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"The Leasing Process - An Overview"

It is mind boggling how often landlords and tenants find themselves looking for guidance because an unpleasant surprise has cropped up during the course of a lease.  In most every case, such surprises are the result of having signed a poorly understood or poorly constructed lease agreement. 

This is especially true of smaller, less sophisticated tenants who, for whatever reason, have chosen to sign the landlord's "Standard Form Lease" with few, if any, changes.  By the same token, inexperienced Landlords will often embrace the use of a lease agreement without really understanding the terms and conditions the agreement will impose on them.

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 loose 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 potential for adversity can result from many things but the focus of lease negotiations is typically limited to the issues of base rent and concessions.  A host of other important concerns remain that are often overlooked, misunderstood or under-negotiated, even by sophisticated landlords, tenants and their real estate representatives.

This really speaks to the heart of a serious problem.  Most educational opportunities in commercial real estate focus on investment and ownership while on-the-job training has traditionally been the primary path to knowledge when it comes to leasing.  Since most formal education programs do little but touch on the process of leasing commercial space, you could spend agonizing years of expensive trial and error and still not attain competency.

Let us help. Discover the most advanced ideas and key concepts in use today by the top people involved in leasing commercial real estate, right here.  Find out how you can better serve your own interests or those of your clients.

The information and training available at this site has been designed to enhance the knowledge of those already experienced in leasing commercial real estate.  On the other hand, those with little or no experience will find it also provides a "Quick Start" program of instruction in the art of leasing commercial real estate.  Essentially, the more significant issues are highlighted and practical ideas and suggestions are offered that will help you determine what works best for:

  • Understanding the lease process, from beginning to end...it's not rocket science, just good business practices
  • Understanding key commercial real estate terms
  • Analyzing a tenant's needs and determining their square footage requirement
  • Assessing the tenant's lease vs. purchase decision (cost of occupancy analysis)
  • Providing a method of property comparison analysis based on a market survey
  • Developing the critical Request For Proposal (RFP)
  • Negotiations, including lease clause analysis and other issues of significance

THE PROCESS - LEASING COMMERCIAL REAL ESTATE

Visitors to this web site include, in addition to brokers, a mix of landlords, tenants and their real estate advisors, such as attorneys and insurance agents.  In every case, it is important to first ensure that each visitor is properly grounded in a base level of knowledge.

Since the process itself begins with an evaluation of the tenant's own needs, continuing to look at the process from the tenant's perspective has proven to provide a continuity that is otherwise difficult to achieve.  Those of you more involved with the landlord's interests will find that developing a full understanding of the process, from a tenant's perspective, will ultimately save money, time and wasted effort.

One of the core concepts of a successful negotiation requires that each party have knowledge and empathy with regard to the significant issues faced by the other.  To that end, you will notice that, whenever possible, a balanced perspective is provided on issues typically affecting negotiations between the landlord and tenant.

The following outlines the key components of a tenant's successful campaign to relocate their business operations:

  1. Determine Space Requirements / Analyze Needs
      a. Location
      b. Amenity and Service Requirements
      c. Space Components / Staffing Projections
  2. Survey Market
  3. Selection of Qualified Properties
      a. Location
      b. Amenities and Services
      c. History of Current Landlord
  4. Technical Property Review / Physical Tour
  5. Proposal Process
      a. Prepare the Request for Proposal (RFP)
      b. Distribute the RFP to Qualified Candidate Buildings
      c. Review Proposals (landlord responses)
      d. Evaluate Offers and prepare the Comparative Lease Analysis;
      e. Background Report on Owner Performance, Functional Histories,
        Tenant Satisfaction
      f. Technical and Locational Data is Reviewed
  6. Negotiations
      a. Develop the Negotiation Checklist
      b. Solicit Input from Legal Counsel
      c. Implementation of Tenant Resources
      d. Mutual Execution of Lease Document
  7. Planning / Permitting / Construction (if applicable)
Identify Project Team

In its simplest form, the Project Team will consist of the tenant, often represented by the owner, office manager or other trusted employee, and a commercial real estate broker.  The more complex the requirement, the greater the number of participants but in any case, it is most important that daily lines of communication be established.  This communication will help coordinate the team's efforts and allow the team to present a solid front to prospective building owners and agents.

In smaller companies, the principal often tries to do it all.  If you fit this profile, remember that there are so many issues attached to moving a business operation from one location to another, a single individual can quickly become overwhelmed.  Whenever possible, others should be designated to help work through the day-to-day details, leaving the principal free to concentrate on guiding the process and making final decisions.

