1. TENANTS: HOW TO SURVIVE THE BIG UGLY
In many respects, we’ve been here before. Seriously, we’ve been representing tenants
in the City for 27 years—all but a few of which have been great years for tenants! The
Dot Com period comes to mind, now, but with seasoned experience; better tools and
technology; and greater flexibility to address HR issues than several years ago. Facing
soaring occupancy costs, tenants, what should you do about it?!
1. Do NOT assume that your next office leasing transaction will be anything like
your last negotiation. There is FAR MORE AT STAKE this time and a great deal
more strategy will be required in order that your organization is able to
survive...and hopefully thrive...during your next lease term.
2. STRATEGY SESSIONS
As we’ve mentioned in previous educational articles, it normally takes between
12-15 months of planning to either effectively renew one’s lease or execute a
relocation to a new site for a tenant of 10-20,000 square feet or so (LONGER
for larger tenants). However, under the circumstances, we recommend starting
the entire process even earlier—giving yourselves an additional three months,
or more, to delve into the really tough issues facing you in your next set of
decisions.
a. Hire your broker [Mihalovich Partners] and assemble your representative
management team, first.
b. We will help you to assemble the rest of a Strategic Team, including an
architect/space planner; Team contractor; a furniture consultant; your IT
specialist; and any other primary consultants necessary to launch a
strategic study about your current and future occupancy needs.
EVERYTHING about your office leasing needs should be on the table for
discussion, since the magnitude of expenses have risen so dramatically
since your last negotiation.
c. HR will play an ever more critical role on this next lease. Careful
examination should be made, not only of current and prospective
employee home-locations, but also to perform a study to detect employee
sensitivities to relocating...to either “suburban” areas of San Francisco, or
to outlying counties...or potentially out of State.
d. Telecommuting/hoteling/”hot-desking” should be explored. To what
extent, if any, could your organization “export” its full-time and/or part-time
employees to either work in the field and/or at home. It may become
feasible, with rising rental rates, to build out and furnish work spaces in
home offices—potentially to even contribute or pay the entire cost of
retrofitting an employee’s home to accommodate a work space. Parking

2. TENANTS: HOW TO SURVIVE THE BIG UGLY
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and transportation costs should be considered as well as the
organization’s carbon “footprint”.
3. FURNITURE
Tenants/clients are relieved to know that we’re here to assist you with
RENEWAL negotiations....not just to orchestrate the competition for your
business amongst several outside building owners. Your current landlord must
compete for your business, too. Early on, during these strategy sessions, the
conversations may focus on what you know best—the space you currently
occupy—with all of its benefits and challenges. BEFORE assuming that the
existing space is too small or that it can’t possibly be renovated to
accommodate additional growth....let your team explore all the possibilities:
a. Fact-gathering has to be done very early on. It may turn out that buying
ALL NEW furniture and phasing a renovation of your space, while you
occupy it, may be a LOT cheaper than relocating. You simply won’t know
if you don’t do your homework. New furniture systems may be more
efficiently layed out than when you last shopped systems.
b. Given a choice between new furniture systems and keeping the old, but
relocating to an inferior location, your management team and employees
may opt to renew and “refresh” the space. You may explore “green”
systems, as well as “green” paint and carpet tiles.
c. Explore the democratic nature (or lack thereof) of your organization. You
may decide to demolish some or all of the private offices in favor of
creating more efficient space—adding more people without taking more
space—opening up the light and views to more employees, too.
d. The new lease—even a renewal—is a good opportunity to purge old files
and examine all storage capacities and efficiencies. Off-site storage
should be examined. Can more office space be created within your
premises by creating either central files and/or taking storage off-site? Is
condensed filing an option, even if it takes adding structural elements to
the floor/walls/ceiling, if it saves office-space rent? New furniture systems
are more efficient, all-around. They are built to handle “modern” filing;
new telecom equipment and power; and can generally be moved within
the office with greater ease than the old systems. Remember, we are
planning for the future, too. In rising rental rate markets, one should
maintain as much flexibility as possible.
4. OPERATING EXPENSES AND TAX ASSESSMENTS
Long before your lease is due to expire (as we recommended, above), in your
strategic assessment of your current building, your broker [Mihalovich Partners]
should review the history of operating expenses and tax pass throughs from
the landlord. Each and every building you will consider during the landlord-

3. TENANTS: HOW TO SURVIVE THE BIG UGLY
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“contest” for your business will provide us with their operating expenses....past
and projected; and we can verify the tax status, the currently assessed value of
the property.
a. With many months still running on your lease, it will be time to close out
any “old” issues with the landlord before getting on to the “new”. Have you
been overcharged for operating expenses all these years? How do you
know? Did you ever exercise your right to audit the landlord’s books? We
have a new article for you to read on this topic...but suffice it to say that
you need to “square up” with the landlord and collect on any overcharges
before entering into renewal discussions.
b. Under Proposition 13, your landlord’s real estate taxes and, therefore,
their billings to you, should not have increased more than 2%/year during
the lease. Noting that your building may have recently sold, however, and
will be reassessed to current “market” levels, the pass throughs could be
HORRENDOUS. Judging from the recent purchases of buildings from
EOP by Morgan Stanley, many of those tenants may see $5.00/square
foot/year increases in taxes—and for NO incremental “value” to the
tenants!
c. Understanding and quantifying your CURRENT building expenses, and
the forecasts, will lay the ground work for your team to assess all of the
competing buildings in our comparison matrix. The grass may not be
greener, folks, as ugly as it may appear in your current building. Total
expenses may be a LOT more expensive—and the ensuing pass
throughs—at other buildings. The PROCESS we lead you through will
ferret it all out. The operating expenses and tax bills are just a couple of
the many line item budget points for us to consider—-as we calculate
your projected TOTAL OCCUPANCY COSTS.
5. THE ARCHITECT’S JOB: WHAT ARE YOU AFTER? EFFICIENCY?
Plan, plan, and plan some more, as we described above. It cannot be
overstated at this time and in this economy. There is far too much money at
stake. In fact, your business is at stake. The Tenant-Team Architect will assist
us in many ways, not the least of which is to interview all key management
team personnel to produce a working-document: “The Program”; your space
needs, as defined by YOU and told to your skilled architect/space planner.
Your current space, if at all a possibility for renewal, should be carefully
examined by your architect to explore any and all productive ideas for
renovating to create additional efficiencies—all juxtaposed to your Program.
Your architect will likely “see” opportunities that the rest of us cannot.
a. They will also examine the way you do business. How do people and
traffic flow in your space? Are the current and projected adjacencies
appropriate?
b. What are you losing, if anything, being on more than one floor?

