If Your Building Sells… How Does this Affect You?

September 23, 2018

Derek Pedersen

Recent Office Property Sales in Q1- 2018

Name City Date Price SF $/SF
Advanta Commons

 

Bellevue Mar 2018 $224,900,000 636,322 $353.44
Bellevue Gateway

 

Bellevue Mar 2018 $25,500,000 68,290 $373.41
Kirkland 405 Corporate Center, Bldg A

 

Kirkland March 2018 $14,800,000 41,405 $357.44
Qaudrant I-5 Corporate Park, Bldg A

 

Redmond February 2018 $14,400,000 74,974 $192.07
Mercer Pointe Bellevue January 2018 $26,700,000 71,329 $374.32

 

A recent rush of investment has created high office turnover in Seattle’s eastside neighborhoods. These suburban markets are appealing not only for their lower costs, but also comparatively increasing rents. When facing an ownership transition, it is important to remember why an investment group or private owner would purchase your building in the first place. The new ownership has expectations of significant financial returns on their new investment.

When it comes time to renew your lease, the new owner will likely raise rents to keep up with changing market conditions, boost profits, or in response to pressure from their investors.

 

How much time remains on your existing lease?

Less than 24 months out, you will likely face an increase in rents if you choose to go forward with renewing your lease in the building. It is vital you sit down with your real estate advisor and plan your future needs to determine whether it makes sense for your business to stay and accept the premium in rents, or relocate.

Tenants with a lease more than two years out–obviously have less flexibility. Take the time to review your lease and ensure that you are maximizing the benefits and protections it provides your company.

 

Expect cost increases in a variety of ways

 

The most common impact following a commercial property trading hands is increased costs, either immediately or upon lease renewal.

Increased property taxes

Higher property management fees

Aesthetic upgrades to the property, new lobby, signage,

 

What action can you take?

The building contact or property manager is a good resource for answers to the following questions:

  • Will there be a change to the property manager? If so, who is the new property manager and what is their contact information?
  • Is the owner local or out of the area?
  • When is the transition expected to occur?
  • What month will the base rent change?
  • What are the plans for the building, such as renovations, and what is the timeline?
  • Armed with this information, you can reach out to a tenant-only commercial real estate advisor for guidance on
    your next steps.

 

Inquire about a Potential Lease Audit:

A tenant advisor can review the language within your existing lease in detail. Based on the language of the lease, they can explain how you may be impacted by the sale.

A typical lease audit will look at:

The rights your new landlord will inherit: Clauses that may have seemed harmless with your previous landlord could become problematic if the new landlord has different plans for the building.

Business terms: Just because there is language in your lease, doesn’t mean the landlord is abiding by it. A lease audit will look at business elements in the lease – such as common area maintenance charges – to ensure that the previous and new landlords are meeting these terms. It will also determine how much you can influence decisions that could lead to cost increases.
Financial audit: This is the opportunity for your real estate advisor to deliver the most value to you (an attorney will not be able to provide a financial audit of your lease). A financial review of your lease will look at:

  1. Charges including rent and other fees are consistent with the lease
  2. Cost requests are accurate and legal with the context of the lease (asset management, property management, or other new operating expenses)
  3. Identify what costs you may be exposed to
  4. Explore whether the impact of potential tax increases can be limited

 

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