Needs Analysis

At an early stage, it is critical that the Project Team fully analyze the client company's needs.  Any manager, employee or consultant of the tenant, as is determined to be appropriate by the Project Team, should be encouraged to participate.  Areas that should be covered initially include:

  • Lease renewal vs. relocation vs. purchase option
  • Corporate objectives
  • Importance of building attributes such as location, image, services & amenities
  • Lease terms and cost
  • Legal parameters

With larger requirements, it is often beneficial for an architectural space planner be included on the Project Team.  The architect can meet with designated personnel to help identify the desired physical attributes of the facility.  In any case, items of this nature that need to be addressed include:

  • Efficiency and desirability of current space
  • Size of offices, open areas and warehousing areas
  • Size of common use areas (conference, copy, break and storage rooms)
  • Computer room requirements
  • Finish standards

Once the Needs Analysis has been completed, a supplemental summary of the architectural requirements can be developed that will become the foundation for all subsequent building investigation.  An accurate project schedule can also be established, based on both the architectural requirements and the results of the Needs Analysis.

It is important for a tenant to have the ability to pre-determine their square footage requirement before initiating a market survey.  Easily accomplished using the Office Needs Analysis software made available here, the tenant describes, in detail, their proposed use of the space.  Performing this evaluation in a step-by-step format can help the tenant think through exactly what space components are or are not required, and then match these components to their staffing projections.

The above referenced software solution offers sufficient detail for even the largest and most sophisticated tenant but remains simple enough to be valued by smaller tenants as well.  The format provides for each possible shared component of space (i.e. reception, conference, coffee bar, copy/file, etc.) and inspires detailed thought with respect to individual work areas such as private offices.  This is, in part, accomplished by specifically noting the wants and needs associated with each space component (i.e. Reception Area: built-in reception desk; 4-guest seats; elevator exposure; locate adjoining guest office and board room).  This information not only helps build consensus within the tenant's organization but also proves invaluable when communicating tenant needs to each prospective landlord's space planner. 

Whether through use of the Office Needs Analysis software or by other means, the tenant's stated needs should be converted into a "usable" square footage requirement.  This is important given the fact that, unlike the "rentable" square footage which varies given the efficiency of each building's common areas (i.e. lobbies, restrooms, corridors, etc.), the "usable" square footage is a constant that allows an apples-to-apples comparison of the economic terms being proposed by each of the competing buildings. 

Taking the simple step of fully analyzing the tenant's needs will help prevent false starts and better insure that the functionality of the leased space will meet the tenant's needs, both now and over the entire term of the lease.  This is a VERY important step in making the process work for you!

PROPERTY COMPARISON ANALYSIS

Presenting the Market Survey

Based on the results of a market survey, it is useful to present the various space alternatives in a format that makes it easy to compare available space to the tenant's stated objectives.  Decisions can then be made as to which properties qualify for the property tour.

Market knowledge is possibly the most important aspect of the survey.  It is essential to know general market conditions and to have a keen awareness of the subtle dynamics of each sub-market to insure the accuracy and thoroughness of the survey.  This, of course, is one of the primary reasons that a tenant will seek out the assistance of a real estate broker. 

Because subscriptions to a quality "space available" database software product, such as CoStar, etc., are often available only in many major metropolitan markets, we continue to make available Microsoft© Word and Excel Templates that have proven quite useful for organizing and presenting market survey information.  Designed for use as a visual aid when deciding which properties should receive consideration, these forms provide the ability to list and compare pertinent base building data such as the submarket; class of building; rental rate; expense stop; parking ratio; building factor, etc. together with the data relating to the available space at each property.  They also allow for the comparison of important informational items such as ownership, property management, year of construction, amenities and provides space for relevant comments.

It has also proven useful, using a map of the metropolitan area, to note the general location of each prospect building.  Additional detail can be provided through the use of sub-market maps on which the exact location of each prospective building has been pinpointed.  Again, a program like CoStar will generate these maps in mere seconds using third party mapping software that is readily available but other good quality mapping tools are freely available over the internet as well.

Property Tour

Arrangements can now be made to tour candidate buildings and appropriate personnel are encouraged to attend.  As with any tour, it can become difficult to remember details as the tour proceeds from one building to the next.  It has proven helpful to provide the tour leader with a form on which to document the tour participant's thoughts about each building before going on to the next.  Although it may seem insignificant at the time, this small step becomes an important part of the process and remains useful when a final decision must be made between prospective building finalists.

