week 5 commercial offices + green leases

Question 1

define absorption rates

Answer 1

The amount of floor space in square meters that have been historically leased in a given period (usually annually).

Figure expressed as a % and is an indicator of supply and demand in the market.
Relevance for tenant:
Gives tenant indication of the tightness of the market and
Ability to negotiate rents

o Indicator of supply and demand in the market
o Eg. Melbourne has 750,000m2 of vacant space Each year 250,000m2 of space is leased Therefore we have 3 years of supply available

EXAMPLE:
If there are 3 million m2 of vacant office space in Melbourne and the absorption in recent years has been 750,000m2 per year, then the city is said to have a four year supply of leasable office space available. The absorption rate is 25%.
Year of supply = Vacant area / Absorption
3,000,000/ 750,000 = 4 Years
Absorption Rate = Absorption/Vacant area
750,000/3,000,000 = 25%

Question 2

define vacancy rates

Answer 2

Total vacant space as a ratio of total market stock at a point in time, expressed as a %.

In the above example, if the 3 million m2 is the total vacant space out of a total market stock of 24 million m2, then the vacancy rate is 12.5%.
3 million / 24 million = 12.5%

Question 3

define Gross lettable area

Answer 3

) Measurement of the whole building area minus elevator shafts, staircases, ducts

The amount of floor space available to be rented in a commercial property. The total floor area designed for tenant occupancy and exclusive use, including any basements,mezzanines, or upper floors. (common area in pro rata share)
Expressed in square metres in Australia
In United States,Canadaand theUnited Kingdom in square fe

It is measured from the centre line of joint partitions and from outside wall faces.
Gross leasable area is the area for which tenants pay rent, and thus the area that produces income for the property owner.
For a property with only one tenant:
Gross Floor Area(GFA) & Gross Leasable Area (GLA) are essentially equal.

Question 4

define nLA

Answer 4

Measurement of the GLA area minus areas not available to the tenant (i.e. corridors, washrooms, plant rooms)

Question 5

define rentable area

Answer 5

Is compared by measuring the inside finished surface of a permanent outer building walls

Question 6

define usable area

Answer 6

Is the number od square meters that can be actually occupied

Question 7

define dominant portion

Answer 7

– Is th inside finished surface of a permanent outer wall – must be 50% or more of the vertical floor to ceiling dimension. Used for property council Australia measurement standards.

Question 8

define incentives

Answer 8

incentives for tenants to enter into a lease
o Typically depends on the lease
o Rent free / discounted rent
o Contribution towards tenants fit out

Incentives:
Enticements for tenants to enter into a Lease
Depends on the length of the Lease
Example: In a 5 year lease the tenant may get 6 months’ Rent Free or discounted rent as a contribution towards tenants fit out.

Question 9

common safety measures in office building (“essential services”)

Answer 9

Aims to reduce risk to life and property in emergencies legislated under the building regulations act 2006
Examines:
o	Exit doors
o	Emergency lightning
o	Fire extinguishers
o	Smoke alarms
o	Fire hydrants 

Legislated under the Building Regulations Act 2006
Aims to reduce risk to life and property in emergencies
It examines aspects including; Exit doors, Emergency lighting,
Fire extinguishers, Smoke alarms, Fire hydrants…etc

Question 10

what is an ‘escalation clause’

Answer 10

o Covers unavoidable annual increases in rates, costs, market rates of rent

Question 11

what is assignment and subletting

Answer 11

o Right to assign or sublet critical to commercial tenants

o Protects against rapid expansion/collapse of a business

Question 12

explain recapture clause

Answer 12

o Allows the landlord the right to recover any space that the tenant is unable to occupy or sublease

Question 13

explain services by a landlord provided

Answer 13

Utilities – heating, water etc must specified who is responsible for what in the lease (determined if it is a gross lease or net lease)

Possession:
New or alterations of office space – office lease not void if delays

Remodeling office space:
Economic conditions determine whether tenant or landlord bears expenses of alterations

Building standards:
What are the stds? Air conditioning, carpet, blinds, electrical outlets, phone connections etc

Disabilities Compliance – lifts, ramps

Question 14

market analysis may include

Answer 14

Regional Analysis:
o Office space availability – qty and type
o Draw national offices to relocate
Neighbourhood Analysis:
o Transportation, parking, proximity to services

Energy efficiency:
o Energy costs, triple net lease – tenant pays all costs
o Requirements to meet standards – 5 and 6 star neaber leases

Building class definitions – A, B, C trophy buildings

Question 15

explain premium office class

Answer 15

o 5 star NABERS Energy rating
o Newest and highest quality buildings in the market place
o Generally the best looking buildings with the best construction, and
o High-quality building infrastructure. High end lobbies/ lifts/ recreation
o Excellently located, excellent access & parking
o On site management; 24/7 security
o City or water views
o Attract the highest quality tenants and also command the highest rents.

