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Twin Cities Industrial Market Remains Strong

Industrial markets have been in the unique business position of becoming increasingly more valuable during the pandemic. The value of e-commerce, same-day delivery, and infill development is more important today than it was a year and a half ago. I recently moderated the Bisnow webinar panel Minneapolis Industrial Updatewhich included developers of industrial facilities from United Properties and Ryan Companies. The panelists Connor McCarthy, Development Director at United Properties, and Eric Morin, National Director of Architecture, Industrial at Ryan Companies both confirmed that the pandemic has accelerated an already growing industrial sector. Eric stated that “the reasons we are seeing the growth and explosion in the market aren’t new, they have all been here for several years, those trends have just been accelerated (by the pandemic), studies suggest maybe by five years in terms of acceleration and adoption for e-commerce especially for e-groceries and other items.” Both panelists agree that many of the challenges other sectors have faced due to the pandemic have not been as big of an issue to overcome in the industrial sector. Many of these businesses were deemed essential, workers needed to be on-site, and the naturally distanced workplace lent itself well to continued operations. Connor points out that businesses that figured out how to ramp up distribution like “Amazon, Target, and Walmart all did very well during this pandemic”. The rapid growth in this industry is also opening up new opportunities for construction companies who are being called upon to modify existing warehousing and develop new buildings in an effort to meet increasing demand. Submarkets in the Twin Cities Emerging as Hot Industrial Hubs The Twin Cities submarkets are running hot in the industrial sector agreed the panelists. The northwest quadrant is seeing the most active development due to access to both labor and roads but that doesn’t mean the other markets aren’t also doing well. They both noted that labor is absolutely the number one concern for businesses across the board in their sector. Cold storage is in high demand and is increasing in primary and secondary distribution markets. As grocery stores move direct-to-home, increased demand for cold storage space creates a big opportunity for development but it also has its challenges. Trying to get the right mix on a speculative basis is difficult, particularly when it comes to cold storage and freezer space. In addition, the city approval process is often more difficult due to the build specs needed up front which can be difficult to nail down in the early stages of development. It costs 2-3 times more to build a cold storage facility than other spaces. In addition to this, a very small number of companies own the majority of cold storage sites in the US creating a barrier to entry. The last-mile delivery trend is also creating an opportunity in the market, however, conducting due diligence and identifying the risk and opportunities a particular site provides is very important. The panelists agree that in-depth traffic studies are needed to determine adequate access to highways and the surrounding community. These particular facilities also have naturally high parking needs for both employees and delivery vehicles. The combination of traffic, parking, and labor issues require developers to become increasingly creative with their site selection. Historically, developers would look to farmland outside of the cities, but with the trend in customers wanting everything sooner, site selection is more crucial than ever before. Pain Points for Developers are Real Developers must conduct increasingly complex due diligence and take into account issues of remediation, re-zoning, or re-entitling a site as risk issues. In addition, close proximity to a city will increase a site’s cost. The market rent for a first-tier suburb vs. a third-tier suburb vs. a business district, all affect the premium someone pays, which in turn factors into project budgets and the offerings developers are able to provide to the marketplace. Design changes to help mitigate these costs are being explored and implemented but a big issue that developers face today is a shortage of steel. Connor points out that “in Oct 2020, the lead time for steel from the date of commitment to showing up on-site was around 12-16 weeks and today it’s 36-40 weeks…and costs are up 50% as well in this same time period”. As a result, build-to-suit development is becoming increasingly challenging with the timeframe needed to order steel for a fully designed building now sitting at 12-18 months ahead of time. Trends in Industrial Supply chain weaknesses have been identified during the pandemic which could result in businesses needing more space. There is also a trend in reshoring manufacturing to the US creating a sense of security that manufacturing at home provides. With this in mind, good land, sites, and specs will continue to be in high demand. Automation is increasing in manufacturing and warehousing facilities and the current labor shortage amplifies this need. Finally, another important trend in the industrial space is a greater need to have access to data. Getting high-quality fiber to a site is just as important as electricity these days. Outlook Long-term demand in the industrial space is growing consistently year on year. Developers are meeting current needs but new design opportunities will open up for distribution centers with more development, construction, and design which is good news for Twin Cities developers. To watch the full webinar and hear much more about industrial sector development including thoughts on repurposing shopping malls, what to do about ghost kitchens, and more, please listen to the full webinar at: https://www.bisnow.com/webinar/minneapolis/minneapolis-industrial-update-7027. About the Author Brandi Kerber focuses her practice on real estate law, nonprofit law, and corporate law. She advises clients in connection with all aspects of real estate transactions including development projects, commercial and residential sales, and leases, cellular tower leases, commercial loan transactions, construction contracts, easement agreements, title registrations, zoning matters, and lot splits. Brandi advises nonprofit organizations on a wide range of matters including organization, income tax exemption, property tax exemption, and sales tax exemption. She also represents closely-held businesses in corporate matters as well as mergers and acquisitions.

