they share notes. If they don't agree,
00:21:25 or if they're beyond 5% apart, then they have 1/3 party, and that third party arbor trader comes in you comes their own assessment of violation.
00:21:34 At that point, if they're on par end there within that 5% and then over the third party are traders evaluation.
00:21:41 So it's really tricky legal language, but you need to have renewal option there. Do not side, at least without one exclusive use.
00:21:49 This is, I mean, so I used to represent retail tense back in the day, and, you know,
00:21:55 I represent her large ones. Chunky Cheese and Smith. It's really, really best for fun one, but it's important they want to protect their share of any of the money coming into a shopping center,
00:22:07 and I think this is the same concept when it comes to the office space in an office building. They won't protect their share of what revenue could come into that proximity based on someone who just likes that building.
00:22:18 So it's important to say, Define what you're uses and that you have a model which is based on licensing or licensing more membership agreements and then also that would include covering spaces,
00:22:33 business centers, executive suites, the whole gambit for the flight space offering. But then, also, it could be a regular tenants in the building that have decided to alter their business model for and sent someplace in the space they may try to.
00:22:49 You know, somebody sit out through a shared workspace model, so you want to find that so they can't do that because ultimately anyone in the building could be a potential competitors down the road.
00:23:00 I've heard a number of clients, especially on the corporate side, that have come to me in the past and said,
00:23:05 Hey, we have a pretty large portfolio I don't think we need all this space. Can we turn around and start?
00:23:11 You use maybe 30% of the space in a building for co working, so that question comes up often.
00:23:19 And so I think that that will only be happening warm or so it's important to be protected on that.
00:23:25 Another thing that consider here is when you're doing exclusive you want. Make sure you're setting boundaries for who your competitors are.
00:23:32 Could be other tenants of the building, but also could be the language. No, no, that's happening more and more emphatically.
00:23:39 A couple of folks mentioned that's happening in their situation where they don't have this clause, right? So it could be that you will endorse and trying to create specs sweets,
00:23:51 which is not a new concept, but they do. It often is somewhere between, you know, 1000 toe 2500 for foot spaces.
00:23:58 They build them out and they're playing and playing. And there you see, it's to do many tense.
00:24:02 Well, we'll end up, you know, taking those on. So those will be in direct competition with a coachman space.
00:24:08 So we wanted to find that. Okay, landward, you already have the spaces. We don't want you to operate them any more.
00:24:14 Respect sweets, or you don't want you to build more. Any new intendant comes in under 2000 square feet would be a potential 10 for the potential member for the open space.
00:24:26 So we should have first flights found that that potential target and then if it doesn't seem to be a good fit with working.
00:24:33 Then they get and go organically within the building. But you want to separate that's rights. What is sort of the boundary that you think is reasonable to set?
00:24:41 I know Unite traded some e mails with some folks who were trying to kind of make that number serve larger than what I thought.
00:24:47 The landlord might agree. Thio. It probably varies, but what's kind of reason? Yeah, there's lots of compromises there.
00:24:54 And so I think it's reasonable to say your first position should be 2000 square feet on. But I would keep your last fall.
00:25:04 That position have won thousands for a P. I know with a journal and, you know, reasonable session being at 1500 square feet within the battling,
00:25:13 that building. But the baby, if there's multiple buildings and these be the entire complex. Yep. So that's a really important differentiator,
00:25:23 because if there's two identical buildings right next to one another, you don't wanna have competitors right next to you.
00:25:29 I wonder, Is this clause becoming more challenging to negotiate as landlords understand what the business model isn't think?
00:25:36 But I would like the right to do that myself, if it could. If it comes up, so I think they see it.
00:25:41 Morris, you're tying their hands with. They want the option that leaves the auction for smaller tenants. And what the way always described to them is,
00:25:51 Do you really want to be in the business of, you know, doing build a house for 1 to 2000 square foot sentence?
00:25:56 You were doing 123 year terms. It doesn't make financial sense. So it makes better sense for both parties to allow those a shorter term tenants to come into our space.