Question 16

explain A grade office class

Answer 16

• 4 star NABERS Energy rating
• Newest and highest quality buildings in the market place
• Generally the best looking buildings with the best construction, and
• High-quality building infrastructure.
• Well located, have good access, and are professionally managed.
• Security/ reception

Question 17

explain B grade office class

Answer 17

o Any NABERS Energy rating
o Generally a little older, but still have good quality management and tenants.
o Can be returned to their Class A glory through renovations such as facade and common area improvements.
o Technological capacity is good, but not best-in class; elevator and HVAC systems are functional but not industry-leading. Finishes are good to higher quality, but perhaps not as high as A or premium.
o Generally are not functionally obsolete and should be well maintained, bit outdated.

Question 18

explain C or D grade office class

Answer 18

o C and D-grade buildings do not require any NABERS ratings
o Older buildings (minimum 20 years old, and often much more)
o Long history of occupation by other tenants.
o Out-of-date furnishings and poor maintenance services.
o Where a Class B building may have a lobby attendant, Class C buildings have neither attendant nor lobby. No or slow elevators

o As they lack many modern amenities, these buildings rent functional space at below average rates. They therefore compete for no-frills tenants who desire a more economical option for office space.

Question 19

what are the 6 steps in a market analysis

Answer 19

Step 1: Define the Product
o Owners/tenants, property assessment and office class.
o Examine physical and legal constraints.

Step 2: Market Delineation
o Identify the geographic market study area. Analyse consumer profiles of most likely end users.

Step 3: Demand Analysis
o demand influences – explore economic conditions, absorption rate, population growth etc.

Step 4: Supply Analysis – supply influences
o Take inventory of existing supply, forecast future supply etc.

Step 5: Analyse the Interaction of Supply and Demand
o Calculate the residual demand analysis, Determine the timeframe for the new supply to be absorbed etc.

Step 6: Capture Analysis
o Estimate the subjects capture and absorption potential

Question 20

qualifying the prospective tennant

Answer 20

Spatial qualifying:
o	Single office space
o	Multi personnel space
o	Special facilities 
o	Special facilities 
o	Miscellaneous areas

Level of quantity desired

Additional areas of qualification:
o Determine decision-making responsibility
o Ask the same questions of all prospects

Owners / investors:
o Larger sized investors including corporations
o REIT and insurance companies
o Value certainty of income and growth in asset value

Tenants:
o Small, medium and large businesses
o Value control over their operations, security, brand exposure and business continuity

Question 21

potential supply and demand influences on office tennants

Answer 21

Demand Influences:
• State of the economy – expansion/contraction
• Politics
• Technology/communications
• Number of employees, workplace requirements (space per employee, equipment per employee)
• Corporate location decisions

Supply Influences:
•	Financing availability/options, 
•	Government incentives
•	Corporate brand/marketing decisions
•	Space utilisation
•	Business climate
•	Removal or consolidation (movement) of space from/in the market

Question 22

explain property analysis - computing the rentable area

Answer 22

Setting the rental schedule
• Minimum rents – The least amount of rent paid by the tenant per month
• Establishing a base rent – The minimum rent paid per month before other factors are taken into account (performance based rent)
• New York method – Takes the whole construction area into consideration

Question 23

define green lease

Answer 23

Rating the environmental performance of commercial buildings starts with an analysis of the sustainable management of energy consumption

o Lessor and Lessee accountable for annual NABERS assessment (rating)
o Separate metering of tenant light and power and base building
o Mutual monitoring and reporting of agreed sustainable outcomes
o Lessor issues quarterly energy consumption and maintenance reports

Question 24

what does green star ratings mesure

Answer 24

evaluate environmental :design” in buildings
o design and construction
o energy use,
o indoor environmental quality,
o transport proximity,
o water and materials use,
o land use,
o emissions, management and innovative features
o Administered by GBCA (Green Building Council

Question 25

what does NABRES measure

Answer 25

• NABERS scheme rates a building’s greenhouse performance
o Rating scheme for existing buildings
o Measures and rates energy and resource consumption of a building based on actual data collected
o Administered by NSW Government’s Office of Environment and Heritage on behalf of Commonwealth and State governments

Question 26

define green star

Answer 26

Performance assesses the operational performance of buildings across nine impact categories

Question 27

what is a green lease?