June 14, 2021

Commercial Lease Negotiations

Commercial Lease Negotiations in Uncertain Times: Series Final

This is the sixth and final post in a series of blog posts on the topic of commercial leasing during these uncertain times. Throughout the summer this series has explored a number of commercial leasing related questions raised by both commercial landlords and commercial tenants. Even before 2020, the world of commercial real estate was dominated by highly unique leasing arrangements, with no two lease agreements or arrangements looking identical. This year has only added to the individualized nature of commercial leasing arrangements and the need for both landlords and tenants to pay close attention to the terms of their existing and future lease agreements, to provide flexibility, long-term stability, and safety for their clients, employees and customers. In previous posts, we addressed negotiations surrounding rent deferral and rent abatement as well as negotiations surrounding improvements to leased premises. Due to the increased need for additional safety precautions in all indoor spaces and concerns about the possible long-term financial impact of the pandemic, these have been two of the most frequently examined lease topics during the last six months. In this final post, we aim to identify other lease terms that landlords and tenants should examine closely as they review their existing leases, consider renewing an existing lease, or consider entering into a brand-new lease. Lease Terms to Consider Force Majeure Clause:In light of COVID-19 and civil unrest, landlords and tenants are looking to the force majeure clauses of their leases to determine whether either party has a basis for non-performance. Force majeure clauses allow for delays in performance for various events outside of the parties’ control and may excuse performance for events such as riots, strikes, forces of nature and governmental actions or inaction. Nonperformance based on a pandemic may or may not be covered under the force majeure clause in a lease depending on the precise wording of such clause. Often, a force majeure clause will explicitly require the payment of rent during any period of force majeure but the explicit language of the force majeure clause should be reviewed carefully to confirm whether this is the case. Force majeure clauses are strictly and narrowly construed by the courts and will likely be given much greater scrutiny and be subject to more negotiation as landlords and tenants are navigating the uncertainties in our changing environment. Early Termination Provision: As we have discussed in this series previously, most businesses across the country and across the world have had to adjust occupancy limits in their places of business and/or have had to close their doors completely in order to deal with a rising number of COVID-19 cases in their areas. While in some places, the number of positive COVID-19 cases seems to be trending down, most states around the country expect positive cases to ebb and flow until there is a vaccine widely available. Accordingly, businesses may be forced to remain flexible, and to scale their operations back at times as a response to the pandemic. In order to remain financially stable, tenants in particular, may want to negotiate an early termination option in any new or renewed leases. This may come with a monetary fee but will likely leave a tenant in a better financial position long-term than they would have been had they been forced to remain in their leased space for the duration of their current lease term. Term of the Lease: Both landlords and tenants have suffered hardships in light of the pandemic and civil unrest in their communities. These hardships have resulted in some businesses closing their doors and not reopening. When negotiating a new lease or the renewal of an existing lease, tenants and landlords have had to weigh the costs and benefits in agreeing on the length of the initial term of the lease and any renewal terms. While the negotiation of a long-term lease may result in better rent terms for the tenant, many tenants moving forward will want to weigh the cost savings of reduced rent against the possible costs in the event the tenant is unable to fulfill its obligations under the lease due to the pandemic or civil unrest. These costs can be especially detrimental in situations where the tenant has personally guaranteed the terms of the lease, which is often the case with new businesses that do not yet have strong financials. Assignment and Subleasing Provision: Similarly, to consider the term of the lease, landlords and tenants may want to build flexible assignment and subleasing provisions into any leases. If the pandemic lasts as long as epidemiologists are anticipating, landlords may find themselves in a position where selling their commercial properties makes financial sense, and tenants may find themselves in a position where they do not need as much office or warehouse space and it may make sense to decrease costs by bringing in a subtenant or assigning the lease altogether. Casualty/Insurance Provisions: As a result of civil unrest some landlords and tenants have had situations where the leased premises have been damaged or destroyed. In these cases, both landlords and tenants have had to look to their lease provisions to determine both their responsibilities in connection with any rebuilding of the premises and the applicable insurance provisions of the Lease to determine what costs are covered and whether it is economically feasible to rebuild. Even in situations where buildings have not yet been damaged and losses have not yet been sustained as a result of COVID-19 and civil unrest, many landlords and tenants are evaluating the insurance provisions of their leases and their current policy coverages to make sure they are going to be adequately covered as we move into the future. Business Interruption Insurance: With many businesses having to close for indefinite periods of time due to government action or due to civil unrest, many tenants are carefully reviewing insurance policies for coverage. While business interruption insurance typically only covers interruption due to physical loss, there are differing definitions in insurance policies as to what constitutes a physical loss. In addition, while some policies may specially carve-out business interruption insurance for pandemics, some do not, and some policies may have endorsements specifically covering pandemics. Accordingly, it is important that such policies be reviewed and analyzed carefully to ensure that any claims for coverage are promptly submitted. As we have discussed throughout this series, many landlords and tenants are reevaluating not only how they do business in uncertain times, but how they structure their leases in order to ensure that their properties and their businesses can remain economically feasible in the future. Do you have further questions about commercial lease negotiations? Brandi Kerber, Victoria Dutcher, and members of Larkin Hoffman’s real estate team are available to answer your questions. You can reach Brandi at 951-896-1543 or bkerber@larkinhoffman.com and you can reach Victoria at 952-896-3305 or vdutcher@larkinhoffman.com.

