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Negotiating The Lease
 

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While the advanced knowledge and techniques made available at this web site are primarily directed at experienced commercial real estate professionals (i.e. brokers,landlords, corporate real estate executives, attorneys, etc.), we recognize that experience is a relative term.  As a result, we will not assume that you have a base level of knowledge or expertise.
As landlords and tenants go about the process of negotiating a lease, each of the parties MUST strive to incorporate lease language that will protect them should the other party suddenly exhibit a lack of integrity or the relationship is affected by outside events, such as a fire or other natural disaster.  Remember, landlords sell buildings and tenants have changes in personnel.  The person across the negotiating table may not be the person you will be dealing with a year down the road.
This is in line with our position that every participant in a commercial real estate leasing transaction needs the FULL toolkit of knowledge and techniques in order to function at maximum effectiveness.  No matter your role (i.e. landlord, tenant, broker or attorney), you cannot negotiate effectively unless you know, up front, what will constitute a successful negotiation.  This page, and those that follow it, will provide you with specific details about the actual negotiation process.
 
Leveling The Playing Field
Before getting into the meat of the negotiation process, it is important to first acknowledge a few truisms about changes that are occurring in this industryÖ
Third party data providers, such as CoStar, have begun to level the playing field between brokers and brokerage houses.
  - The large brokerage houses no longer exhibit the same control over access to information (i.e. space availability, lease expiration dates etc.) as they have in the past.
  - Market knowledge and quality presentation capabilities are now available to everyone, for a price.
  - Itís just no longer possible for a broker to merely be a tour guide and effectively compete for a clientís business.
  - If you are not familiar with CoStar, their data is now available in many larger metropolitan markets and they are constantly expanding into new markets.  Essentially, they provide space availability data for every building in town (i.e. office, industrial and flex space) and the information can be exported to your presentation software along with pictures of the building, floorplans, etc.  This is the really powerful stuff that every tenant representation broker dreams of having in his toolkit.

As a result, only brokers who offer true transactional expertise, including in-depth analysis of the lease agreement, will be able to set themselves apart from their peers.

The focus of negotiations in a lease transaction is usually directed toward the issues of base rent and concessions - Let us assure you that there are a host of other important concerns which are often overlooked, misunderstood or under-negotiated, even by sophisticated brokers, tenants and landlords.
 
Why Transactional Expertise Is Critical
If you are an experienced real estate broker, you have had clients who chose not to engage an attorney to review the lease document!  In our experience, 90% of the smaller, regional size tenants either donít consult an attorney or fail to seek out an attorney with sufficient real estate leasing expertise.
How do we know that? Because they didnít request prudent modifications to the landlord's Standard Form Lease!  Even more disturbing is the fact that in 8 out of 10 cases, a broker represented these same tenants and still, they were offered NO guidance on fundamental issues!
Countless brokers have indicated that they will merely counsel their clients to seek the advice of an attorney.  They reject the notion that it is their responsibility to knowledgeably discuss or have expertise in the ďotherĒ issues of significance that surround a lease document.
Are these brokers worried about the issue of giving a client legal advice?  No!  They just donít enjoy a thorough understanding of the issues and lacking such knowledge, can only suggest that their client seek guidance elsewhere.
Conveniently, brokers are usually required to recommend that clients have an attorney review the lease agreement.  Somehow, many have come to feel that this actually relieves them of any obligation or duty to delve more deeply into the business points of the lease.  Not So!  In today's market place, this is how brokers can offer true value and set themselves apart from their competition!
 
The Standard Form Lease
If you represent a tenant and the landlord says, "It's our STANDARD lease. Everyone signs it!",

STOP!   STOP!   STOP!

"Standard" does not mean right or fair to the tenant. When you consider the potential negative effect a lease can have on a company's bottom line, this is foolish.

Leases are usually very long, complex and often printed in very small type.  For the most part, everyone hates to read them.  Big companies, who have their own real estate department, in-house attorneys and multiple business locations, are used to modifying leases to their own standards and landlords are used to negotiating those changes.  If your client doesn't fit that profile, you're going to have to do a little work to protect their interests.
  - Essentially, a lease is much like a partnership agreement in that it sets out the parameters of a business relationship.  When everything goes as planned, most any lease will serve the parties well but the true test occurs when there are hiccups in the relationship.
  - If the lease has not been carefully drafted, a hiccup can become a major problem for one or the other of the parties.  Tenants often lose sight of the fact that the "Standard Form Lease" represents the landlord's wish list and if not appropriately modified, may not serve their interests when issues arise.  On the other hand, a sophisticated tenant will often request changes to the lease that, if not fully understood, can cause unforeseen difficulties for the landlord as well.
 
The Space Acquisition Timeline - A Review
While other pages on this Website provide a detailed overview of the entire leasing process, reviewing the high points will provide us with a point of reference for the discussions that follow.  The components of a tenantís successful campaign to lease space are as follows:
Determine Space Requirements / Analyze Needs
  - Location
  - Amenity and Service Requirements
  - Space Components/Staffing Projections/Square Footage Requirements
Survey Market
  - Selection of Qualified Properties
  - Location
  - Amenities and Services
  - History of Current Landlord
Technical Property Review / Physical Tour
Proposal Process
  - Prepare the Request for Proposal (RFP)
  - Distribute the RFP to Qualified Candidate Buildings
  - Review Proposals (landlord responses) and preliminary space plans
  - Evaluate Offers and prepare the Comparative Lease Analysis
  - Background Report on Owner Performance, Tenant Satisfaction
  - Technical and Locational Data is Reviewed
Negotiations
  - Negotiation Checklist
  - Solicit Input from Legal Counsel
  - Implementation of Tenant Resources
  - Mutual Execution of Lease Document
Planning / Permitting / Construction (if applicable)
 