Answer 27

Principal objective to operate a commercial building as efficiently as the design and fitout will allow – this ultimately reduces operating costs for all

Key differences to a typical lease:
o transparency of energy usage and costs through monitoring and reporting
o providing mechanisms/incentives to maintain or improve rating
o Green lease targets (eg: water, indoor air environment, energy, materials

Question 28

how does a green lease work?

Answer 28

A green lease provides a framework under which both landlord and tenant (often driven by a Property Manager) can achieve and maintain energy efficiency and other sustainability goals throughout the lease term. (e.g. installing solar panels, reducing ongoing expenses)

A green lease enables better environmental and economic performance of a building.
A green lease can include information about:
WHAT are the environmental measures to be taken under the lease?
HOW will the parties cooperate to achieve these measures?
WHO will monitor compliance with those measures?
WHAT happens if the targets are not met

Question 29

benefits of a green lease to a landlord

Answer 29

Green leases may result in not only the cost savings associated with operating buildings more efficiently but also happier tenants, meaning longer-term leasing arrangements and fewer landlord-tenant disputes.
There is a proven statistical correlation of green properties with:
• Higher gross rents,
• Reduced vacancies,
• Reduced outgoings
• Reduced incentives.

Green leasing has professional support from professional property organisations (API, Property Funds Association of Australia).

Question 30

benefits of a green lease to a tennant

Answer 30

o significant cost savings, both direct (for example, in lower electricity bills) and indirect (where, through outgoings, a tenant contributes to wider building costs such as waste management, water usage and air-conditioning).
o Green leases can enhance a tenant’s reputation for corporate social responsibility (CSR) - doing the right thing for the environment, employees and the community. Enhanced CSR which can then lead to great indirect
benefits including:
o Staff retention
o Improved employee wellness
o Increase productivity / Reduced workplace absenteeism
o Green leases can also enhance the safety in the environment
o Employees are more likely to bring this knowledge home also which will have a positive impact
o Tenants may be much less likely to relocated which will also reduce the substantial costs associated

Question 31

An effective green lease should…

Answer 31

o	Promote cooperation 
o	Include environmentally sensitive 
requirements egs. sustainable resource use; indoor environment quality
o	Include flexible lease terms 
o	Introduce environmental targets 
o	Necessitate data-sharing by requiring the monitoring and reporting of consumption by the landlord to the EMC, and 
o	Utilise environment management plans.
Overall it should cut emissions down

Question 32

How can a aproperty manager facilitate strong green leases?

Answer 32

• PM fosters relationships between the landlord and the tenant
• Creates an environment in which both parties collaborate together and both benefit from the clauses factored into a green lease.
PM can undertake the following for the mutual benefit of the two other key stakeholders:

o Establishing a EMC to develop and manage the EMP & to guide the strategies and polices involved with reaching the goals set in a green lease
o Ongoing monitoring and reporting of mutually agreed outcomes in relation to energy efficiency and sustainable obligations

o The provision of regular energy consumption and maintenance reports – utilised for benchmarking and determination of best practice
o Consistent and reasonable updates of the EMP throughout the lease
o Flexibility
o Know the legislation
o Commercial leases last for decades!

Question 33

explain the “split incentive” of green leases

Answer 33

The “split incentive” is where costs and benefits of implementing sustainability measures are not aligned:

• Landlord cost - the landlord is responsible for the cost of new plant and equipment or other capital investment that improves sustainability outcomes for the building;
• Tenant benefit - the tenant reaps the rewards of an enhanced indoor environment and lower energy or other costs through reduced outgoings. This applies in the lease situation of a tenant paying building outgoings - in other words, a net lease.

The split incentive can also exist in cases where a tenant seeks to invest in energy-saving plant and equipment that may not be relocatable at the end of the lease.

Question 34

how to overcome ‘spot incentive’ issue

Answer 34

• flexibility and creativity in lease terms
• negotiating other arrangements for cost recovery by one party that reflects the other party’s reduced expenditure otherwise payable under the lease.