September 18, 2020

Commercial Lease Negotiations

Commercial Lease Negotiations in Uncertain Times: Market Trends Surrounding Property Improvements Part 2

In our last post we welcomed the following guests to introduce themselves, to share advice they are currently offering to clients as they navigate the COVID-19 pandemic, and to share their initial observations surrounding property improvements as some businesses are beginning to re-open their doors to employees, customers, and clients: Ericka Miller, Senior Vice President at KimbleCo Heather Weerheim, Director of Business Development at Greiner Construction Shari Bjork, Principal at DLR Group Abigail Heimel Peterson, Healthcare Team Lead, Gardner Builders In this post, we continue the conversation surrounding property improvements with Ericka, Heather, Shari, and Abigail. More specifically, we will hear about the wide range of changes currently being introduced to existing spaces, as well as the long-term changes anticipated in the coming years as a reaction to the COVID-19 pandemic. What changes are property owners considering or implementing with respect to office design and open workspaces? Ericka: What we have heard from business leaders, heads of real estate, national property managers and landlords is that they will follow local, state and national health guidelines and expect occupants to follow along. Because there isn’t a one size fits all approach, many are working hard to get plans back in place that are specific to their property and the health situation in their particular geography. Most notably we have seen: Notices as to distancing expectations within the building common areas New pathways with one way in and one way out Capacity requirements in elevators and other small spaces No gatherings in common areas Increased cleaning in general but especially in high touch areas Review and potential changes to their HVAC systems airflow and filtering practices. Limiting space capacity at first and then allowing more people in overtime Have changes to scheduling of employees, such as staggered work shifts and increased use of home offices, resulted in any unique challenges or improvements to commercial space? Ericka: It has certainly accommodated the need to provide physical distancing to those that are coming into the office. Having fewer people allows for more space per person and supports physical distancing. Because of the unknown future it is challenging for businesses in the short term to make decisions about space needs and, in particular, how much space they will need in the future. Heather: We have been able to navigate this challenge of working from home rather quickly. The only noticeable change would be a lag in communication time early on. Internet issues, distance learning and other distractions while at home caused some delays in communication which can affect construction schedules. Post-pandemic, what pandemic spurred changes do you anticipate will continue to be integrated into the design of commercial spaces? Ericka: We have been doing a lot of listening to business owners and leaders – it seems the concept of high-efficiency space (meaning more people in less space) will take a back seat to the concept of proper spacing. This may get done through either expansion or simply having people/workgroups work in a more flexible way on different days or weeks which can be accommodated by the space tenants have today. While we, like everyone else, are hearing great things about work from home scenarios, there are many who simply can’t make this work at all times and strong collaboration still needs to take place in person. It seems that the focus on wellness we were seeing in the years preceding the pandemic has taken off – really focusing on the health of the inhabitants of the building, not just the sustainability of the systems within a building. WELL building standards that focus on 7 key areas (Mind, Comfort, Fitness, Light, Nourishment, Water & Air) are key to human health and we may see a renewed interest in this type of programming even if just in concept without actual certification. Finally, we are seeing a lot of innovation happening that would seem to be beneficial post-COVID. Shari: In the future, we believe people will continue to work from home some of the time, but final percentages will vary by industry and job function. As the percentage of remote workers approach 50% or more, companies may consider shared desking, which may require a reconfiguration of space and allow a possible reduction in square footage. Emphasis on space designed for workstyle or work modes will be important as we encourage ‘quality time’ in the office, attracting individuals and teams into the office for planned interaction and team-based work. People’s personal health and safety will continue to be a driver post-pandemic, which will push innovation in how space is designed and the products we specify for the built environment. Current social distancing guidelines will influence how much space we allocate to various functions, as well as how space is configured and furnished. We are already seeing changes being made to building mechanical systems and more importance put on the monitoring of indoor air quality. In addition, there are new products being researched and launched weekly, everything from anti-microbial materials, to rethinking elevator design, voice automated controls, and even American Standard is rethinking how bathroom fixtures can be designed to be safer. Heather: Some of the things we’re expecting to see are as follows: Conference rooms equipped for better communication via web-based meetings Redesign of open office environments Stricter guidelines for use of amenity spaces and/or a complete redesign Enhanced HVAC design and air filtration Abigail: Could you imagine a year ago having conversations about how we could most effectively utilize the flow of a parking garage to deliver care to patients at a clinic? Or who could have imagined how quickly the shift to telehealth in so many disciplines would become possible? I think we will continue to see a transition from the use of spaces and technology once seen as temporary to a new normal full of hybrid care delivery and creative design solutions. What is one of the most innovative or surprising changes you have seen to commercial space arising out of the pandemic? Ericka: Innovation around wellness kiosks is an interesting change we have seen; the ability to assess temperature and wellness as employees enter the workplace. Another innovation, indoor air quality systems and products that purify the air to remove airborne particulates and pathogens has been a study that will hopefully go well beyond the pandemic to benefit all building users for years to come. Shari: I don’t think we’ve seen anything too innovative that has been implemented at this point. Both within DLR Group and the broader industry, COVID-19 has catalyzed really positive discussion about the future of workplace design. We are gathering data through our own surveys, and primary and secondary research, as well as through collaborations with our academic partners about the future of buildings, systems, public space and interior environments. Most organizations are currently thinking about the short-term safety and health of their employees and the public. Coming out of the pandemic, this is a real opportunity to think about the overall well-being of a space’s occupants and how we measure the success of our real estate based on its value and impact on both the individual and the organization, versus measuring real estate on the basis of square footage per person. Heather: One of the most innovative methods for bringing staff back into the office is the use of QR codes. Our larger corporate clients are using QR codes in the open office environment to share data and scan to reserve a workstation. I’m surprised by the companies that have announced that their offices are not reopening until 2021. Who knows, they could be working on a complete redesign and preparedness plan in the background, however, if they believe that employees will be able to work in the same pre-pandemic environment come 2021, they will be mistaken. Abigail: I wouldn’t call this entirely surprising, but over and over again we have seen the need for physical space to come together as teams inspired by our basic need for connection. Remote working and staying home when we needed to has proven to be entirely possible, but the need for space to come back together in whatever amount is most comfortable will likely always be there. I saw this in my own team and consistently talk about it with clients. We may never go back to the way things were, but the new normal still require a place to be together and collaborate. Thank you again to our blog contributors for sharing their insights and experience with our readers! As we’ve learned from the last two posts, commercial spaces are already changing and will likely continue to look very different than they did prior to the year 2020. Additionally, while work-related values may stay constant, companies will need to be nimble and creative in their approach to property and the incorporation of possible improvements. Coming Up Next In our final post, we will wrap up this blog series with a discussion surrounding a variety of lease provisions that both landlords and tenants may want to take a close look at in light of the pandemic and civil unrest.

