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Questions for new tenants of business centers to consider

Office

Anna Lalova, Colliers Office Agency

 

The construction of several significant office centers in Riga is expected to be completed in the near future, and developers and investors are already actively working to attract tenants by including such principles as “open book” and “triple net” in the agreements. Along with new projects and the new level of quality in the commercial property sector, new practices in the structure of contracts are currently emerging in the market.

This approach is common in Western Europe, like in Scandinavia, for example, where international tenants have already encountered these principles, but it is often unclear to local companies and organizations what they really mean. However, this approach will certainly be strengthened in our market, as well.

The goal of professional developers is to build a successful building. They think about the future viability of the project and its realization—either as a sale to other investors or a constant cash flow. One of the solutions that helps to achieve this goal is, among other things, to choose a certain type of contract and cost structure—to enter into the already mentioned “open book” type of contract, to provide for “triple net rent”. In a triple net lease, the lessee is responsible for paying the basic rent together with property taxes, building insurance, and maintenance of common areas.

Such properties provide a stable income in any economic environment and have been popular with investors for years. In turn, the high and constant interest of investors is an important precondition for the continued development of the national economy.

In the past, it was common for tenants to fix part of the cost in a lease, which could be indexed to rising prices, while the owners or lessors of the buildings bore part of the cost themselves. The obligatory costs are real estate tax, insurance, etc., while the rest is used for the maintenance of the building. In many positions, costs increase very rapidly and, even with the amount obtained after indexation, it is no longer possible to cover all expenses in order to maintain a consistently high level of quality so that the services meet the expectations of tenants. As a result, the manager or owner often has to pay extra, but this cannot be done for a long time.

It should be noted that a wide variety of services are used to maintain the office building, including, for example, security, the cost of which is also affected by salary changes. In the case of another service, other nuances must be taken into account. Therefore, it is necessary to be able to react dynamically to various changes, otherwise some services will have to be abandoned and something may disappear from the building maintenance list. Therefore, in order for the building to continue its life at maximum quality, it can provide all services to tenants and it does not have to look for additional funds; tenants are offered a different approach, where all users of the building are responsible for the costs.

The open book agreement and the triple net lease terms provide that the lessee has control over costs and may influence the choice of service providers. In addition, all tenants cover or share all costs equally related to the proper, orderly, and consistent maintenance of the building.

Then, the landlord does not have to think about where to take the “extra” money, and these principles allow the quality of buildings and services to always be maintained at the level that tenants want. The principle of “triple net” is fair—everyone is equally responsible for how the building will look, how it will be managed, maintained, and will continue its life cycle.

On the other hand, triple net contracts can usually offer tenants a relatively lower rent compared to other types of contract in which landlords immediately try to include part of their contingency risk in the higher rent.

Taking into account that new projects are built with high quality and modern technical solutions, the maintenance costs of the building are often lower than in older projects. As a result, this type of contract is attractive not only to building owners and potential investors, but also to the other party using the premises—their tenants.

This approach is not unfamiliar to international tenants, companies with offices in other countries, as companies understand it and evaluate all its advantages. On the other hand, local businesses and organizations often have resistance to, or misunderstanding and worries about unforeseen costs that cannot be planned immediately. However, in understanding the basics and benefits, this approach is ultimately accepted.

There are enough tenants in our market who are actively waiting for new options for office space, especially international companies, which have included the use of modern technologies, sustainable development and well-being into their strategies. Unfortunately, these strategies are very rarely able to be implemented and accomplished in older buildings. They mostly use more conservative solutions as the systems are already outdated. Until now, there has been a shortage of high-quality Class A office buildings in Riga, but we are now finally expecting a wave of development for such projects. However, the owners of many older buildings are also committed to making improvements in line with the times, investing in real estate, green solutions—adding appropriate technologies, and renovating engineering systems, which, ultimately, means a lot in the distribution of total building management costs.

Landlords who consider the realization and viability of their property will concur with the new principles. A new office space fund and a new approach in cooperation with tenants will increase the overall market level.

 


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Anna Lalova

Consultant

Riga

Anna has considerable experience in one of the largest construction companies in Latvia. There she gained extensive knowledge about the construction industry and its features, experience working with large construction customers, understanding the overall construction cycle at all stages. Then she continued her professional work in real estate, specializing in office spaces.

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