Tag Archives: landlord

10 Lease Renewal Reminders

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1.   The most important consideration any tenant may do is to hire a tenant representation broker, especially when relocation is an option.  Working for both landlords and tenants, I can say for certain that having a tenant broker can provide a tremendous advantage during a renewal negotiation. Just by placing a tenant broker on your team can increase the leverage in your lease negotiation. In the Greater Houston market, it is traditional for the landlord to pay your commercial broker’s fees, so it is imperative to be informed about the commercial real estate marketplace through brokerage representation.

2.   Second – begin early.  You do not want to subject your company to a position where it is down to the wire and the terms will not be favorable. Most tenants neglect this point and end up signing a poor deal only because they were not familiar with the process and had no time to negotiate a better transaction. “Early” can even mean over nine months or greater in advance of the lease termination, especially for those spaces that are large, and whose lease documents were written previously in a complex manner.

3.   On that note, review other options.  Even if you are not considering other space, you should always keep your eye on other space.   Have a number two and three pick for that “just in case” scenario. Performing proper due-diligence to see what the competition is offering for incentives is our job as tenant representatives. And, you will be surprised at what we can uncover. The simple fact that you have options lets your landlord know that you have alternatives.

4.   Negotiations do not take place casually in your office or at showings. Even the largest companies make this mistake.  Stop talking and start listening for negotiable items.  So often, emotions and ego enter into negotiations and they will typically lead you to nowhere.  Remember, these are business decisions that need to be handled behind the closed doors of your business operation.

5.   Always have you landlord present you with the first proposal. This not only will lay the groundwork for a possible counter proposal by your team, but it will reveal what position the owner is angling.

6.   Once you get your proposal from the landlord, always counter. Even if it looks like a great deal with everything you want, 99% of the time you can get more if you simply counter. In addition, you should always ask for more than what you want, that is, if you have a leg to stand on.  Typically a back and forth takes place, so do not begin by asking for too little.

7.   You should not put stock into how long you have been at your current property, how many times you have paid your rent on time, or how little you have called to report problems at your space. None of these items will present you with a better deal.

8.   You should avoid having side conversations or direct conversations with your landlord or their representative. This can hinder your tenant representative’s negotiation power and can muddy the waters if things were promised in a side-conversation that your representative was not privy.

9.   Your business should try and keep only those who need to know on a “need to know” basis. Rumors spread fast, especially among co-workers. You do not need the latest updates on your renewal negotiations to be made aware. In the end, this will hurt your negotiation efforts.

10. Lastly, I always recommend to my clients that you seek the assistance of a real estate lawyer before signing any legally binding documents. A good time to bring in an attorney is often when a lease document is produced for the tenant’s review. It is the attorney’s job to find the glitches, problem areas, and other questionable sections in the often lengthy lease document, that may not be in your best interests. If there are any, they should produce alternatives to the lease section language or suggest deleting it all together.

3 Tips For Startups When Leasing Space

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Yes, in 2011, we have been receiving more inquiries from startups.  With this in mind, we have documented a few ideas for business owners to take advantage of a weakened commercial real estate environment, while preserving cash and protecting themselves in a situation where future funding may be a concern.

Tip 1: Find Turnkey Space!

Truth in any space relocation is that the simple act of “moving” is expensive! Not only does the search for office space rob operating officers of hours that they should be spending growing the business, but it also creates several additional expenses. These expenses, for example, include having to pay movers, order new telephone systems, purchase new furniture, add telco/data cabling, request new service contracts, change paper advertising, etc.

These expenses can range from ten thousand to one hundred thousand dollars, depending on the space requirement. The best way to reduce expenses is to find a commercial space that is already furnished and comes with a telephone system. In an environment of shrinking balance sheets, opportunities are available via other businesses that are downsizing and trying to sublease space. The majority of sublease spaces have furniture and phone systems in place, in which these companies would rather include, as it would create an additional expense for them to be removed. The most attractive feature regarding subleases is that the rent is typically discounted when compared to space offered by landlords, as the tenants have greater motivation to lease.

Tip 2: Negotiate Low Rent Today and Let it Increase in the Future!