September 3, 2020

Commercial Lease Negotiations

Commercial Lease Negotiations in Uncertain Times: Market Trends Surrounding Property Improvements

In our previous post in this seriesCommercial Lease Negotiations in Uncertain Times, we discussed the concept of improvements to existing leased premises. In this post, we are continuing our property improvement conversation and have invited experts from the industry to speak to anticipated market trends surrounding property and design improvements in commercial spaces. We are thrilled to welcome the following guests: Ericka Miller, Senior Vice President at KimbleCo Heather Weerheim, Director of Business Development at Greiner Construction Shari Bjork, Principal at DLR Group Abigail Heimel Peterson, Healthcare Team Lead, Gardner Builders What is your current role and how has the COVID-19 pandemic impacted your day-to-day work? Ericka: In my role as Sr. Vice President at KimbleCo – a certified, woman-owned, full-service commercial real estate firm in the Twin Cities Metro – we have felt the impact on our day to day work schedule over the last 6 months. Covid-19 has impacted our work mostly in not being able to meet in person very often with our clients, prospects and colleagues. However, business is still moving forward and since our team has worked mostly virtually for 10 years or more, we feel it has been easier for us to pivot – we have been fully set up to work from our home offices for some time! The hardest part is having very limited in-person time with our clients. Shari: My primary responsibilities are with DLR Group’s Workplace studio as a Client Leader, Project Manager and Senior Interior Designer. DLR Group is an integrated global design firm with 1,200 employee-owners in 29 offices across the country and internationally. I am based in the firm’s Minneapolis location. Like most professional services firms, we have been working from home since mid-March and fortunately, we were fully prepared as a company to make that transition. Prior to COVID-19, I spent a significant portion of my workdays in face-to-face meetings with clients, as well as in internal collaboration sessions with project teams. As we began working from home, those activities shifted to 100% virtual engagements using Zoom and Microsoft Teams – both of which I had already been using – as the primary communication platforms. The most significant impacts have been on how we collaborate with clients and internal design teams. The firm introduced some additional technology tools to support collaboration (which I have had to learn), and I rely more heavily on Microsoft Teams to chat with and mentor team members throughout the day. In recent weeks, I have started meeting with some internal teams back at the office and have my second in-person client meeting next week. We have made collaboration and mentorship over virtual platforms work, but it cannot replace the efficiency and value of meeting face-to-face for some aspects of our process. Heather: My current role is Director of Business Development and the COVID-19 pandemic has impacted just about every aspect of my day-to-day work. My main job is to cultivate new business partnerships and maintain existing ones. Connecting with people when social distancing as recommended has been difficult, to say the least! I’ve found creative and safe ways to connect with people. Abigail: As a project manager and market sector leader in healthcare, this has been the most challenging few months of my career. My day-to-day work focusing on construction projects inside clinics and hospitals has either stopped completely or accelerated dramatically. No two days are ever the same. How has your company had to pivot to adjust to the everchanging conditions caused by the COVID-19 pandemic? Ericka: We have been set up well to work from home for years and while many of our clients (local and national) have had the capability – they haven’t had the experience of navigating the waters of communicating with their landlords, tenants and/or vendors through something like this, so our first order of business was to reach out back in March to check-in to see how we could help. We have really worked hard to learn as much as we can about health and safety in the workplace during a pandemic so we can be better advocates for our clients. The good news is that we have been seeing the continuing need for space even if it looks different going forward. Shari: DLR Group was well-positioned for the shift to work from home (WFH). Pre-COVID, we had already upgraded our technology and migrated our servers to the Cloud, so access to electronic files and information was seamless. As a global firm, our team members already were able to work remotely and across geographies. We had been using Zoom as a meeting platform for years. I was already working with one national client primarily via Zoom and other technologies, so figuring out how to work with and deliver projects on a virtual platform was not a big deal. Early in the pandemic, our firm implemented a regular communication strategy to keep employees informed and connected via our intranet, virtual all-staff town halls, and smaller team meetings. As the weeks progressed, the firm developed new protocols for return to the office, addressing sanitization, circulation, use of common areas, masking, registration upon entry, etc. We assigned liaisons in each office to assist, and these protocols have evolved as needed over the past few months. Like many organizations, the biggest issue we face is how to maintain a strong culture, how to collaborate and how to mentor virtually the longer we stay in a WFH mode. We’ve introduced some exciting new design, collaboration and process management tools and software to help with these challenges, but virtual interaction has its limitations. The physical workspace helps us connect on a level that can’t be replaced by Zoom or Microsoft Teams. Heather: Greiner Construction’s business plan is flexible and market sectors adaptable as we navigate our way throughout the COVID-19 pandemic. While one market sector is flat because of short term lease renewals another is expanding because of the cost to borrow money. We remain optimistic during this time because of our multiple markets and lean business model. One of the pivots we made was to rethink our process in both the office and the field to keep our employees, clients and subcontractors safe. We needed to pivot quickly since Construction was deemed essential when the stay at home order went in effect in March. On the job site, we developed a preparedness plan which continues to evolve, we mobilized signage stating our new procedures and hand sanitation stations. In the office we’ve adjusted how we connect with each other, our clients and sub-partners given most are working from home. Abigail: For our office staff, we were able to