In January 2023, a new management company took over one of Chicago’s oldest and most important buildings, the 92-year-old Chicago Board of Trade building. It was part of a deed in lieu of foreclosure, which means the original owners gave the building to the new owners to avoid defaulting on debt—in this case, more than US$256 million. Building owners utilize deeds in lieu of foreclosure when their buildings have generated more debt than income or more debt than the property is worth.
“This [action] reflects what is happening in many commercial office buildings around the United States,” said Michael Wilson, president and CEO of AFFLINK, a network of more than 300 jansan distributors throughout the country. “For cleaning contractors, the term ‘deed in lieu of foreclosure’ is just one of many terms they need to know as the commercial real estate industry struggles to find its way in a new and much more challenging commercial office building environment.”
What you don’t know can hurt you
Knowledge of commercial real estate, financial, and legal terms is useful when building service contractors (BSCs) submit bids for cleaning larger properties. When a building switches ownership due to its financial health or foreclosure, the new owners or managers may not be obligated to honor past contractual agreements or may want to make changes to the agreements.
“The unfortunate factor for the cleaning contractor maintaining this facility is that the need for their services may change or decline with the change of ownership,” said Wilson. “In a worst-case scenario, the [cleaning] contractor’s services may no longer be needed at all.”
There should be no surprise this is happening. During the pandemic, employees started working at home, and now many want to keep it that way. These remote workers occupy their old workspaces one to three days per week at most.
The lower worker occupancy rate has a direct impact on cleaning and maintenance. When a building’s physical occupancy rate is only 40% to 60%, as many downtown office buildings are today, and only occupied two to three days per week, cleaning frequency might drop to only two or three times a week instead of nightly. This can impact the dollar amount a BSC bids for cleaning a property, and it also delivers a blow to the BSC’s pocketbook if they are already maintaining the property.
“A lot of money, time, and resources are involved in maintaining these large properties,” Wilson said. “The more contractors know commercial real estate terminology, the better they can adjust and profit from the evolving commercial real estate marketplace.”
Research before you bid
Before bidding on a large commercial office building, Wilson suggests that cleaning contractors know the building’s equity value—the value of the property minus its liabilities.
“A positive equity value means the building is financially healthy. This would be a good facility to bid on,” he said. “A building with a negative equity value may be worth about [the same amount] or less than what it owes [its] creditors. Not a healthy situation.”
In addition to “deed in lieu of foreclosure” and “equity value,” Wilson suggests BSCs become familiar with other terms. Although some of these are older terms, they have added meaning and much greater importance today.
- Gross square footage (GSF): GSF is the total area of the building, measured from inner wall to inner wall, with no deductions for obstructions or nonleasable space. Cleaning bids and charges are typically not based on GSF.
- Gross leasable space. Also known as “rentable area,” this is the total area leased to a tenant but also includes charges for what is called common area maintenance (CAM), which includes lobbies, elevators, hallways, restrooms, and other common areas that need to be cleaned. The cost of maintaining these spaces is borne proportionately by the tenants. If there are few tenants, maintenance of these common areas might be reduced, which could impact the BSC’s bid.
- Usable area. Whereas the gross leasable space includes common areas, the usable area is the actual space a tenant occupies from wall to wall. If usable area is being rented when a BSC submits its bid, the contractor should include this area in the bid amount. However, if it later becomes vacant, the BSC will need to reduce the monthly charges accordingly.
- Physical/economic occupancy. Physical occupancy refers to the area occupied by tenants, while economic occupancy refers to the amount of revenue a space is generating.
Since the pandemic, some tenants have walked away from their leases. In such situations, the space is contractually occupied by lease agreement—whether tenants are making rent payments or not—but not physically being used. Contractors will likely need to reduce their bid
amounts and charges in such situations.
When and where to find help
The terms just described reflect the many changes occurring in the commercial real estate industry today. They alert us that before submitting bids, BSCs need to ask questions. They need to be aware of the financial health of the properties they are bidding on.
BSCs may also need to ask for help. According to Wilson, one of the best sources of help for contractors bidding on large facilities is jansan distributors.
“Many of these distributors are already working with the owners and managers of these facilities,” Wilson said. “[The distributors] are aware of the [facilities’] financial health and can help contractors bid more carefully and effectively in this tough environment.”