00:26:08 Alleviates all your kfx shukan defragment. Your building will take all the small tenants and then let the mature and then grow organically.
00:26:16 And so you have a more stable last building. So I think there's a better approach. And once you explain to him that there more going to accept that,
00:26:24 Yeah, but a lot of times I think it's brokers that are pushing back because it's a time their hands on,
00:26:29 you know, easy going to Yeah. Yeah. So that's something I would definitely something You should be your proposal.
00:26:36 It should be in one of your first conversations with landlord. One other thing to consider has the coworking continues to grow and grow,
00:26:44 with a large prevalence going towards Class A and Class B properties. The amount of building several left that don't have exclusives are getting smaller and smaller.
00:26:53 So pretty soon, you know, 10 years time the amount of space is available that's unencumbered, so unrestricted could be a pretty low,
00:27:03 so it would make it very difficult. And it's hard to go out there and do. A survey is they don't define which ones have exclusive,
00:27:11 which ones don't get to call up to one. Okay, interesting. So that's not something that they will be your problem in the future.
00:27:18 But for now, it's kind of bhangra. Yep. Okay, good a land grab and lock it in for 10 years,
00:27:23 so you could at least buy yourself some time until there's more competition. It will be interesting to see how that plays out for sure.
00:27:32 Like, will there be enough demand for competition in the building? I mean, I know I can think of one and building really nice building in San Francisco that has two operators in the building and both their full Yeah,
00:27:44 but that tells me that one operator could have expanded a bit more profitable. Good point. Yep. So have Yeah,
00:27:53 Yeah. Eso I in a million's worth building is going very, very difficult to get that suits of unless you're willing to keep on experience.
00:28:01 Yep. So Okay, so going through some of this will be this next part where talks about operating expenses and taxes and what's part of your lease?
00:28:11 Maybe it's a good point to kind of for some of the listers that don't have a really broad understanding of terminology for real estate rule quickly.
00:28:20 So full service lease means everything in one payment, as that would be your base. Friends be operating expenses,
00:28:27 your utilities electric. Everything's in one payment, but you also have a face year, so they established what your first year is for operates business or Elsie taxes and commoner maintenance.
00:28:39 And then after that first year, they'll do a reconciliation. If that amount goes higher than your base year,
00:28:46 then you might be charged the difference. So that's important differentiator because, and some leases, you don't have that.
00:28:54 So in a triple, at least, for instance, you just pay your base friends separate from that base year of expensive.
00:29:01 They left the triple nets, which are the real estate taxes, commoner maintenance in the insurance for the property.
00:29:07 And let those float is a variable, and you have to pay that relative. What the variation ISS.
00:29:12 So in your performance, make sure that you separate the those line items, whether it's a full service leaves or a troubled,
00:29:20 at least because that could be a big factor. Yep, and whether there's a utilities included and the wrench or not,
00:29:27 you know you need to and you're performing. You need to have an extra Lina for each of these,
00:29:31 Cause no, no. Two buildings, they're saying. Sometimes they charge you for water outside. Sometimes they charge you for electric outside.
00:29:38 You always have to just ask what spends his dog outside. My red got in, so there are a couple things you can do for your operates.
00:29:46 This is that they do pass through to you. You can cap them. You want to cap the amount of increase that haven't from year to year.
00:29:54 Layla reserved typically a little bit of resistance to this on the the taxes because it's a gun control and so that's a direct pass room.
00:30:02 But where you can have a little boy leverage is, um, control control, operating expenses. So we want to catch those at you're from,
00:30:11 say, 3 to 5% is a reasonable amount, and that's typically things that are tied to, like the landward can go out there and get a sever bid.
00:30:21 Then that's a control, watery expense. But if they're bound to use one contractor like a utility firm,
00:30:28 you tell quieter than a non control. So is like a cleaning service. He can't use his cousin service,
00:30:35 which is three times more than I think the market. You have the right to write help that be controlled exactly,
00:30:43 and it always call it the brother in law clause. So if they have brother in law, there's a landscaping company and he just wants to go from 1000 per month to 10,000.