Most businesses today have had the feeling that if they “burn” through current funding too quickly, they may not be able to come-back for more. So they find themselves hunkering down wherever you can. Most business owners are not aware, but they can actually negotiate an extremely low rental rate today, one that landlords would of laughed at just a few years back. This is true. The reason: The landlord’s sweet spot and what they are most concerned are “Effective Lease Rates”. An Effective Lease Rate is the “average” lease rate over the life of the lease term.

Tip 3: Negotiate Termination Options!

Many office lease obligations could create a situation where the owners are held personally liable. If provided with this conundrum, sometimes it is best to negotiate a lease-termination option with the landlord, one in which the landlord and tenant determine how losses will be reimbursed, sometimes at significantly discounted payment(s).

If you should have any inquiries regarding this article or commercial real estate interests, please do not hesitate to contact Robert S. “Bob” Lowery.

Mastering the Art of Commercial Real Estate Negotiation

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In commercial real estate, we are constantly honing our negotiation skills. Our ability to negotiate will be put to use, not only in the process of creating an offer and working diligently to get it accepted, but also with your contacts, brokers, buyers, sellers, landlords, tenants, vendors, and lenders. In any situation where there are more than two interests, we know that negotiations will take place in order to satisfy everyone’s goals.

Many people fear negotiation, usually due to a lack of experience. But, once they begin practicing, over time it becomes progressively easier, and may even become fun! Negotiation is filled with tactics and problem-solving, used to yield the best results for each party. Being a good negotiator is very important to our business, especially in a challenging economic environment.

There are different negotiating styles that work for some people, and not others. For example, some find success with a very strong, even intimidating approach in negotiation.  This method is successful on occasions where the other party is easily intimidated or extremely motivated to relinquish their position. Personally, I prefer to use a straight forward approach, whereby I am prepared, informed and persuasive. As I have anticipated the questions and concerns the other party may have, I find it easier to answer them. This helps me to clearly and confidently negotiate terms. As a result, closing deals is often easy and fun. It is true that different styles should be used in different situations, so study others who negotiate and develop a style that works best for you.

In commercial real estate brokerage, as in most businesses, it is best to yield to an agreement that is win-win, meaning both parties are satisfied with the results at some level. If the strongest concerns of each party are addressed and a solution results, the agreement is of mutual benefit to both parties.

If you are not familiar with negotiation, I suggest that you take a class, purchase a book (I just completed ‘Essential Negotiation’ from The Economist), or find a seminar that covers the basics of negotiation. There are many generic tips and tactics that will sharpen your negotiation abilities and make it easier for you to get what you want out of an opportunity.

In commercial real estate, there are specific negotiation tactics that can be written into contracts. Many of these tactics require some creativity and are specific to certain situations. Don’t be afraid to get creative; after all, this is where commercial real estate becomes exciting.

We are always making an effort to sharpen our negotiating skills, and shape our strategies to increase our clients’ bargaining power.  Having a few extra tricks up our sleeves to help influence a deal in your favor does not hurt either.

10 Real Estate Requests From Our Medical Clients

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These are the most common requests fielded by our medical representation group:

