Commercial Investment Real Estate March/April 2018 | Page 35

each of its employees, as noted above in Method 3 of $.04 psf per month. Calibrating Expenses After evaluating the return on costs for an owner, total operating expenses, and adjusted operating expenses, this example shows that a tenant should pay 50 percent more in rent for extra employees above the established body count cap. Of course, each building operates differently, so the calculations may vary a bit. Billing specific tenants for excess occupants allows the owner to lower its CAM charges to other tenants in the office building. Increased variable expenses offset the reduction in total annual oper- ating expenses and base years. Just as an owner reduces the electricity expense when separate meters are installed for HVAC units to cool server rooms in tenants’ spaces and charged back to the indi- vidual companies, so are higher costs for tenants with extra employees given to compensate owners. This will keep true operating expenses lower, which boosts net operating income and value. Below is an example of a provision to the lease that covers the cost of excessive employees working in a limited office space. Premises occupancy. Tenant acknowledges that the number of persons present in the building and at the proj- ect has a direct relationship to costs incurred by the land- lord. Excessive occupancy results in costs and burdens not contemplated at the rental rate negotiated hereunder, and additionally can have a negative impact on the professional office environment sought to be maintained by landlord. Tenant agrees, therefore, it shall not exceed a maxi- mum (further subject to applicable fire agency or city regulations that may be more restrictive) of five perma- nent occupants per 1,000 rentable square feet leased, (the occupancy cap), without prior written authorization from the landlord, which the landlord may withhold in its sole and absolute discretion. For purposes of this paragraph, permanent occupants are defined as the tenant and its employees or contractors performing services within the premises at any one time within the leased premises, or in the event the tenant conducts training of nonemployees or contractors regularly, three or more days per week, such additional persons shall be included in the definition of permanent occupants. The tenant may, with the landlord’s approval, and at the landlord’s sole discretion, add additional permanent occupants to the premises that exceed five persons per 1,000 rsf at a cost of 50 percent of its then current monthly base rental amount divided by the square footage of the premises per occupant. For example, a $2 psf monthly rental rate for a 10,000 rsf space equals $20,000 per month. Divided by 50 maximum CCIM.COM occupants at five individuals per 1,000 rsf equals $400 per month. Fifty percent of $400 is $200 per month per additional permanent occupant, or $.02 psf. Violation of this covenant shall be a material breach of this lease, and entitle the landlord to pursue all remedies for breach of lease and unlawful detainer. A violation of this covenant more than three times in any 12-month period shall be a noncurable default in the lease terms, and the landlord may thereafter terminate the tenant’s right to occupancy. Capping Occupants Per the brokers surveyed, capping occupants is becom- ing part of the negotiations, as companies strive for more efficient office space. Clearly stating how to monitor and define tenant occupants is critical, as shared workstations, hoteling, and telecommuting become more prevalent. To ensure lease compliance, work with the tenant to under- stand the schedules of its employees and consultants, and count workstations to clearly define the expectations within the terms of the lease. While it will take time to add an occupancy cap for all tenants in an owner’s building, this is recommended as new leases are negotiated. While landlords may worry about ten- ants’ response to being charged for extra employees, in reality it has become another clause in the lease. Also, incumbent tenants welcome the news that new tenants cannot exceed the norm of five employees per 1,000 rsf. By building this clause into the lease during the negotiation, the tenant knows that occupancy is limited and predetermines how to handle this situation. Without a methodology to man- age this, the result could be lease default and eviction. But landlords need a tenant’s rent. Furthermore, many states’ courts wouldn’t enforce an eviction simply because a ten- ant exceeded its occupant count by one person. Should a tenant need to expand for accommodating growth, the tenant can lease more space in the building at the full market rental rate. Alternatively, by using the appropriate calculations and considerations, the landlord can make a determina- tion whether to allow additional permanent occupants. As described and calculated, the payment of more rent for higher occupancy is a bargain for the tenant. Establishing an occupancy cap helps to preserve the qual- ity of the office building environment and justify a reason- able rent for the number of occupants. Addressing this issue directly in the lease negotiations provides better tenant rela- tions, avoids potential confrontations, and generates more income for the building owner. Jeffrey W. Eales, CCIM, CPM, is senior vice president of asset management and leasing at Birtcher Anderson Realty Management in San Juan Capistrano, Calif. Contact him at [email protected]. March | April 2018 33