pivot pretty seamlessly to remote working. We started by having an all-company check-in meeting via Zoom twice a week and gradually tapered them off as we adjusted. Overall, it has been a group effort to stay connected and continue to be nimble finding ways to deliver projects. The field staff had the incredibly challenging task of keeping up with ever-changing safety guidelines to keep everyone on site safe and healthy. As local and national businesses are bringing employees back to work and/or opening their doors to customers and clients, what are some of the changes you have seen implemented to increase safety in workplaces? Ericka: We have had the privilege of being in several different networking groups (some as often as weekly) with heads of real estate and health and safety leads of large national and even global companies who are brainstorming on this very subject. Some of the changes we have seen include: Bringing people back in waves (20% then 40% then 60% and so on to make sure they can control any outbreaks if they happen) but also many are deciding not to go back at all in 2020 Having a plan in place for a full return to working virtually should an outbreak occur Increased cleaning in high touch areas Capacity controls Increase in touchless devices Adjusting company policy to allow for checks on the wellness of employees returning to work, use of company common areas and rules for PPE New ways to deliver great customer service and product delivery in a safe way Shari: Protocols: Most businesses have implemented new protocols that address density, safety, sanitization, circulation, visitor protocols and personal protection. Workplace Modifications: All businesses and industries are not the same. We’ve seen and assisted clients with a variety of responses based on the conditions of their pre-COVID workplace. Whether they own or lease their space is a factor, as is when and how their employees will be returning to the office. Modifications have ranged from minimal to significant. On the more minimal side, we have assisted clients with updating plumbing fixtures to be touchless, added some barriers where social distancing is more difficult to achieve, or made minimal changes to workstations, meeting, and social spaces. For other clients, we’ve reorganized their entire open office to decrease density and achieve proper social distancing. On the more significant side, we have been assisting clients with rethinking their entire approach to the future workplace—which could result in a reduced real estate footprint and/or the allocation of square footage to support primary activities that will bring people back to the office either full or part-time. Indoor Air Quality: A component of our business is High-Performance Design and Engineering, and indoor air quality is an extremely critical component to controlling the spreading of disease. Understanding that all properties are in a different starting place, we have developed strategies for property landlords and end-users that help with filtering air, circulating air, and sanitizing mechanical equipment. Heather: We have been requested by many of our clients to provide plexiglass barriers at reception desks and at furniture stations with walls that don’t provide proper protection from employees. Many are working in staggered shifts or are not coming back to the office at all until 2021. Abigail: The biggest changes we are seeing are the touchless entry and exit procedures along with adding directional signage. Restrooms and breakroom areas have also required many adjustments to reduce contact between employees and implement more cleanable materials. What is the most common advice you find yourself offering your clients during these unprecedented times? Ericka: The most common advice we are giving our clients is to communicate early and often and be prepared for hard conversations with your tenants, landlords, property managers, etc. Rely on your broker to help with those conversations. Be prepared to show how your business has been affected. If your business is suffering, speak with your lender, attorney and accountants for advice on programs that may be able to help get you through this. Finally, do your absolute best to work with instead of against others during this time – the outcome will be so much better! Shari: In the short term, the solution to the problem is multi-faceted. It is important to consider a toolkit of solutions that include new workplace protocols; intensified cleaning and ongoing sanitization; enhanced HVAC system modifications; and touchless features in high traffic areas such as entries, lobbies and restrooms. Furniture and workspace modifications may be necessary to accommodate new protocols and density. Bigger picture, if a client is considering making long-term changes to their workplace or real estate, make sure those changes are human-centric and future-focused while respecting current health and safety concerns. Employees are an organization’s number one cost, but also their number one asset. Understanding “why” people are going to come back to the office should be the driver behind any significant changes and expenses outside of short-term safety. We are often re-visiting with our clients what happened after 9/11 as a comparison of not reacting too quickly. When 9/11 occurred, there was a lot of talk around organizations moving out of major metropolitan areas, no high-rise buildings would ever be built again, etc. The reality nearly 20 years later is that the real changes happened around security, not real estate. People are going to come back to the office, but the reasons and durations will be different, therefore the workplace will look different. We need to make sure the future workplace is flexible and resilient so it can support continued change and the physical and mental needs of the people who occupy the space. Heather: My personal advice is to allow yourself and others grace during unprecedented times. Unfortunately, you have no control over a global pandemic, until you accept this, it’s going to be an uphill battle every day. Abigail: In medical office buildings specifically, I have had numerous conversations with clients about air quality, air exchanges, and how existing systems can be adjusted. The best advice I can give is to consult HVAC experts and get to the bottom of what you really are trying to accomplish. Increasing the amount of air going in and out of a room can only go so far and you are pushing the limits of the base building units that serve many spaces. You cannot ‘virus-proof’ the air in an office building, but you can make a series of small adjustments to many systems and protocols to create a healthy a safe space everyone can feel comfortable in. Coming Up Next Next week, we will continue the conversation surrounding property improvements with Ericka, Shari, Heather, and Abigail.