  1. Accessibility – Doctors are looking for greater access to major road arteries and highways so that their patients can locate them easily. If a doctor’s office is off the beaten path, the patient may become lost and have to cut through side streets or worse, make unnecessary phone calls to your office. From a patient’s perspective, after exiting the highway, a physician’s practice should be no greater than two turns. As a patient, they may not be in the best physical or mental health whereby adding additional stress may complicate the already difficult situation. While most doctors that we speak with have a strong regard for their patient population, more and more are heeding this wisdom.
  2. Mixed-Use Development/Modern Architecture – More often, physicians are looking for mixed-use developments featuring more modern architecture. They are attracted to buildings that are appealing and inviting. Unless you are a small practice with a doctor or two, the old one story stucco flat roof office building is quickly becoming history. A few recent medical office building projects in the Woodlands, Sugar Land and Cinco Ranch are examples of prime upscale designs with the more modern office park environments to which many physicians gravitate.
  3. Parking Ratio and Parking – Most professional office buildings have a parking ratio of three to four parking spaces per thousand square feet. With patients coming and going throughout the day, doctors need to have at least five to six parking spaces per thousand square feet to avoid overcrowding. Since parking can be tight in areas such as Downtown, Midtown and the Inner West Loop, doctors often shy away from the area for medical. Driving the suburban markets you will notice medical in every direction, but driving Travis Street, Main Street, or Westheimer the medical is very sparse, if not nil in some stretches.  Physicians are requesting reserved parking, which is also a nice bonus for key employees and staff as well. Also, covered handicapped pick-up and drop-off areas are a real asset, especially if there are associated outpatient treatment facilities.
  4. Shell Space vs. Used Space – Although shell space, not built-out, may cost more in the initial term, it will end up saving the practice or organization a tremendous amount of money in the long run. With new shell office space the practice can implement space planning/design to fit their needs as well as increasing patient flow. Used office space with existing layouts, but such space often cannot be adapted without expensive demolitions and remodeling. While this can be accomplished, there still remains the potential for poorly laid out space that doesn’t fit the requirement.
  5. Proximity to Other Physicians – In a medical office building, doctors are often looking for proximity to other physicians who may refer business to one other. For example, a family medicine physician will frequently refer patients to other medical specialties such as cardiology or orthopedics. With the right synergy, all of the doctors are inter-referring and enhancing their practices.
  6. Ancillary Services – Working with the physician community is no different than working for a Fortune 500 in that, especially in this environment, people are trying to maximize profits to stay ahead of the curve.  The buzz word within the physician community over the past five year is “Ancillary Services.” Traditionally, hospitals were the main benefactor of such services. Ancillary services include MRI’s, sleep labs, physical therapists, outpatient surgery centers, and imaging centers. Doctors are more recently looking for extra medical office space where they can install ancillary services and other diagnostic treatment areas.
  7. Geographic Location – Until the last decade, doctors needed to be close to the hospital to round on large numbers of inpatients and perform mostly inpatient surgeries. Now procedures have been more frequently performed on an outpatient basis, and physicians can relocate their offices farther away from the hospital at usually lower lease rates. Many practices now have incorporated outpatient surgery facilities located at or nearby their office location.
  8. Exclusivity – Willingness of the landlord to restrict leasing to other physicians of similar specialty in the same building is common. While many physicians view this as an important concession, it probably is not that important in the long run. After all, there is really nothing a physician group can do if a competitor wants to relocate across the street. This idea is typically of greater importance in rural or less populated areas where a new hospital is being established.
  9. Signage - Building monument or signage to distinguish a medical organization or practice is an important feature. Local restrictions often restrict the size and location of business signage in a given area, but often the developer can offer “top of building” signs for major anchor tenants.
  10. Price – Everyone is looking for price in today’s market, especially physician groups that are in their office more than in the hospital.  For a doctor to move off-campus, the offer must be aggressive.  For an example, Memorial Hermann is offering a few of our clients below market rental rates with above market build-out allowances.  In other locations, they are offering full-service gross rental rates, which is coming back into vogue as hospitals rely heavily on cost control their costs to improve their bottom-line.

