As Commercial Buildings Mature, Will Tenants Lose?

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By the end of the 1980s, almost half of the office buildings that existed at that time were constructed during the previous ten years.  When leasing space in new office buildings, it was easy for tenants to understand that they would not likely experience significant pass-throughs of capital expenditures.  Why?   Because the majority of those buildings were new, and even in a poorly conceived or constructed building, a tenant had a reasonable expectation that at least for the first few year of its lease term, substantial capital improvements would not be required.

Another interesting trait of the 1980s was that every third dentist became a real estate developer over night.  And, many of us have heard of those stories where buildings were so horribly constructed that they immediately started falling down around their tenants.  Thank you cheap money and speculative construction!

Those shiny new office buildings had brand new elevators, HVAC systems, electrical and safety systems, facades and parking lots.  Their tenants, not expecting to bear the financial burden of major capital improvements,  negotiated their leases by restricting their landlords from passing through such costs.   Landlords, who also recognized that their buildings would not likely require immediate capital re-investment, most often agreed to such restrictions.

That was in the 1980s….30 years ago!  Now, those buildings are mature, the warranties on their roofs, windows, elevators, HVAC systems, parking lots, and other infrastructure and capital components have long since expired.  Replacements of capital items have been made once, twice, or more (at least in better run buildings!), in order to properly maintain functionality and service levels.  That’s the nature of buildings…as their systems wear out, and they will wear out, those systems must be replaced.

Because of how leases were negotiated in the past, under the terms of such older leases, replacement of major systems and the associated costs fell to landlords.  Now, with office buildings maturing and the expectation that building systems will require on-going replacement over time, should landlords continue to be responsible for these significant costs?  Should those costs be passed onto tenants?  Should both parties share these costs?  Should those costs be handled differently for existing and renewing tenants versus new tenants?  Who is rightfully responsible?

What do you think?

 

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About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com. Follow CFO Studio at http://www.Twitter.com/CFOstudio.

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