00:30:52 You don't have a cap on the control offer expenses, and they could pass that directly on to you.
00:30:57 You don't have any say Yep, so that's real important. Okay, on. We talked about the right to renew,
00:31:05 but there's two other areas that they're important. The right to expand or the right to contract. So I like to put in at that.
00:31:13 If you the tenants have the right to expand within a site for a certain time, frame the safe 18 to 24 months.
00:31:21 If you expand within 12 months, I like to end to say that the terms that deal should be based on the terms we agreed to in this initial ally.
00:31:32 Her proposal is close enough to where it is most up to the current market conditions, eh? So we don't really re negotiate everything,
00:31:39 but it's after that time frame. Then you have based on market at that time. Okay, so that's an important difference here because all times you have groups,
00:31:48 they're coming in and say, OK, let's start with 7500 square feet. Yeah, once at least is up there.
00:31:54 Don't want spans and the building. And so what happens if if the landward increases rent by hand or $20 a square foot,
00:32:03 all sudden up doesn't really become feasible, and it hurts your business. All of his you're thinking that you could spend freely.
00:32:09 It's on the same terms. Yep, So it's aborted. Put that in there and the contraction, and that's less common.
00:32:16 But basically it says you have the belly to get back space at any time with a notice to lend word.
00:32:22 And it's not through a subway east. It's not their evening. You see them on bigger corporate leases that they're taking 40 50 60,000 square feet.
00:32:30 Yeah, it helps them right size. But, you know, I don't see that as common, if any,
00:32:36 covering spaces under 20,000 super V sun inches is really important. I tried to get as much science as possible for faces because you're the front face for the building S o.
00:32:50 You need be visible for members so they could to you and they see a rant and they associate with that.
00:32:56 So the visitors will be able to find you, though, is it big differentiator from the Regis is back in the day with the day and care about scientists.
00:33:04 There's a plaque in the lobby, so I prefer to into my class. Go into smaller buildings if possible.
00:33:11 So you're a larger fish in the pond, see? Have more leverage to get done tip of exterior signage.
00:33:17 But that's not always possible Sometimes they're just great deals that I come up and, you know, the right is substantial enough that we're a You may not be a visible,
00:33:27 but you're gonna be killing it. You based on your S E o u know abilities. So I think it helps you if you can.
00:33:36 I think this is one of those things. It's a great example of. If you're not experienced in negotiations,
00:33:42 you might think, of course I'll get Sign it. Landlord's a nice guy who Give me some sign it.
00:33:46 Just worry about that later. Not how it works. I mean, there could be, You know,
00:33:51 you just kind of talked to you like a number of reasons why you're not gonna get signage. And you need to know that up front and you need to get it in writing.
00:33:58 Even though it seems like one of those, like, we'll work it out, we'll be fine. Yeah,
00:34:02 not only probably nothing. Sign Ege. If you're, let's say under a full floor of Yep. If you're taking less than 12% of building,
00:34:11 I would not expect to be on the top of the building that destroys the quick your thumb. Medically There's another anchor tenant that if you see a sign top billing,
00:34:21 there's someone already has rights there. So you know your value to a scientist could be subject to Berlin or going back to them and ask him if they won't give up rights.
00:34:29 Which Probably not. Yeah, yeah, yeah. So but it is possible. I mean, well,
00:34:37 I was able to get for my client's gather and downtown Norfolk. Whoa. Got the men the 15th and 16th fours of downtown,
00:34:45 high rise and BB and T was getting part of the building. And so we're able to take two of their science positions of the four,
00:34:53 so it is possible, but we're taking two floors, so that gave some ability. Anything clever is to get it.
00:34:59 Yep. And those things were costly too. You know, it's insane how much tail gating cost. I think a large part of it is based on,
00:35:06 you know, bringing in the crane and the manufacturing of science, But that would make sure you go get some bits before you just assume this coming a couple $1000.
00:35:15 Yep. Okay. Getting into the work portion of the build out so I like to work in toward the land.