15 Common Leasing Lapses

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  1. Tenant Performs Build-out – It may be better to have the Landlord perform actual build-out work, so that unexpected problems or delays will be the Landlord’s cost.   When it is appropriate for the Tenant to perform the build-out, have the lease provide for an extension if delays are encountered which are not the fault of the Tenant, and extra Landlord monetary contribution if unexpected repairs are required (termites, code violations, etc.).
  2. No Limit on the Personal Guaranty – Many times it is possible for the Personal Guaranty to expire “x” months after lease commencement, or provide a specific dollar amount of guaranty. Sometimes it is possible to have the guaranty amount diminish in equal annual installments over the lease term or a portion of the lease term.
  3. Limit on Company Flexibility – How fast is the company going to grow? Will it be necessary to downsize or expand? How likely is a new partner or merger?  These situations, and more, indicate the Tenant’s need for as much flexibility as possible. Tenants should work with experienced professionals to insert language into the lease which will allow a cancellation or modification of the lease under certain circumstances.
  4. Limit on Product Flexibility – Will the company want to carry a new product line or install a new technology? Will a neighboring Tenant vacate (or move-in) which impacts the business? Tenants should be cautious with their “Use Clause” since these clauses can be very specific as to what goods and services the Tenant will provide, and may prevent a Tenant from offering a very lucrative product or service in the future which has not yet been invented!
  5. Declining Market Area – Tenants who do not know the local market may locate into a declining area, making it impossible to hire and retain the highest quality employees.
  6. Choosing a Building because of Low Rental Rates – Retail Tenants who choose the wrong location to obtain lower rental rates. Traffic and subsequent sales volumes are terrible, and tenants fight a losing battle.
  7. Hamstrung by Outdated Technology Systems – The office building is not set up with the newest in telecommunications and data cabling, such that Tenant cannot benefit from today’s technology. Business is lost to competitors which can offer better service to clients.
  8. Taking Too Much Space – Tenant did not use their own space planner and leased offices which were too large or had an inefficient floor plan.
  9. Space was Measured Incorrectly – Tenant did not verify the Landlord’s dimensions and figures and paid rent on “phantom” space.
  10. Unnecessary Security Deposit - Landlord asks for Security Deposit as standard procedure, but should not require one depending upon Tenant creditworthiness and/or build-out requirements.
  11. Too Narrow of Search – Tenant limits its geographic area of interest too severely, and does not complete adequate market education resulting in lost opportunities.
  12. Holdover Penalty Too High – Standard hold-over penalties in first draft lease agreements are typically far higher than necessary.
  13. Not Reviewing the Lease Often Enough – Tenants miss notification dates, resulting in automatic renewals, loss of option period, or other penalties.
  14. Poor Design - Tenant made poor choices during interior design stage because of focus on “least initial cost” instead of “lifetime operating costs”. Many times upgraded lighting, windows, insulation, etc. can make very dramatic improvements in employee productivity, operating costs, and business security. Your professional should be able to discuss the latest in facility design, materials and technology.
  15. Poor Planning – Natural catastrophe occurs and electric power is lost for an extended period of time. Tenant is out of business, and loosing clients at a rapid rate. Proper planning and/or design can eliminate potential business disasters.

7 Strategies to Implement Prior to a Lease Renewal

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Be Prepared To Walk Away

The biggest mistake many tenants make is not developing legitimate alternatives to their first choice, whether a new space or a lease renewal. If a landlord believes you’re not willing to relocate to a comparable property, you lose your negotiating leverage.

Begin the Process Early

Time should be your ally, not your enemy during negotiations. Landlords know that the managers of other buildings can take six to nine months to create a space plan, obtain construction pricing, agree on a rental rate, prepare a lease document and ready the space for occupancy. If you wait too long before asking for a renewal proposal, you’re telling the landlord that you’re not considering any other options.

Capture the Big Picture Before You Start Negotiating

Is the building being sold? Is the largest tenant moving out? How much free rent did the last tenant get? Does the building have HVAC or parking problems? What is the landlord’s financial situation? Candid, complete answers may not be forthcoming from the landlord or landlord’s broker. A large commercial brokerage that has access to such items is mandatory, as they will impact your lease decision and negotiation.

Make Sure Landlords Are Competing For Your Business

The key to a successful negotiation is creating competition between your current landlord and other landlords in the area. You should have an experienced adviser providing the comparable market research, lease comparables and the negotiating expertise to create a competitive advantage.

It’s In Your Best Interest To Have A Professional Negotiate On Your Behalf

Unless you’re a commercial real estate professional, it’s not a good idea to negotiate a lease deal directly with the landlord’s broker. An experienced tenant representative will help ensure that you receive the best possible rates, terms, incentives and lease clause protections. Remember, the landlord’s representative negotiates leases every day; you may do it once every 5-7 years!

Hire A Tenant Representative

Occasionally a landlord will “try to save you some money” by discouraging you from engaging a tenant representative. Don’t be fooled. He’s not doing this out of the goodness of his heart. He knows that without a tenant representative you’re more likely to be in the dark about market rates and complicated attorney drafted lease items.  Also, you are far less likely to shop the market or consider other lease or purchase alternatives. This equates to more money in the landlords pocket.

Make Sure You Are Comparing Apples To Apples

Business owners who are not experienced with commercial real estate often find it difficult to perform a true “apples to apples” comparison of different facility choices. Lease terms such as full service gross, modified gross, triple net, tenant improvement allowances, rental abatement, escalations, base years, operating expense stops and loss and load factors can obscure the true amount you’re paying and make legitimate comparisons difficult. A good tenant representative will sort through all this for you.