August 20, 2020

Commercial Lease Negotiations

Commercial Lease Negotiations in Uncertain Times: Improvements to Existing Premises

This is the second post in a series of blog posts on the topic of commercial leasing during these uncertain times. Throughout the summer this series will explore a number of commercial leasing related questions raised by both commercial landlords and commercial tenants. Now that we are five months into the COVID-19 pandemic, the majority of us have come to terms with the fact that the pandemic is going to define the year 2020 and that even after there is a vaccine or treatment, the impact of the pandemic will continue to resonate in some areas of life for years. It is unlikely that during our lifetimes travel, restaurant dining and shared office spaces will ever truly look the same. While businesses have implemented quick solutions in office spaces ( “stand here” stickers, hand sanitizers in common areas, and limited capacity in meeting rooms and dining areas) to encourage healthy habits and decrease the risk of transmission to clients, customers, and employees, businesses are now beginning to consider what additional large scale changes need to be made to their office space in order to create a sense of comfort for those who visit and work in those spaces. Spaces that are developed post-2020 will likely look and operate in a significantly different way than those built and designed pre-COVID-19. In addition to personal offices looking significantly different, common areas like lobbies, restrooms and mailrooms will likely be more spacious to allow individuals to keep their distance if they so choose. Advanced air filtration systems, touchless sensors for doors and touchless bathroom faucets, soap dispensers, and paper towel dispensers will also likely be considered the norm in newly developed tenant spaces moving forward. While newly planned and designed spaces will be a hot topic in the months and years to come, this blog post is aimed at answering questions related to improvements to existing spaces. This blog post seeks to explore the concept of improvements to existing leased premises and common areas in light of the COVID-19 pandemic. More specifically, we will identify some of the most common improvements being requested by tenants, discuss payment options for these improvements, and look at ways that landlords can modify existing space and leases in order to attract future tenants and retain current tenants. What common improvements and changes are being requested or considered in light of the COVID-19 pandemic? In order to reopen for business or to comply with current Executive Orders, landlords and tenants have made changes to existing space focusing on the safety of clients, customers and employees. Some of these changes are permanent and some are temporary modifications which will remain in place until they are no longer needed or until more permanent solutions can be implemented. Some landlords have increased janitorial services, access to hand sanitizer, and cleaning products both in common areas and within the premises to help prevent the contamination of common touch points. Tenants are implementing measures to provide social distancing in leased spaces and are looking to landlords to provide guidelines for building wide social distancing in walkways, elevators and other common areas. In addition, some tenants are seeking the installation of additional touchless options in restrooms and other high traffic areas. In office settings, they are seeking ways to separate cubicles and work spaces and provide other barriers to provide safe working spaces for employees. Some tenants have looked to landlords to provide additional space for conducting business, such as use of building conference rooms and other common areas located outside of the tenant’s space for meeting with clients. Some restaurants and other food establishments have sought additional outdoor space to allow social distancing for customers. Tenants are also becoming more aware of air filtration and what can be done to provide safe filtration. Many businesses have also adopted policies for health screening and have posted signs and information to encourage social distancing, hand washing, and mask usage. In cases where utilities are supplied only during specified operating hours under the lease, some tenants may need landlords to modify the operating hours to accommodate increased operating hours to allow for staggered shifts with increased social distancing for employees. How can landlords and tenants come to an agreement regarding payment for these improvements and changes in operations? Landlords often provide improvement allowances at the commencement of a lease. They also may offer an improvement allowance in connection with a renewal of a lease or in the case of an expansion of the premises. But what happens when a lease renewal is not imminent and an expansion is not needed? While landlords may be reluctant to provide an allowance for improvements without some concession from tenants, some improvements to the premises or common areas in light of the pandemic will not only benefit existing tenants and increase the likelihood of such existing tenants renewing their lease but will also make the property more marketable for future leasing or sale of the property. Accordingly, landlords and tenants will both need to evaluate what modifications are needed now and whether those modifications will benefit one or both parties. Who pays for any modifications will depend on the terms of the lease and will likely require some negotiation of lease terms between the landlord and tenant. Landlords may be able to accommodate some requested modifications at landlord’s initial cost and recoup such costs from the tenant through common area maintenance provisions under the lease depending on the terms of the lease. Landlord’s will be more likely to contribute to costs that will have long term economic benefits to the landlord either through the ability to obtain higher rent or making the property more marketable for future tenants. How can landlords modify their properties in order to attract future tenants or retain current tenants? As discussed above, there may be modifications that landlords can make to their buildings today, including touchless options, that will not only help retain existing tenants but will make their properties more marketable in the future. With the increased risk of contracting COVID-19 when in enclosed spaces, many property owners are looking at what can be done to