00:35:25 Words will buy a test fit, which is initial preliminary Spaceland, and they'll take the space if they have all plug it into,
00:35:34 uh, give it to their Are Hector gets your ex and created quick space plan, test it, There's great groups and that they were doing this work.
00:35:44 Stu is one that does the rich. All of you know, curating test pits four working groups, and they do as a total.
00:35:51 To get in here is a potential way to create your design That would be a primitive producing and men my submit your expenses and use that as a negotiation or how much T I've you need.
00:36:03 And also it allows you to start working on your pro forma and start building out your projections of which you could have revenue wise.
00:36:12 And I think it's important because all those advise my clients do not sign a lease unless you've already run the performance and you know that your profitable and a reasonable time frame you need to confirm it.
00:36:23 You can't just guess based on square footage, it's too hard to guess, right and your account for,
00:36:28 like you said non usable space and walkways and all the things that you'd simply don't know until you do the actual test fit,
00:36:36 right? Yeah. Just ensure no spaces were created equal. Some architects, Billy architects were has really crafty designs and regular your windows.
00:36:47 It is really created an efficient of footprints, but the floor. So it makes it harder for the our case to work around and be efficient as you want to in order to drink a ready to look for.
00:37:00 So I always advise you, get the landlords in to buy a test fit allowance and then make it where it's not intentional.
00:37:07 If you get in the day, you don't sign this L. A. Y. You are not responsible for paying back that test 50.
00:37:14 So it's a cost of doing business for land worth it. Surprisingly, I know about 90% getting that approved by landlords.
00:37:22 That's great, right? Need to know how to ask for it and know how to frame it and get it approved,
00:37:27 right? Okay. And then getting into the construction side. And there's two different ways you could set up a construction turnkey where the landward just pays for everything that you essentially agree on what the scuffle work is,
00:37:43 and that landlord assumes all costs. That's one way to do it. Another way to do it is through a 10 proven allowance where you estimate,
00:37:51 how much is this gonna cost? You try to get much T I allowance as possible, and then if your actual construction comes in higher than UT I allowance.
00:38:01 The dilemma provides you and the tennis responsible for paying his difference. So it's important to know the difference between the two in most cases,
00:38:10 a small scale. If you're looking at something, you know, 5000 square feet are below or minimal construction on being carpet pain,
00:38:20 Sin Devo, things like that that was always nearest where I would consider it. It's good case to do at tricky work.
00:38:28 A lot of times, if they do a turnkey, they're overestimating how much gun costs, and they're gonna build it into the rate.
00:38:34 So it's better for you to say, but I won't be a sufficient It's possible. You take away the variables of how much cost you for obstruction by.
00:38:42 Just get me a set dollar amount. I'll take on that suit risk, but also I want the right to be a sufficient and lower as possible.
00:38:50 So, like that scenario, because it simply a larger base where you have 15 20 40,000 Sparky, you're gonna have construction manager who's gonna be managing that process for you and go into you actively curate of a bidding process.
00:39:06 And you're a meal the value It's your A list kids. And then in today, if you get $25 for a foot in Tian balance from a landlord and your construction,
00:39:15 I'm staying at $60 a square foot, which would be a small miracle. It has never happened right build outs,
00:39:24 But this is a hypothetical scenario. 10 could receive a free person for the difference. So you get that $15 Elsa back as a credit against rent or keep it as a check.
00:39:37 So that's one. The reasons why I like getting the TNT I allowance because it has provided some 10 preferred scenarios and also just gives you more control over the trade offs that you make like you're so directly managing where that value engineering comes in and you know where you're willing to give and not give on the budget exactly and then going down parking Well,
00:40:02 much of her l A bit. So the landlord's work is exhibit. That Tachibana proposal is essentially a sets way.
00:40:10 A base billing definition is for the Delta land. George should provide these certain things regardless of what the allowances and stopping it cost the 10.
00:40:20 And the reason I put this vivid in there, which basically says, you know, the link or abuse,
00:40:24 but a drop ceiling the landlord forbid Home provides electricity to the space that he don't want to buy the original trunk line for the Tracy throughout the the primary distribution space.