Workspace Study

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Poorly designed office layouts are an unfriendly reminder of how tenants, as well as landlords, paid little attention to the detail when arranging space for their daily operations.  Now, as our economy forces many of these organizations to downsize, landlords and tenants are liable for these past mistakes.  The office configuration that suited the way business was conducted just ten ago is likely irrelevant today.

So what can tenants do now?

The best way for a tenant to find out if their office is dysfunctional is to conduct a study of the space. We advise firms to create a drawing of traffic patterns around the office, by shadowing employees for several days in a row. Whether conducting an in-house study or hiring a design consultant, the three key methods for gathering information is shadowing employees on their paths through the office; visiting conference rooms and desk areas every half hour to determine how they are being used; and asking employees to track their own movements and report back on how they spend their time.

Here’s what to look for:

Layout

Study whether the layout of the building is helping or hurting employees in their quest to get work done. Shadowing workers for a few days will reveal wasted motion and inefficient organization of space.

Problem Areas are:

Collaborative spaces that are bunched at the far end of the space
People whose jobs are highly collaborative not naturally coming into contact with colleagues during the workday
Employees spending a majority of their time in transit to meeting rooms, printers, copiers, and fax machines

Usage

Find out how often people are using existing spaces. Check in on what is occurring by stopping by the cubicles and conference rooms every half hour.

Problem Areas are:

An workspace that is always empty
An workspace that is always overcrowded
Workers competing for certain furnishings or equipment and not using others

Workarounds

Look closely at whether workers are using their space, furnishings, and equipment as intended. Does the environment support their process, or have they been forced to circumvent it?

Problem Areas are:

Employees meeting at a coffee shop because they can’t find common space
Workers use drop-in space on another location of the office, or different floor, because the area around their desks is too noisy

Remember: If your study reveals a number of these so-called problem areas, it’s time to hire an experienced broker, efficient space planner or architect to find out how a redesign can improve the efficiency of your space.

To view our complete list of “top ten” areas of concern regarding office space design, please contact Robert S. “Bob” Lowery at 832-275-6514.

Helpful Reminder Regarding Lease Concessions

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During the commercial lease process, it is common to run across the word ‘amortization’. By general definition, amortization is the recovery of landlord incentive costs over the duration of the lease.

In this property market, landlords are anxiously attempting to attract tenants to the property, so as to encourage the decision of signing a lease within the building. In the case of new tenant occupancy, the landlord may choose to provide incentives – some by way of free rent, a fresh build-out or reduced rate. This is common when the market is in a downturn and an oversupply of vacant space exists.

But, landlords who choose to provide incentives upfront, provide such discounts with the understanding that these incentives will be returned in some form or fashion within the lease.  And, the game of whack-a-mole begins.

Cost of Incentives

When incentives such as build-out and free rent are provided by the landlord, it is common practice to attempt to recover the costs of those incentives, plus interest on any funds provided, structured over the duration of the lease. Amortization is the process that achieves this.

This then suggests that incentives are not actually free.  While most of the time, this is the case, it really depends on the property’s overall position in the marketplace (too many factors to list here-contact us).  Most tenants and their representatives become disappointed when they find that their client’s lease is structured in such a way that the incentives turn to balloon payments towards the end of the commitment.  Due to their lack of familiarity, they are unaware of how to structure leases to protect their themselves.  In turn, the deal that the tenant strikes typically forfeits any leverage that they initially had as time becomes an enemy.

This is why experienced aid and client support are very important throughout the leasing process. It is wise to implement financial analysis spreadsheets (economics of the lease) to ensure that the funded incentives do not become bloated to overly favor the landlord 3-5 years from now.

Face and Effective Rent

The rent and incentive commerce typically is offered in two ways:

If the rent for the premises, without incentives, is $24 per square-foot (sf) and the incentive that is to be provided to attract the tenant to sign the lease is equivalent to an amount of 10% of the rent recovered from the tenant during the term of the lease, then the starting rent should be $26.40 p/sf. This is called a ‘face rent’. The rent without incentives paid in the lease ($24 per sf) is called an ‘effective rent’.