August 3, 2020

Commercial Lease Negotiations

Commercial Lease Negotiations in Uncertain Times: Rent Abatement and Rent Deferral

This is the first in a series of blog posts covering the topic of commercial leasing during these uncertain times. Throughout the summer, this series will explore a number of commercial leasing related questions raised by both commercial landlords and commercial tenants. The COVID-19 pandemic has impacted businesses across all industries in disparate but equally challenging ways. Some businesses have faced the challenge of figuring out how to transition their employees to remote work, while others have had to decrease the size and scale of their in-person operations in an attempt to safeguard their employees and customers. Other businesses have been required to shut their doors completely for extended periods of time. These shifts in business-as-usual have left both commercial landlords and commercial tenants with questions about how best to sustain their businesses and maintain long-term financial stability. As commercial landlords and tenants consider cost-saving and sustainability-focused measures, rent deferrals and rent abatements have been and continue to be explored as possible solutions. The following aims to describe some options landlords and tenants can pursue to remedy defaults in the payment of rent due to a loss of income during the global pandemic and periods of civil unrest. We look at the difference between rent abatement and rent deferral, explain how to pursue one of these options and provide creative solutions to commercial rent related issues. Common Questions Related to Rent Abatement and Rent Deferral 1. What is the difference between rent abatement and rent deferral? When rent is abated under a lease, the tenant is not obligated to pay and the landlord is foregoing the right to receive the rent or a portion of the rent for a specified period of time. Once the period of abatement ends, the tenant resumes payment of rent pursuant to the terms of the lease. While rent is typically not due during an abatement period and not tacked on to the end of a lease term as a deferral may be, there may be times in which abated rent is required to be repaid by the tenant. For example, the lease could require repayment upon a breach of the lease by the tenant. On the other hand, when rent is deferred for a period of time, the payment of rent remains an obligation of the tenant payable by the tenant at a future date. While rent abatement is preferable to a tenant and rent deferral is preferable to a landlord, there are creative solutions that can be incorporated into leases to make rent abatement and/or rent deferral work for both landlords and tenants which we discuss below. 2. How does a tenant or landlord go about seeking one of these options? Negotiations related to rent abatement and rent deferral can take a number of different forms. Landlords and their tenants can work with each other directly or can involve their real estate brokers or attorneys an order to work through potential rent related negotiations. Regardless of the specific terms agreed to by a landlord and tenant, it is important to work with your real estate attorney to memorialize newly negotiated rent terms in an amendment to the original lease rather than relying on informal email exchanges or phone calls. Proper documentation is important to ensure the terms related to the agreed upon rent abatement or deferral are enforceable and are consistent with the lease and any previous lease amendments. 3. What are some creative solutions to commercial rent related issues? There is no one solution that works for all tenants or for all landlords. However, rent abatements and rent deferrals are some of the options being pursued by tenants and landlords. So how do we make one of these works when tenants prefer abatements and landlords prefer deferrals? First, let’s look at rent abatement. A landlord may be open to a period of rent abatement with some additional benefits for the landlord included. One possibility would be to allow for an abatement with the current term of the lease extended for a period consistent with the period of the abatement which may or may not be at a higher rental rate. Another option may include an early exercise of a renewal option in exchange for rent abatement. This could be beneficial to both parties. If these options aren’t feasible, are there other terms of the lease that could be negotiated in exchange for the rent abatement? These other negotiated terms could be either monetary or non-monetary. Next, let’s take a look at rent deferrals. A deferral of rent could give a tenant the time that the tenant needs to increase its production and alter its business to be successful in the new normal. However, rent deferrals can be scary for a tenant that is not sure they will have the money to pay the deferred rent when it becomes due. There are multiple ways deferred rent can be structured to help alleviate some concerns. Deferred rent could be paid in multiple payments over an extended period of time or it could be paid in a lump sum at the end of the lease. Another option would be to tie repayment periods to certain financial metrics. Landlords and tenants can also look at whether there are things that can be done to help with tenant’s success moving forward to help ensure deferred rent will be able to be paid when it comes due. Are there improvements or modifications to common areas that are needed in order for the tenant to reopen or increase business safely? While rent abatement or rent deferral may provide needed relief now, both parties need to carefully evaluate and consider whether the relief being negotiated is going to work for the parties in the long term. A landlord will need to consider the tenant’s financial performance (including projected performance), evaluate long term risk of future default, comply with any lender obligations or restrictions with respect to modifications of lease terms, and evaluate their own cash flow. A tenant will need to carefully consider any long-term impacts COVID-19 and the civil unrest will have on its business operations and financial performance, whether any negotiated relief now is going to have long term negative impacts in the future and, if so, what can be done to mitigate such impacts. Coming Up Next Our next post in this series will address improvements to premises and common areas in light of recommendations for employee and customer/client social distancing.