00:40:38 Certain elements of this I mean my face building definition. If the landlord, if you're taking a cold,
00:40:44 dark shell, me just concrete floors and no rough in walls, it's just exposed insulation and no job stealing.
00:40:53 It could be upto 25 maybe $30 a square foot of value. And having this basically set, Len was going to provide a little box.
00:41:03 And from there, that's when your tea I dollars go work kick in yet. So it's one way of canceling.
00:41:09 This is it helps us in their house levels, has no two buildings of same there always a different conditions.
00:41:16 So if you do have one building that you're comparing proposals with and it's a role shell, then and you have this in place,
00:41:23 then you can hear that equally with a second generation space that already has dropped ceilings has existing walls, and existing leisure is just like that.
00:41:31 So those two work, then evil. And then you just look at how musty Iolaus you're getting from the land wars.
00:41:38 So that kind of wraps up the construction portion of it. Couple final footnotes and I just saw my notes at the end.
00:41:45 So maintenance and repairs, if you're in full service, at least then the landlord should be responsible for all means to prepare for the building.
00:41:54 If they see electrical plumbing, everything, uh, trouble, at least be prepared to pay for any impairs inside your premises.
00:42:04 And one way that you could may mitigate your best air. It is to cap put. Your exposure is so you may be gonna be able to negotiate.
00:42:12 Have a what's your out of pocket expenses are given year. That's one wayto tell work around that if your large enough as a percentage of the building.
00:42:22 I always courage my clients and to get in on the service agreement. So nonce turbans. An agreement will basically allow you to stay in space if the building gets taken over or take it back from the bank and the bank decides that they want to remove the suit tenants in order to research of the building and make it more awful tests and to lease it to one full tenant.
00:42:45 Maybe do that, unless you have a non disturbance. Agree. Okay, so typically you would have to get this.
00:42:51 It's a severed document. It's a legal document. You'd have to get the lender, the landlord's lender,
00:42:57 to sign off when you signed the lease. At that same time. If you do not get them to sign off,
00:43:02 then they're not recognizing the non servants agree. When is that worth pushing for? If you're more than out,
00:43:10 say 15 to 20 thousands for a feat in a pod. 300,000 screaming for a foot building that would push for anything under 20,000 square feet unless you're in Yeah,
00:43:22 building this May 20 years, 30 thousands for a fee. How would this work and push for it,
00:43:28 But the ideal break up? Yeah. Yep, Most of that is Don't want go to the Linda and passport,
00:43:34 so it's really just a matter of pain and talk about it. Yep, parking is critical for co working,
00:43:42 as you know. You know, the landlords typically will say you have a certain allowance based on a bargain ratio for the building.
00:43:49 So this building full allow for 4003 and 1/2 4000 parking spaces on cruiser faces and some non so via a rate for that.
00:44:00 And sometimes they're bumped, and so you want to make sure you define what the unreserved rates are. And if there is a reserve rate,
00:44:07 what that is, and then try to get some of those reserve parking space is put in for free into your lease.
00:44:14 If you have anything over 15,000 square feet, you should be able to have enough leverage to get a couple spaces reserved.
00:44:22 And typically, that's not for the community manager to use. As you know, I don't want very far to others,
00:44:28 and so you're gonna have an easy visitor space, so it provides a little expression for remembers visitors when they're trying to find the space you can.
00:44:38 You clearly point out to him that the sign where the visitors are parked there watch this space so becomes easier process.
00:44:46 So always try to get you know, at least 2 to 3 visitors spaces that are reserved. It makes total sense any of their calling remarks,
00:44:54 last things s o the security deposit and these securitization of be Lise. So this is kind of 50.
00:45:05 I think you did the young whether you included or not. You know, if you know that you're gonna get a lot of money to lend word for the build up.
00:45:11 If you're building out from scratch and you're talking about millions for the landlord, then no robber that that you're in need some type of securitization,
00:45:20 which is essentially like a guarantee of your lease commitments. I will not put that language in there for small East.