Whatever the beginning rent (face or effective), it will need to be compared to the overall marketplace by a rent review structure via your representation. Because most brokers do not have access to this information, it is mandatory to begin the lease process with a commercial tenant representation broker that not only deals in the market, but has adequate resources (Costar Tenant and Property Databases) supplied by their company. Also, absolute market knowledge is a tremendous advantage to a functioning lease rent assessment. The tenant and representation need to be aware of the most recent market information to uncover and negotiate the most attractive lease deal.

Time Is Money When Leasing Commercial Real Estate

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In my twelve years in commercial real estate, I have never seen a better opportunity for tenants to reduce costs and secure better space – at the same time!  With a few exceptions in and around the Houston area, today’s commercial leasing market is a tenant’s market.  Tenants should not shy away from renegotiating their leases early to take advantage of the favorable market conditions.

It’s All About Leverage

I have been saying the same thing to my clients for many years; lease negotiations are largely about leverage.  In a landlord’s market, the only leverage a tenant has is to begin negotiations early and keep all options open, including moving to new space.  For example, if a tenant has been leasing 20,000 square feet of office space for the past fifteen years it is unlikely that the tenant wants to move.  Landlords know this.  Therefore, the landlord will wait until as late as possible to approach the tenant about renewing its lease.  Waiting serves the landlord’s interests, because at some point there is not enough time for a tenant to find new space, negotiate business terms, engage legal counsel to document the deal, complete improvements to the new space, pack up their existing space, retain a moving company, and move into the new space.  Depending upon the size, type, and complexity of the space, negotiations should begin anywhere from two years to a few months in advance of commencement.  Many small commercial tenants believe that they can pack and move into a new space that does not require improvements quite quickly, however, they frequently forget that at least a few months must be allotted to finding the new space, negotiating the business terms, completing legal documentation, and moving.

Leverage shifts to the landlord in negotiations when the landlord knows the tenant does not have sufficient time to move before the expiration date of the tenant’s current lease.  Unless there is a provision in the tenant’s current lease to the contrary, the tenant will likely become a holdover tenant on the first day after the expiration of the term.  In the best case scenario, the landlord will have to provide a thirty day notice to quit which would not be effective until the last day of the calendar month following the thirty day notice.  Accordingly, in the best case scenario, a tenant would have sixty days to vacate if landlord delivered such a notice on the first day after the expiration of the term.

Early planning and action shift negotiating leverage to the tenant and save tenant money in the long run.  For example, if tenant’s lease is set to expire on December 31, 2010 then the tenant should begin (or already be in) the process of renewal or new lease negotiation now.  The tenant or representation should begin by sending out a request for proposal to its current landlord and to at least three other landlord’s with suitable space available.  The proposals received will form the basis of tenant’s decision to move or stay and will help shift leverage to tenant in its negotiations.  Making it known to the current landlord and others receiving the request for proposal that all options are being considered.  To keep confidential the fact that tenant is exploring all options is to negate the leverage obtained by starting early and exploring options.

How to examine a proposal and what information to request be included in a proposal is the topic of another article, but suffice it to say for purposes of this article that the tenant should negotiate each possibility seriously to obtain the best possible business terms.  Such terms are not simply about rent, although that is the single largest business term, but also about obtaining other tenant friendly provisions or rights.  A tenant’s current lease may not permit assignment or subletting without landlord’s consent, which consent may be withheld by landlord for any reason or no reason at all.  Such a provision is not tenant friendly or reasonable, in my opinion.  The tenant should state in its request for proposal that the right to assign and sublease with landlord’s consent, which shall not be unreasonably withheld, delayed, or conditioned, is an important business term to tenant (there are many variations of this provision that may be important for one reason or another to the tenant, but for example purposes, I have kept this simple).  Any proposals received that include this provision can then be used to negotiate such a change in the tenant’s current lease if the current landlord submits a competitive proposal.

Multi-Track

In my experience, the average new lease acquisition unfolds something like this:  A prospective commercial tenant will look at various spaces and make a decision about which space best suits their needs and desires.  Based upon that determination, the tenant makes the decision to lease that space and requests landlord’s form lease.   The tenant then goes back to the office and waits for the landlord’s draft lease.  Several weeks may go by before the initial draft is received.  During the wait period, the tenant is comfortable that she has found the space she wants and all other leasing activities have ceased.  Either through communications between tenant and prospective landlord directly or through brokers, the message is communicated that the tenant is excited about the new space and ready to move.