The Request For Proposal (RFP)
For our purposes here, we will simply say that the negotiation process begins with a comprehensive RFP.  The actual RFP can only be developed after the tenant has developed a thorough understanding of its needs and qualified properties have been identified.  As such, the property tour has taken place and optimally, at least three suitable properties have been identified.
In a sale transaction, this is the point when an offer would normally be submitted.  In the process of acquiring leased space, the offer is replaced by an RFP.  The really fun part is that, unlike offers to purchase, RFPís can be submitted to multiple properties at the same time because the tenant is merely soliciting a proposal from the landlord.  This should be thought of as the tenantís wish list and becomes a critical component of the negotiation.
The landlord responses will give the tenant a great deal of market knowledge.
A competitive atmosphere will have been created between landlords.
At least one property will usually express a profound desire to consummate the transaction and when this occurs, the tenantís negotiating position is strengthened.
Negotiations that have been well documented in the RFP - which will be explain later in more detail - can help establish the intent of the parties in any future dispute.
Always, always, alwaysÖ request a copy of the Standard Form Lease!
Let us repeat that one more time!  An important component of the RFP is to request a copy of the landlordís Standard Form Lease agreement.  This document should be thought of as the landlordís wish list, which is subject to revision in a variety of important respects.  After its thorough review, subsequent submissions of the RFP (weíll talk about this in more detail in just a moment) can incorporate the tenantís requested modifications as well as any suggested addendum language.
Other considerations when developing the RFP include:
Speak to ALL of the tenantís needs and core requirements.  Included are such things as expansion (i.e. right of first refusal), renewal options, etc.  It is much more difficult and many times impossible to obtain the optimum result when an important consideration is put on the table late in the negotiation.
Insert legitimate items that are ďthrow away issuesĒ for the tenant and define the other areas of flexibility prior to the start negotiation.  Similarly, most landlords will have pre-determined fallback positions for many lease clauses and the desirability of the tenant will dictate their willingness to make modifications or deletions in their standard form lease.
The content of the RFP should be consistent with market conditions and take into account what is attainable by this particular tenant in the current marketplace.  (i.e. larger requirements with fortune 500 credit will normally be able to ask for more than a smaller tenant with local credit).  It is, of course, necessary to push the boundaries as a strategy in the negotiation but the tenantís requests for concessions shouldnít be viewed as outlandish by the landlord unless it is a very strong tenant market (i.e. high vacancy / low absorption).
Note that over the years, we have reviewed hundreds of high quality, well thought out tenant RFPís.  We have taken the very best language, from the perspective of the tenant, and compiled comprehensive RFPís for both office and industrial space requirements.  These sample RFP's are made available in "Products/Resources" so that you can quickly construct an RFP which has been customized to properly reflect your own or your clientís needs and core requirements.
The Landlordís Response
Good business practice would dictate that the landlordís proposal, or response to the RFP, always attempt to mirror the content and format of the tenant's RFP, even if the response is only to reference such-and-such paragraph in the standard form lease.  This is not the norm. Often, the tenant will have presented something like a twenty-point RFP only to receive a nine-point response in return.  While there may be inadvertent omissions, at other times it will be by design in that the landlord just doesnít want to address the issue, such as when a response would put the building at a competitive disadvantage.
As a result, it is important for the tenant and/or the tenantís broker to employ an effective method of tracking the progress made on deal points while also making sure that all the original points outlined in the RFP eventually get addressed.  So, here is where we get to the part about the well-documented negotiation touched on earlier. One method that we have found to be effective is illustrated below.  It has the added benefit of also documenting the negotiation. This is particularly useful in any instance where it becomes important to fully understand the intent of the parties, such as when an attorney is asked to draft lease language accurately reflecting the negotiated business points of the transaction. Again, documenting the intent of the parties can also prove useful if a dispute develops during the term of the lease.
When the landlordís proposal (response to the RFP) is received, insert the response made to each point, word for word using bold face type, directly under the original corresponding point in the RFP.  The use of bold face type helps to distinguish the landlordís responses. Under any original point in the RFP which has failed to elicit a response from the landlord, the tenant should note in bold letters ďNo Response ReceivedĒ.  The tenant then adds his further responses (or indication of acceptance) just below the landlordís bolded responses, once again using regular type, and returns the document to the landlord for his review.
Tip - Since most proposals will be generated using a program like Microsoft© Word, request that the landlord forward the document file to you as an email attachment. This will allow you to easily cut and past the landlordís response into the original RFP.
A clean and simple procedure.  The tenantís request Ö landlordís response Ö tenantís response or indication of acceptance Ö landlordís further response or indication of acceptance. The alternating standard/bold and No Response format continues until a consensus has been reached on each deal point. Refer to the sample below:

Corporate Identification: Please state how the building could accommodate corporate identification and signage and address responsibility for the costs of such identification. Please include information pertaining to any municipal codes affecting signage on your building.
The landlord will provide, at no cost to the tenant, one (1) listing in the building directory located in the lobby and one (1) building standard sign on the wall adjacent to the front entry door of the suite identifying the tenant and suite number.  A limited number of additional listings can be made available in the building directory but the cost of said listing(s) would be the responsibility of the tenant.  There is no exterior building signage available.
Accepted

If you think this article was interesting, you haven't seen anything yet!  Click on the following link and allow us to share with you an excerpt from "Lease Clause Analysis - Issues of Significance" that deals with Analyzing and Negotiating Lease Clauses.


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