00:45:27 If we know that we're gonna come in with less improvements, it's less risk for the landlord. So I've tried to defer that and get them to you will win this stating stage to stay happy in overtime.
00:45:40 Hey, you're gonna It's minimal risk. Let's focus on getting this deal done, and I'm really successful that wants to get to the least,
00:45:47 either getting them to forget about that issue. Reports differ as long as possible until they say, Hey,
00:45:53 we've already gone down, Throw for two months. Let's just get the deal done. Yeah, but if you're asking them for a 1,000,000 or $2 million up front,
00:46:01 that's the first thing they're gonna talk to you about. So I would upfront disclose A. We understand that there's a live liability here we'd like to address is made these terms as possible.
00:46:12 But while we're doing that, here's how we would like to address the securitization police and how exactly structure that is.
00:46:21 If you can contain that with the amount of money that the laborers is putting out of pocket, it's not your total Rimkus a very consideration for the entire turn of the lease and just amount of a pocket from the landward.
00:46:34 Yep, that's a way to mitigate what that potential exposure is and then have a burn off where if you're in good performance and standards of least for paying on time and you have an acceleration for that burn off,
00:46:47 so your liability drastically goes down and the first 1 to 5 years of the lease. So after four years,
00:46:57 you pay on time, then you don't have a large, substantial amount of securitization that's hanging over you.
00:47:04 Yeah, so you're trying to reduce the landlord's risk that he puts in a $1,000,000 on the build out.
00:47:11 Your business doesn't work, you're out. He doesn't have a security deposit, has got downtime on the space,
00:47:18 and he's dropped a $1,000,000 on the build out, which he then may need to spend again. And lieutenant,
00:47:24 that comes in. So your point. You're not giving security for the total value of your lease, but at least his out of pocket,
00:47:32 so to say, costs on the build out cost or the tea I dollars. I guess you're minimizing the amount of guarantee.
00:47:39 So if that's another be through a personal guarantee, you or a corporate guarantee. So this corporate guarantee that L.
00:47:46 C. Or maybe it's being backed by a corporate entity that's who's been getting and minimizing the risk If it's ah person guarantee that literally goes to the signers of the hearing towards up Billy's personally,
00:48:00 so they very last case scenario. I do not advise my clients to to take on personal guarantees unless they've explored every other avenue first.
00:48:10 Got it, Casey. This was like many class in space proposals. Thank you for going through in so much detail.
00:48:19 That was really, really helpful. I know. We talked at the beginning. You see, a 1,000,000 of these,
00:48:25 But for most folks, it's the first time they've ever seen one that it might look a little overwhelming or intimidating,
00:48:31 or you'd be tempted to sort of gloss over it, not kind of dive into the details. And I think you've really illustrated today that the details are important and you need to go through the process even if it feels painful and takes longer than you would like it.
00:48:43 Thio. And you need someone in your court that really understands the business risks in the business model so that they can really negotiate for the right terms right now.
00:48:54 So I appreciate that there s o. I think it is really important. I strongly advise any one less thing to make sure that they're being represented by a broker at the minimum.
00:49:05 But if they are doing in the middle of the negotiation, and there are no hiccup said. They're kind of stalling out because of certain things.
00:49:14 You know, feel free to reach out to me. I'm going to have helped have maybe all person by sign out to compromise on somebody's in these areas because it's not just felt,
00:49:24 you know, sticking in your feet and saying, No, we're not gonna do this, You know?
00:49:28 Ultimately, everyone compromises. This is a matter of how much you're willing to give up, so you feel for it.
00:49:33 Used me as a resource. I'm happy to kind of share with some life. Experience is a basic stories,
00:49:39 you know, sneers where I was able to be successful or not successful and, you know, potential compromise itself didn't help.
00:49:46 Awesome. And, ah, Casey Affleck's space advisers dot com And I won't stick that in the show notes so that you can easily find it.
00:49:54 Casey, thank you for your time today and for sharing so much detail. Get information. I really appreciate it.
00:50:01 Thank you. Appreciate it before until next time. All right. Thanks for joining us on this episode of everything co working.
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