July 16, 2020

Commercial Lease Negotiations

Commercial Lease Negotiations in Uncertain Times: Introducing New Blog Series

As the COVID-19 pandemic and civil unrest have swept through the United States, we have been presented with novel challenges and uncertainty in nearly all aspects of life, including commercial real estate. The world of commercial real estate, dominated as it is by highly-individualized leasing arrangements, has always presented real estate attorneys with unique leasing questions, but now we are seeing landlords and tenants seek legal advice and assistance with even more new and unanticipated leasing challenges and questions. While the real estate market continues to operate with many of its usual and somewhat predictable economic forces intact, it has become clear in recent months that the current global pandemic, and the possibility of such a threat to public health and economic activity in the future, along with the current civil unrest will persist among those forces that will have an impact on the real estate market and both new and existing leases. Rather than a brief detour from life as usual, the first half of 2020 is beginning to define a new normal, and we aim to shed light on this emerging paradigm shift in the commercial real estate industry through a series of blog posts focused on lease negotiations in these uncertain times. This paradigm shift is, broadly, a reaction to the economic, social, and public health implications of the COVID-19 pandemic and civil unrest arising out of racial and other inequalities in our society. We have helped landlords and tenants in the United States adapt on an individual level by addressing various leasing concerns including loss of income and rents arising out of government-mandated closings and needed modifications to space and common areas to comply with government-mandated restrictions and to create a safe environment for employees and customers. Even as various states, locales, and individual businesses resume a semblance of normal operations, it is evident that these novel circumstances raised by the initial disruption are impacting the vast majority of existing landlords and tenants and are impacting current leases and will come to dictate future leasing arrangements. In light of the current uncertainties and unprecedented changes in the industry, tenants and landlords are looking for ways to modify existing leases and prepare new leases that not only address impacts that the pandemic and civil unrest have had on their businesses to date, but that also address the uncertain future we are facing. In this series, we will look at lease negotiations to address a variety of questions and concerns that have been raised by both landlords and tenants. What options does a landlord have when a tenant fails to pay rent during periods of mandatory closing? How can leases be revised to address the loss of income during the global pandemic and periods of civil unrest? What should landlords and tenants be negotiating with respect to improvements to the premises and common areas in light of recommendations for social distancing? Does the force majeure clause in a lease provide any protection and, if not, should it be revised? We will explore these questions and more throughout this series. Our first post will address negotiations of lease revisions to address rent payments (including abatement or deferral of rent).

July 2, 2020

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Brandi S. Kerber

Twin Cities Industrial Market Remains Strong

Commercial Lease Negotiations in Uncertain Times: Series Final

Commercial Lease Negotiations in Uncertain Times: Market Trends Surrounding Property Improvements Part 2

Commercial Lease Negotiations in Uncertain Times: Market Trends Surrounding Property Improvements

Commercial Lease Negotiations in Uncertain Times: Improvements to Existing Premises

Commercial Lease Negotiations in Uncertain Times: Rent Abatement and Rent Deferral

Commercial Lease Negotiations in Uncertain Times: Introducing New Blog Series

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