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c. Could it make sense to departmentalize and locate a “support” or
“service” group on a lower floor? In a nearby building? In a suburb? Can
your IT people support such a split? Will morale allow it, even if the
economics make sense?
d. What flexibilities are there in your Program? These areas should be well
defined, if possible, since many a landlord in this tightening marketplace
will be quite rigid about offering expansion or contraction options. How
TIGHT can you manage, if you feel compelled during negotiations to
gravitate toward LOWER square footage alternative sites? Your architect
will need your direction on these fronts, to be prepared to react to highly
expensive construction costs/higher rental rates.
e. Examine after-hours usage. In our experience, the vast majority of
building owners do NOT know how to calculate their actual costs for
providing after-hours HVAC service, beyond the basics of the cost of
union labor to run the system. Power calculations are complicated, but we
want to ensure, at a minimum, that you’re only charged at-cost....without
markup. So, most often these landlord charges are arbitrary. Your
architect and contractor should explore ways to create more efficient
systems within your premises...all to minimize the extraordinary costs of
after-hours occupancy. Using just three hours of “extra” air conditioning
per day, at, say $150/hour, would cost you over $540,000 during a five-
year lease. Can we save some money...and energy?
6. NEGOTIATE. THEN NEGOTIATE SOME MORE. THEN...WELL, JUST HIRE
US.
If you’re a tenant of size (in San Francisco that generally means greater than
10,000 square feet), you’ll still be respected by most of the landlord
community—in spite of rising rates, etc. Most of you, though, do not live in the
world of negotiating as we do...and it’s not only OK to entrust us with this
fiduciary responsibility on your behalf....you should find great comfort in doing
so, knowing that our Principal, Dan Mihalovich, has handled over 200
representation assignments in his 26 years in the San Francisco leasing
community. As you’ve read this Editorial, written by Dan, and reviewed his 40+
letters of recommendation, do you get the sense that we’re on to something
important—tracking these issues, trying to prepare you for your upcoming
project? NEGOTIATING the business terms and lease will be “the meat” of it.
We will have you simultaneously pursue AT LEAST three buildings, if not
five....including a renewal, if possible and desirable. Do we need all five to
meet the best of the best of terms in order for your project to be successful?
a. Only one alternative, assuming that ALL of your short-listed buildings are
serious contenders, needs to be the “perfect fit”. After all, you will sign
only one Letter of Intent, not more, in the building where you decide to
spend your future.

5. TENANTS: HOW TO SURVIVE THE BIG UGLY
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b. The most aggressive, straight forward, eager and forthcoming landlord
usually rises above the rest fairly early in the process. However, one must
keep one’s options open...until YOU are ready to make a commitment.
Our letters of intent are usually more thorough than any of our
competitors. Why? There are scores of business issues, and the purpose
of a Letter of Intent is to flush out and identify ALL of the important
business issues....leaving the balance of LEGAL issues to be reviewed
during lease documentation. We do NOT “bury” or defer important points
to a later date after LOI execution, when much of the leverage is diluted.
LEVERAGE is paramount. Repeat. LEVERAGE is paramount.
c. TIME, the availability of time, is paramount to creating a successful
negotiation. DO NOT delay the entire STRATEGY process or subsequent
processes because you think your lease expiration date is too far out...It’s
NEVER too early to create the strategy we referred to above. USE THE
EXTRA TIME to your advantage. We should not be rushed through this
process. You’ll have ONE chance to have your transaction put together
on time; on budget; and managed by us in the most methodical and
productive way for everyone.
d. ALL options will be considered for renewal and relocation sites, provided
that you want to pursue a renewal or relocation within your building.
Perhaps the expansion space you desire isn’t currently available through
the landlord. OK. But we will pursue ALL options, including those which
may become available through other tenants in your building. Your
landlord may not be an interested party if the best deal is for you to
pursue expansion space into another tenant’s space in the building! Be
flexible. Be creative. We’ll explore all the options together.
e. CREATIVE brokerage is paramount. We have dozens of examples to
share with you. We’re here to save you lots of time and lots of
money....no matter the market conditions.
f. FOCUS from your broker is paramount. Unlike our competitors, we’re
focused on a small number of deals each year—and we ALWAYS
REPRESENT TENANTS, ONLY.
g. It’s OK to BE DEMANDING. We’re used to it. We’re up to it and we’re
ready to help you.
WRITTEN BY:
Dan Mihalovich
President
MIHALOVICH PARTNERS
Tenant Leasing Services
655 Montgomery Street, Suite 810
San Francisco, CA 94111
T: 415-434-2820
C: 415-999-9244
F: 415-434-2830
E: dan@TheSpacePlace.net
W: www.TheSpacePlace.net

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