Building Comparisons

Given the results of the property Tour, decisions can now be made on how favorably each building compares to the tenant's ideal, as delineated in the Needs Analysis and pre-defined architectural requirements. The 3 or 4 top contending buildings are then asked to prepare a preliminary space plan.  The efficiency with which one building or the other accommodates the tenant's needs often forms the basis of a "tie-breaker" between two finalists or serves as a method used to trim a lengthy list of candidate buildings.  Given the cost savings and stronger negotiating position that can result, tenants should always take into consideration the potential for re-use of the existing improvements.

Request For Proposal / Letter Of Intent

The formalized Request For Proposal ("RFP") represents a compilation of the many considerations that a tenant might have and should be customized to reflect their specific needs.  Just as the building's standard form lease document represents the landlord's "wish list", the RFP serves in that same capacity for the tenant.

Sample RFP's, for both office and industrial users, are made available in "Products/Resources".  The content of these RFP's includes every tenant requirement that we have seen over the years and each has been postured, from the tenant's perspective, in what we consider the most effective manner.  Having a comprehensive sample of the RFP available for reference helps ensure that the tenant has addressed all of the important issues.  It should be noted that the RFP, once presented, then becomes the basis for a systematic procedure used to document the negotiation and help maintain a focus on issues not fully resolved between the parties.

Most major lease negotiations are founded upon an RFP, which might later result in a letter of intent or statement of terms. Even if non-binding, it will be difficult to vary those terms; accordingly, the importance of initially dealing with all items of significance in the RFP cannot be overemphasized, from both the landlord's and the tenant's perspectives.

  1. The tenant's negotiating leverage will be reduced if provisions such as options to extend or terminate, liability limitations, escalation and security deposit provisions, rights of first refusal, and other items of significance are not included in the RFP;

  2. It serves both the landlord's and the tenant's interests to spend extra time on the detail of the RFP and/or letter of intent.  This can serve to minimize the misunderstandings that might otherwise crop up during the course of negotiations, together with the associated cost of attorneys, etc.

  3. In order to preserve that an RFP or letter of intent not be binding, the document should not only provide as such, but should further provide that it imposes no legal obligation to continue negotiations to reach agreement.  Alternatively, one approach which often finds favor is to provide that the parties are obligated to negotiate in good faith and the like, but that if no formal agreement is reached within a prescribed period of time, either party may terminate the negotiations.

Although elementary from a legal perspective, it is important to remember that a document will not be enforced if it omits an essential part of the bargain.  Thus, if a letter of intent is to be enforceable, it should highlight all of the basic terms.

Lease Clause Analysis - Issues of Significance

While it's true that brokers, landlords and tenants have become much more knowledgeable over the years, this knowledge has generally been gained at the cost of a bad experience.  By its very nature, this type of learning often has limited benefit since it is generally very narrow in scope and relates only to the bad experience itself.

By way of example, a tenant who has been burned once by the operating expense provisions of a lease will concentrate on that issue during any subsequent lease negotiation.  The problem, of course, lies in the fact that there are a thousand different ways the landlord can structure the operating expense recapture.  Unless the tenant and/or the tenant's advisors have a thorough and complete understanding of all the nuances surrounding this issue, the tenant might once again be "cruising for a bruising".  Our goal is to educate you, pure and simple.  The 73-page Lease Clause Analysis - Issues of Significance report has been designed to shorten your learning curve so that you will be able to immediately begin negotiating effectively from a "big picture" perspective.

Consider another example.  If the tenant has never experienced a casualty (i.e. fire or flood), then the casualty provisions of the lease may not be viewed with a large degree of concern when, in fact, should a casualty actually occur, the potential negative impact on the tenant could far and away exceed any unexpected exposure to the building's operating expenses. In our experience, the majority of tenants simply accept the landlord's language on issues such as this, largely because they just don't know how to evaluate the issues involved.  The result is that an unlucky few will pay a high cost for this inattention to detail.  You definitely DO NOT want to be one of these unlucky few!

All right!  So now you understand the process, at least on a cursory level.  If you are looking for a more in-depth discussion of the component parts of the process, you will want to consider the how-to course offered in "Products/Resources".  By putting to use the more detailed level of knowledge available in the how-to course, many tenants have been able to make their lease negotiations a pleasant and successful experience. 

"This is the most thorough presentation of leasing that I have ever seen
during my 25 years in the business"
   Jerry W. Ward, CCIM

If you are a broker, experienced or not, your enhanced ability to assist your tenant clients will blow the competition out of the water.  In the course, we reveal all of the "nitty gritty" on EXACTLY what you need to know in order to successfully consummate a commercial real estate lease… and exactly what our board members have done so successfully, time after time, for their own clients.  Click here  to get more tips and details.


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