Know Details to Capture Sublease Opportunities
By Wayne Mascia
The biggest story in Silicon Valley commercial real estate in 2006 was the record dollar amount paid for large building portfolios. Continuing in early 2007, the trend is shifting ownership from many of our local developers to large national and institutional owners. The trend within the trend is that the majority of buyers are paying more than the asset's economic value as based on inplace rents.
The buyers support their decisions by pointing to an expected upturn in the market and saying they will be able to raise rents 25% for new tenants and lease renewals for existing tenants. As a result, tenants who want to remain in buildings recently included in a portfolio sale can not only expect increased rents, but also increased taxes as a result of the inflated sales price.
In 2006, from a tenant's perspective, we sat on the sidelines watching the transfer of properties across the valley, secure in the thought that the complex in which our offices reside would not be sold and that we would not suffer the same fate as tenants of buildings that had sold. We were forced into the game in March, after discovering our complex was indeed coming to market and that in all likelihood we would be dealing with a new owner before summer.
Our company offices are housed in the McCandless Towers complex, a pair of 13-story, 211,000-square-foot buildings visible from Highway 101 as you approach Great America Blvd. The first tower was completed in 1984 and is a multi-tenant building. The second tower was completed in 1998 as a built to suit for Informix, which was later purchased by Network Associates. The project was developed by the late BirkMcCandless, who created a design and quality that was ahead of its time. We have been in the complex for 13 years.
When we discovered the buildings would be for sale, we approached our current landlord and exercised our option to renew. We felt it easier and to our advantage to negotiate our option with owners that we have known for many years rather than with new owners who we might not know - and worse - might not be totally familiar with this market. We recommend this same course of action to our clients in such situations. If you have an option to renew your lease, make every attempt to do this before the sale. In the absence of an option, approach your landlord and ask to renew your lease now and extend the term for several more years.
We feel we have dodged a bullet with regard to future rent but are reminded that we must still pay our pro rata share of the increased taxes on a building that has increased in value by 75% - a situation all tenants will have to deal with if the building in which they reside is purchased. We also are concerned about additional changes we might encounter if the new owners need to increase income. After all, the building was built by the Birk McCandless, who had his offices in the complex and therefore made sure it met his high standards. What standard will new owners want to maintain?
Will they institute a fee to use the lap pool, work out facility and exercise room? Will they replace with video screen and phone the affable security guard who opens your office door for you when you forget your key? Will they charge for the underground parking? Will they put on as fabulous a holiday party as McCandless Company has done in the lobby of the building every year?
Pot luck, anyone?
September 2007 Commercial Edition Issue
| Permalink