Question 35

explain traditional leases in relation to green leases

Answer 35

o Most obligations are imposed on the tenant and relatively few on the landlord.
o There is no mention of “green” ideas and goals in the recitals or operative provisions in the lease.
o The obligations are designed to be clear and fixed for the term of the lease.
o Amendments to the lease are less likely.
o Capital costs are exclusively outlaid by the landlord typically speaking.
o Limited land lord access during lease. “Right to quiet enjoyment”
o Relationship between tenant and landlord more “arms length” and less transparent.

Question 36

green leases today include …`

Answer 36

o Obligations are imposed on the tenant and the landlord;
o Clear and strategic environmental goals are included within the lease.
o The obligations may be amended and reviewed at regular intervals to ensure the building is moving with new technology, best practices, strategy etc.
o Amendments to the lease are more likely.
o Split incentives concerning capital costs (i.e.. Green refurbishment) may be a cost which is split between the two stakeholders. May be factored into the rent.
o Increase land lord/PM access to monitor environmental performance – this may be factored into the lease.
o EMC may be set up with both stakeholders having a seat at the table which would allow full transparency of environmental output of the building.

Question 37

barriers to upgrade sustanability

Answer 37

o Lack of access to capital
o Lack of knowledge and awareness around energy efficiency
o Perception that the energy efficiency investment won’t yield a return
o Lack of motivation
o Disruption to existing tenants
o Short-term thinking from owners

Question 38

What is the first step Lee should take to solve the high vacancy problem?

Answer 38

o New target market (market analysis = 6 step process)
o Renovation
o Incentives

Question 39

You are a office property manager negotiating a new lease with a not-for-profit agency. They require a minimum 5 green-star rated building (Australian Excellence) and want to know what this involves compared to 6 green-star rating (World Leadership).
Outline to your client the features of a ‘green or sustainable lease’ and the differences between 5 and 6 green star ratings

Answer 39

A green lease provides a framework under which both landlord and tenant (often driven by a Property Manager) can achieve and maintain energy efficiency and other sustainability goals throughout the lease term.

Basically a 6-star rating achieves very high scores typically across the rating criteria and is therefore seen as an industry leader on a global scale.

The National Australian Built Environment Rating System (NABERS) Energy for offices rating - a national rating system that measures building performance on a scale of zero to six stars.
- a zero-star rating means the building is performing well below average and has lots of scope for improvement.
- a six-star rating indicates a market leading performance, with half the greenhouse gas emissions or water use of a five-star building!
Features of a Green Lease

Benchmarks performance - water and energy consumption – sets targets and monitors performance
Waste management plan
Facilities – efficient operation, water conservation and harvesting, provision of bicycle storage
Fit-out guide – green requires use of recycled materials in the build, indoor environment – sunlight etc for employees
Costs – who will pay? Landlord or tenant? Make good – can the fitted-out space be left for next tenant?

Question 40

Explain the obligations and responsibilities for both the tenant and the landlord of a green lease compared to a standard commercial lease.

Answer 40

Conventional lease - landlord covenants to give the tenant quiet enjoyment and not much else! The tenant will be required to pay rent and outgoings and may have some ongoing maintenance obligations in relation to the premises’ plant and equipment.

A green lease should
Promote cooperation by requiring a landlord, Property Manager and tenant to work together to achieve mutually beneficial outcomes;
Include environmentally sensitive requirements, such as consideration of sustainable resource use and indoor environment quality;
Include flexible lease terms, as performance targets must be adaptable to changes in conditions as well as changes in the way sustainability in buildings is measured over time;
Introduce environmental targets in the sense that achieving particular goals will be critical to qualify for and maintain building ratings, which are likely to be specific obligations on both parties;
Necessitate data-sharing by requiring the monitoring and reporting of consumption by the landlord to the EMC, where applicable, or directly to the tenant; and
Utilise environment management plans; provide and set incentives for tenants; include penalties in the lease to ensure targets and requirements are being met.

Question 41

potential difficulties face in managing a ‘green lease’

Answer 41

Many difficulties can arise throughout a lease and a green lease can certainly add some additional risks and challenges for both the landlord and tenant.

Targets are usually included in the EMP - require regular reviews, are they achievable?
Lack of financial resources to drive the requirements of the green lease, such as a lack of finance to purchase the appropriate product which is considered sustainable.

Lack of time and not making sustainability and environmental performance a priority.

Changes to a company’s vision.
Employee’s attitudes and choices – HRM may be required to change behaviour.