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February 2003
Maximizing Buying Power
Source: Austin Business Journal
http://www.bizjournals.com/austin/stories/2003/03/03/story7.html
 
The Austin office of software company Misys Healthcare Systems LLC soon will move into nearly 28,000 square feet of Class A offices overlooking the Hill Country in Far Northwest Austin.

Although the space at River Place Pointe was marketed as a sublease from eLoyalty Corp., brokers for Misys worked out a five-year lease directly with landlord FIC Realty Services Inc.

Gary Bromberger, director of real estate management at Misys' headquarters in Raleigh, N.C., says the company looked for a sublease to "maximize our buying power." ELoyalty's River Place Pointe offices met that goal by providing furnishings, an existing computer room, data cabling, and a sublease rate that was less expensive than direct deals in the area.

Although the goal was to sublease, Bromberger says, the final direct deal removes the master tenant that would have been a middleman in the contract.

"We were very lucky that the FIC folks would let eLoyalty buy out of the lease," Bromberger says.

Tim Casey, senior vice president at FIC Realty Services, says the landlord is pleased to recruit Misys as a tenant.

"River Place was fortunate and eLoyalty was fortunate to have a tenant with Misys' financial strength and growth prospects interested in taking the space," Casey says.

Misys Healthcare Systems makes software to help health care providers manage their practices and process insurance claims. It was formed last year through an internal merger. The company has about 100 employees at 4301 Westbank Drive.

Broker Mike Wiley of Stanberry & Associates Inc. represented eLoyalty in the deal. Misys' broker was Jon Christenson in the Atlanta office of Julien J. Studley Inc., assisted in Austin by broker Michael Buls of Buls Hodge Consulting.

"They had a little less than two years left on their lease," Buls says of eLoyalty. "Their decision was to cut overhead and buy out their existing lease so that Misys could have a direct deal with FIC."

Brokers say a few landlords have agreed to similar transitions that give a would-be subtenant the peace of mind that a direct lease provides, removing the risk of losing space because of a default by a master tenant.

Other examples include real estate brokerage CB Richard Ellis Inc.'s move last year into the Barton Skyway office complex on South MoPac Expressway after landlord Prentiss Properties agreed to a direct deal in space formerly offered for sublease by Vignette Corp.

Casey declines to discuss details of the Misys lease, but other landlords say they generally won't do direct deals on sublease space unless someone pays to cover the obligation remaining on the original lease. In most cases, the master tenant is asked to pay the difference between its obligation and what the new tenant will pay.

Jamil Alam, principal of Trammell Crow Corporate Advisory Services in Austin, says landlords agreeing to make a direct deal with a company that would otherwise become a subtenant do so for one of two reasons. Either one of the parties involved agrees to pay the remainder of the first tenant's obligation or, in the other circumstance, the landlord might feel the new company is less likely to default on a lease than the current tenant.

The latter circumstance is rare because it entails a diminished return for the landlord.

"You would typically see a landlord write a direct lease [at a lower rate] in an instance where the landlord was concerned with the underlying credit of the sublessor, and the prospective subtenant had the same concerns," Alam says.

When the landlord and the new company share doubts about the master tenant's ability to maintain its lease obligation, the landlord might choose a new deal even at a lower rate as a way to reduce the risk of a tenant default.

"It's a bird in the hand," Alam says.

Sources familiar with the Misys lease say eLoyalty agreed to pay the difference between the new occupant's lease rate and eLoyalty's obligation.

But with an office market offering more than 8 million square feet either directly or for sublease, brokers say landlords are becoming more cooperative and flexible in making changes to existing leases to retain or attract tenants.

A good example is a deal said to be on the negotiating table between Equity Office Properties Trust and two of its Austin tenants.

Equity executives decline to comment, but sources say the landlord has offered to move Austin law firm Hilgers & Watkins PC from space the company recently renewed a lease for at San Jacinto Tower to 111 Congress Ave. if Hilgers merges with Austin law firm Brown McCarroll LLP. Managers of the firms confirm merger discussions. Brown McCarroll already is an Equity tenant with about 80,000 square feet at 111 Congress.

Brokers say a landlord might not be so accommodating in a tighter market. Moving Hilgers out of San Jacinto tower might help Equity retain more tenants than the two mentioned, however.

Hilgers shares half a floor in San Jacinto Tower with Thompson & Knight LLP, another law firm that is in the market for new digs in part, sources say, because it didn't expect to be able to expand that half floor to a full floor. Moving Hilgers might give Equity the carrot it needs to keep all three firms in Equity digs.


Email MATT HUDGINS at (mhudgins@bizjournals.com).


Sage Advisory Services, Ltd.
The Buls Hodge team was accurate, dedicated, and professional in fulfilling our company's real estate needs. We couldn't have asked for a better firm to represent us in such a critical decision in our company's expansion.
- Richard Williams, Vice-President of Operations

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