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changes it should make to conference room(s) to improve audio and video capabilities to make it a productive experience both for those attending in person and those participating virtually. Another trend among tenants is “office hoteling,” where employees no longer have a dedicated private office and instead reserve a desk or office for the day. Companies exploring hoteling will need a reservation system to manage bookings and to avoid overcrowding. Some employers are adding lockers into their office design so that employees have a place to store personal belongings only used at the office.
FINANCIAL / LEASE CONSIDERATIONS
Before COVID, most office leases were for a term of five years or longer. Because of the uncertainty caused by the pandemic, office tenants are now seeking leases with shorter terms, and many tenants who decide to renew are negotiating renewals at steep discounts. For tenants who did not fare well financially during the pandemic or have determined that their current space doesn’t meet current needs, or who wish to reduce lease expenses going forward, there are a number of strategies they may want to consider. A good first step is to undertake a strategic analysis of its space needs after reviewing its financial performance during the pandemic, its business plan post-pandemic, how well the space meets its current needs and to what extent its employees will either be working from home or on a hybrid schedule. Once these determinations are made, the tenant can develop a plan going forward. Essential to any such plan is negotiating preferred lease terms or amendments.
LEASE PROVISIONS
Many tenants who are staying in their existing leased premises are looking for ways to reduce charges for underutilized, or unused, office space. Following are a few areas of focus in this regard:
• Reduce Pass-Through Operating Expenses. One area of potential savings is operating expenses, with a particular focus on variable costs such as janitorial. Some leases allow landlords to mark-up pass-through expenses with an administrative fee. Tenants should look closely at these provisions and seek changes where savings can be attained. As with any negotiation, success often comes down to relative leverage.
• Caps on Operating Expense (“OPEX”) Increases. Requests for caps on OPEX increases are becoming more common. Obviously, no landlord wants to agree to an OPEX cap, but if
a landlord is forced into a position to consider this concession, it would be wise to focus on whether the cap is cumulative or not cumulative. For example, if OPEX costs increase in the year following the lease amendment but not up to the cap, can the landlord carry over the difference between the OPEX cap and the actual increase in OPEX charges to the next year? A non- cumulative cap is best for tenants.
• Contraction/Drop Space Clauses. Tenants may want to seek a contraction option (sometimes called a “Drop Space” clause). In negotiating a “drop space” clause, the following are concepts the parties should consider:
o identify the portion or portions of space that can be “dropped” from the lease premises. The space should be identified with reference to an exhibit;
o identify the time period(s) by which the tenant must exercise its right to contract its space. If the tenant is on a multi-tenant floor, the landlord will want to coordinate this “drop space period” with the expiration or expansion periods of other tenants on that floor or adjacent floors;
o the parties need to agree whether annual base rent will be reduced based upon (i) a reduction in the rentable area of the premises using the rental rate per square foot set forth in the lease, (ii) the then current rental rate for other space in the building or, if there aren’t a sufficient number of comparable transactions, the then current rental rate for other comparable space in comparable buildings in the vicinity of the building or (iii) another formula;
o tenant’s proportionate share of operating expenses should be decreased by the reduction in the rentable area of the leased premises;
o subject to any approvals required from the landlord’s lenders, the parties should enter into an amendment to the lease to accurately reflect the changes in the leased premises, base rent, tenant’s proportionate share of operating expenses, a reduction in parking spaces, the construction of demising walls, systems, etc. to divide the dropped space from the leased premises the tenant will continue to rent and other agreed-upon terms; and
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CS-34 JANUARY 2022 - APARTMENT MANAGEMENT MAGAZINE