The 8 Steps of Commercial Leasing
- What financial drivers of your business plan must be met to satisfy you?
- What is the target rate and term you are offering and is it reasonable within the market.
- What is the absorption of space in the market place?
- What is the months of supply? What types of uses will zoning allow?
- What type of tenant credit risk are you willing to absorb?
- What is the up-fit budget for the space?
- Do you have your team in place to execute when you find he right tenant?
- How do you plan on finding a tenant? What is your overall timeline?
The market analysis consists of a study of nearby, similar properties. In the effort, it is crucial that you know how much similar space is being offered and for what rate and term? Are their synergies of nearby tenants and businesses that would lend your property to one type of tenant or another?
These issues will be discovered in the market analysis phase.
How do you plan on marketing the space? What is your web marketing plan? Who will show the space? What will the signage indicate? Many times, a landlord may need to offer concessions. Are you prepared?
Once a tenant is found, an answer to an offer or proposal will need to be formulated. That communication serves as the unofficial deal that is on the table. Attorneys often use this to complete the final lease documents
Space planning usually occurs after an initial proposal has been tendered, although sometimes it will be delayed until the major deal points have been agreed upon and your credit reviewed. The proposals are conditioned upon reaching a mutually satisfactory space plan and a review of the associated costs. Whether you will need space planning services or not will depend on the size of your transaction and the need to customize the location to meet your needs. If there will be construction, no matter how seemingly simple, the services of a qualified professional are essential, not optional. Because all construction requires building permits, and permits trigger inspections, it is possible that inspections could uncover required code corrections. Using a qualified architect will alert you to potential problems before you sign a lease. If you’re in a tight market or responsible for the work of improvement for any reason, you do not want any surprises. Avoid unhappy surprises and use a qualified space planner when modifications are needed. Retail tenants are usually expected to provide their own interior improvements and therefore they are expected to provide the designs for the landlord’s approval.
After the owner has responded to your initial proposal, it is time to analyze all the major points of the response. If you have made more than one proposal there are certain elements that need to be compared. These items might include: Rent rate calculated on the basis of rentable square feet and the rental rate calculated on the basis of useable square feet. This is arrived at by subtracting the load factor from the rentable square footage. Compare the effective rent, which is nothing more than averaging all the years of the rent and factoring in any free rent periods. This is important because your responses may use different rent structures. By reducing this to the average rent per year, per foot, you can easily see which proposal has the better economics. Different properties have differing operating expense histories and it is a good idea to ask for a 3-year history of the operating expenses. Well run buildings have very stable operating expense histories and unless there’s been a spike in energy costs, janitorial contract re-negotiations, an insurance crisis, or snow removal, the expenses should be fairly even.
The negotiation of the lease document is one of the most crucial steps in the relocation process. Because there are almost as many lease contracts as there are buildings to lease, it is impractical and inadvisable to sign a lease contract without a review by qualified legal counsel. Some leases are preprinted forms, which may be suitable for many transactions, but most are customized contracts developed by legal counsel for the owner. Preprinted form leases can run from two legal size pages to twelve pages, plus addenda and exhibits. Custom leases, especially for high-rise office buildings, large retail or industrial sites can easily run 50 to 80 pages. All leases define the business terms, which is the smallest portion of the lease. The balance of the lease seeks to contemplate possible future events and prepares for these events. You will need to work closely with your legal counsel in negotiating the final terms of the lease, including the language of the lease, the economics of the lease, all references to the interior construction and other contractual elements. Make sure that all the terms of the proposals are incorporated into the lease and reviewed every step of the way.
The closing of a lease transaction is simply the start of the contract fulfillment. This can mean tendering a deposit, initial rent and in some cases, up-fit money. There can be other elements of performance in the lease agreement. This becomes deal specific.
FREE Property Preliminary Evaluation
Take the next step on getting your property leased! Find out what is going on in the marketplace right now! And more importantly, what you should do about it!