With apologies to Monty Python’s Flying Circus, let’s go.
I’ve recently joined discussions around wireless funding models, technology affordability and the service needs for building occupants that meet the middleprise classification from 100,000 to 500,000 square feet. While unpacking the issues, I went down the rabbit hole to explore space leasing in commercial real estate. Why? Well, it appears that many property owners consider indoor improvements from one vantage point — what will the project cost me?
However, there are many other business and financial perspectives worth considering:
• Tenant retention — what is the revenue loss associated with changing tenants?
• Tenant recruiting — what is the revenue loss associated with space taking longer to lease?
• What is the incremental monthly cost for wireless improvements?
• How can we fairly charge the tenants for wireless improvements?
The wireless improvement conversation is centered on a fair system cost recovery method for either the building owner or the third party operator (3PO) that deploys and services it.
TERMINOLOGY USED
Before we take a closer look at payment and cost model approaches, it is important to review leasing terms and contract mechanisms to consider where monthly charges could be applied. For this section, our friends at BOMA supply some common definitions for the industry that we’ll use.
• BASE RENT: The minimum rent due under the terms of a lease.
• GROSS LEASE: A type of commercial lease that generally favors the tenant (lessee) because the land-lord (lessor) pays all “usual costs” that are associated with owning and maintaining the rented space.
• GROSS-UP: Usually applies to fully serviced leases (sometimes also called full-service leases); the tenant pays fixed amounts for certain services on top of rent for the actual space leased. For example, a landlord might pay for common area maintenance (CAM) expenses and then charge each tenant a fee based on the percentage of their leased space in the building.
• NET LEASE: In general terms, the opposite of a gross lease. The land-lord (lessor) does not cover building costs such as utilities, water and sewer repairs, insurance and/or taxes; instead, these costs are included in payments required from the tenant.
• RENTABLE SQUARE FEET: A combination of “usable square feet” and some portion of the square footage encompassing the common area. Typically, there is a 10% to 15% difference between usable square footage and rentable square footage. Payment based on rentable square footage will have a higher cost than usable square footage alone. Rentable square footage is typically calculated by adding the usable square footage and some percentage of the common area within the building.
• USABLE SQUARE FEET: The square footage that is rented for exclusive use by the tenant in a commercial building. It may also be referred to as net square feet. Usable square footage includes private (tenant-only) restrooms, closets, storage and any other areas used only by the tenant.
MIDDLEPRISE BUILDING EXAMPLE
In this example, a typical middle-prise building of 200,000 square feet will be used to calculate project recovery costs. For wireless improvements that deliver signals for two mobile operators throughout the building, the total project cost is $220,000. The system supplier expects a life of five years and wants to recover costs over that life.
Quick notes about the chart:
• Wireless adds $0.30 per square foot to annual cost
• Assuming a moderate Class A rent of $21.99 per square foot annually
• Wireless is charged at about the cost to provide it
• Tenant cash flow assumes a 100% occupied building
If the building is fully leased to one tenant, the cost of the system can be added to the base rent or it can be broken out as a separate CAM expense. For the example of fully leased building here, the annual $21.99 per square foot could simply be raised to $22.29 per square foot to include wireless in the base rent.
In a situation where the lessee is only renting part of the building, the owner has a few options. For example:
• Tenant leases 100,000 square feet of rentable space in the building
• Owner can either add improvement costs into base rent or separate them out as a CAM expense
• Wireless improvement costs included in base rent provides tenants with a fixed price for the wireless service
• The CAM approach offers the flexibility to charge a higher amount for wireless coverage until another tenant moves in to pay their portion
For building owners working with 3PO providers, the unoccupied rentable parts of the building need to be considered in the contract between the parties as they won’t be generating revenue between tenants. Here are some potential options:
• Slightly higher fixed cost to tenants per square foot that allows profitable business at less than 100% occupancy
• Lease includes a separate CAM expense for wireless that varies based on occupancy; CAM increases for remaining tenants when other tenants move out, decreases when new tenants move in
THE LONGER-TERM BENEFITS
The concept of wireless in office buildings evolving from a competitive selling feature of a major property to a necessary fourth utility alongside electricity, gas and water has gained traction in the last decade. The need inside buildings and enterprises to enable more devices, people and services requires wired and wireless networks to connect them all back to the data center and cloud services that orchestrate their overall operations. This fourth utility has to span from basement to roof, and carpeted floors to parking garage.
Attracting new tenants and/or retaining current ones will be increasingly difficult in buildings that are not equipped to provide reliable wireless services. As competitive property owners improve their wireless services, they will attract enterprise tenants who value great service both for their business and for employee retention. Recall the building example and consider that, if the building is occupied by one tenant and they renew their lease, the $220,000 capital expense for the system pays for itself by retaining them. Even if building management is wildly efficient, it would take at least a month to clean and prep the building for new tenants — which translates to $366,500 in lost rent. If leasing agents decline to show the property due to inadequate wireless service, the missed revenue opportunities compound with each passing month that the property goes unoccupied.
THE POINT
It often appears that CRE technology buyers are looking at the absolute cost of implementing wireless systems and balking at the investment. As the role of wireless systems in our business culture transitions from casual amenity to required utility, CRE decision-makers looking at the big picture will reap the rewards of satisfying the wireless needs of their tenants — both present and future..