The 8 Steps of Commercial Leasing
- What geographic area(s) is of most interest to you?
- What particular buildings are of interest?
- Is an office with a view important? If so, what is the lowest floor to which your company would be willing to locate?
- How many square feet will be leased? (A table follows for calculating your requirements)
- How many people will be employed at this location?
- What is your annual budget?
- What length of lease is preferable?
- Is future expansion important?
- When does your company intend to move?
- When does your existing lease expire?
- What are your parking and transportation needs?
- What modes of transportation will your employees use?
- Do your clients visit often?
- What kind of image would you like to establish?
If you’re not using a broker, then the Internet is a good place to start in developing a market survey report. There are a number of decent searchable web sites you can access and most of them will come up on a search with some common key words such as office space, industrial space and retail space. I suggest you go on line and get familiar with how these sites work.
You will also need to check the local newspapers and drive around the areas you’d consider suitable for your business. The best time to drive the market is early Sunday morning. There is virtually no traffic, it’s easy to pull over and capture an address and phone number. I suggest a small tape or digital recorder for this job. Not only is it faster and easier, but it will allow you to record a few comments about the building and its location. This will be useful later when you make your screening calls. For the super high tech, using a digital camera with voice recording capacity will definitely save you time and effort when deciding which properties you will want to visit.
- Try to set up your inspection tours in groups of three to four buildings at a time, about 30 minutes per property plus travel time will be sufficient. By doing it this way you can more readily compare the features and benefits of the properties while the impressions are fresh in your mind. Even the best minds have difficulty remembering a large number of variables, by limiting the number of properties to 3-4 you will maintain clarity and separation between the properties in your mind. A camera helps too, as does taking notes.
- Your objective during these tours will be to evaluate floor locations, views, physical characteristics, amenities, as well as the general character and quality of the building or site. Use a checklist to facilitate a thorough comparison of the buildings. This checklist can help you to evaluate non-economic aspects of the sites you visit. It also assists you in recalling the details of the properties and in narrowing down the list.
Now that you have narrowed down your choices to one to three good potential sites, its time to start making your proposal or proposals, as the case may be. Because you are making non-binding proposals it may be all right for you to make more than one at a time. In many areas of the country it is an accepted practice to do so. You must be careful that the property owner does not incur significant expenses on your behalf or they may have recourse against you for those expenses if you fail to consummate a lease. I’d advise you not to go much beyond the first round of proposal responses or into multiple space planning sessions without informing the property owners that you are negotiating for more than one space. Creating competition in a softer market can work well in your favor, so letting the other side know that you have other options can garner some nice concessions. Just be careful and let the other party know that you are continuing to consider other locations. Most often, proposals to lease commercial property take the form of a letter of intent. A letter of intent outlines the basic terms under which the parties would enter into a lease contract. After all the terms are settled, the credit-worthiness evaluated, and conditions satisfied, a lease draft is prepared.
- 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.
How Working With an Agent May or May Not Help
A new video series has recently been released detailing how tenants can benefit from having a real estate broker represent them in their leasing efforts! In MOST cases, this service is paid by the Landlord, and costs the Tenant nothing at the end of the day!