By the end of the 1980s, almost half of the office buildingsthat existed at that time were constructed during the previous tenyears. When leasing space in new office buildings, it waseasy for tenants to understand that they would not likelyexperience significant pass-throughs of capital expenditures. Why? Because the majority of those buildings were new,and even in a poorly conceived or constructed building, atenant had a reasonable expectation that at least for thefirst few year of its lease term, substantial capital improvementswould not be required.

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Another interesting trait of the 1980s was that every thirddentist became a real estate developer over night. And, manyof us have heard of those stories where buildings were sohorribly constructed that they immediately started falling downaround their tenants. Thank you cheap money and speculativeconstruction!

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Those shiny new office buildings had brand new elevators,HVAC systems, electrical and safety systems, facades and parkinglots. Their tenants, not expecting to bear the financialburden of major capital improvements, negotiated their leasesby restricting their landlords from passing through suchcosts. Landlords, who also recognized that theirbuildings would not likely require immediate capital re-investment,most often agreed to such restrictions.

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That was in the 1980s....30 years ago! Now, thosebuildings are mature, the warranties on their roofs, windows,elevators, HVAC systems, parking lots, and other infrastructure andcapital components have long since expired. Replacements ofcapital items have been made once, twice, or more (at least inbetter run buildings!), in order to properly maintain functionalityand service levels. That's the nature of buildings...as theirsystems wear out, and they will wear out, those systems must bereplaced.

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Because of how leases were negotiated in the past, under theterms of such older leases, replacement of major systems and theassociated costs fell to landlords. Now, with officebuildings maturing and the expectation that building systemswill require on-going replacement over time, should landlordscontinue to be responsible for these significant costs? Should those costs be passed onto tenants? Should bothparties share these costs? Should those costs be handleddifferently for existing and renewing tenants versus newtenants? Who is rightfully responsible?

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What do you think?

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Follow me at http://Twitter.com/RealStrat

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Where is Andrew Zezas?

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Check out '2010: More Business,Now!'

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Copyright Real Estate Strategies Corporation 2010. AllRights Reserved.

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