Challenge
Medical Mutual hired Allegro as its tenant representative to determine whether or not they should renew their current lease in Strongsville, Ohio, or move to a new location. The client had been subleasing the 120,000 square foot building for about seven years and due to the sublease terms and conditions, was paying a well below market rent. The master lease was going to be expiring and Medical Mutual would be faced with paying significantly higher rent and operating expenses if they stayed in place. The owner of the building, a Tenant in Common (“TIC”) comprised of 27 different individual owners, had a large amount of debt remaining on the commercial mortgage backed security (“CMBS”) loan and needed to refinance. In order to do so, the TIC needed Medical Mutual to commit to a long lease term extension. However, they desired the flexibility that a shorter term lease provided.
Solution
In an effort to determine if the current space was even still suitable for Medical Mutual’s needs, Allegro spearheaded an architect selection process. At the conclusion of this filtering and vetting process, the client hired an architect to conduct a programming and planning study to determine whether the current building was operationally efficient and whether it could be redesigned in such a way to better suit their needs. The findings revealed that a significant amount of work would need to be done with the current space in order to achieve the objectives. Another key outcome of this study was that Medical Mutual could fit these employees in much less square footage if a more efficient building could be located. Armed with this information, Allegro conducted negotiations with the TIC and also led the client through a full tenant representation process to find additional options in the marketplace.
While continuing to communicate and negotiate with the TIC’s representatives, Allegro identified, among other locations, an 88,000 sq.ft. office building in Strongsville that could more efficiently accommodate the client’s space requirements and required significantly less construction. The building was being marketed for sublease as the existing tenant had been acquired and this location was being relocated. Allegro recognized that a lease directly with the master landlord would benefit Medical Mutual more than a sublease, which would neither provide the amount of lease term desired nor maximize a tenant improvement package to upgrade the building. Accordingly, Allegro facilitated discussions on a three-party transaction. The landlord and existing tenant came to agreement for the tenant to buy-out of its remaining lease obligation at a discount. The landlord then could use a portion of those proceeds to upgrade the building and offer Medical Mutual a market-based tenant improvement package. As such, the client would enter into a lease directly with the landlord, which also allowed for a shorter lease term and the flexibility they desired.
When it became clear that the TIC would not be able to put a compelling offer on the table due to its financing situation, Medical Mutual executed the transaction Allegro had negotiated to relocate. The new, much more efficient building offset the below market sublease rent that the client was paying at the previous facility. This solution not only met Medical Mutual’s financial objectives, but also the qualitative objectives, mainly staying within the City of Strongsville and having lease term flexibility.