The landlord’s draft lease arrives and it is a typical landlord oriented lease.  During legal review, many issues arise that tenant’s counsel advises against, but tenant reminds its counsel that this is the space tenant wants and there are no other options being considered.  In addition, it is most likely too late to consider other space because now there are only two or four months left until expiration of the current lease as opposed to the six, nine, or twelve months that were left when tenant first began to search for new space.  Tenant’s counsel negotiates the best deal possible considering that landlord is not willing to negotiate too much because landlord knows the tenant really loves the space and does not have time to find and negotiate new space before its current lease expires.

The point is that the tenant should always be multi-tracking its negotiation process.  The tenant should begin early and always continue negotiations with current landlord and prospective landlords until the tenant’s attorney is comfortable that the form of lease is negotiated to a point where the remaining issues are not significant.  This way the tenant can say to the landlord “the first one to give me a lease that my attorney says I can sign wins”.  With that pressure and leverage, the deal will move faster and most landlord’s will be more willing to negotiate.

Yes, this multi-track approach may result in a longer period of time spent up front, however, it should result in a better rental rate and better lease terms for the tenant, which will more than pay for itself in the long run.

Example

An office tenant’s lease was set to expire December 31, 2010.  The tenant has a small space of approximately 2,500 square feet, but it is in a Class A Building in the Energy Corridor, so even that small space equates to significant dollars.  In December 2009, the landlord approached the tenant about renewing for ten years.  The tenant was receptive and asked the landlord for a proposal.  The proposal was promptly faxed over to tenant and stated that renewal would be for ten years at $25 per square foot with a formula for escalations.  The tenant was inclined to agree and execute a renewal amendment because, as the tenant put it to me, “the landlord is a good guy and I trust him.  He said this is the going rate now”.  The tenant’s wife convinced him to call me just to be sure everything was okay.

The tenant reluctantly called me and faxed me the landlord’s proposal and their current lease.  I quickly determined that the landlord had other vacant space in the building that was advertised at $22 per square foot.  I brought this to the landlord’s attention and he dropped the proposal to $22.  That saved the tenant approximately $75,000 over the term.

I then suggested to the tenant that they look at other spaces on the market.  They did and found two spaces that they loved.  They received proposals from both of those landlords one of which was at $22 per square foot and one of which was at $21 per square foot.  I then reviewed their current lease and made a list of provisions that were deficient or unfair to the tenant.  We redacted the proposals from the two vacant spaces so that the landlord and address were not visible and sent them to the current landlord.  The tenant told the current landlord that while they would like to renew in place, they were willing to move if they did not get terms they considered favorable.  The landlord did not cave right away, but the tenant’s determination to move if the current landlord did not improve its proposal led to a ten year renewal at $20 per square foot, an increased base year for taxes and expenses (left out of landlord’s original proposal), release of tenant’s personal guaranty, and other changes favorable to tenant.  I have no doubt that without the credible threat of moving, the tenant would not have been able to negotiate such a good deal.  In the end, the tenant will save around $125,000 over the ten year renewal term and have no personal liability.

Cautions

Shifting leverage by shopping around and knowing the market conditions is one thing, but taking the opportunity to renegotiate other terms of the lease is another.  Tenant’s must bear in mind that a landlord may perceive renegotiation of lease terms other than base rent and length of renewal term to be a renegotiation of the entire lease.  Accordingly, the landlord will feel free to review the lease for provisions that the landlord would like to see amended to suit the landlord.  There is not much that can be done about this except to plan carefully with your legal counsel and utilize whatever leverage can be mustered.

To a large extent this is a game of chicken.  Most tenants do not want to move and most landlords do not want to lose a tenant.  However, there is no greater leverage for a tenant than a credible threat of moving.  In some cases, tenants really do find better space and end up moving and that’s okay.  However, without the credible threat the landlord has no fear of losing the tenant and little or no motivation to negotiate a good deal for the tenant.

There are many good brokers serving the commercial leasing community, however, it has been my experience that tenants should not share their strategy with their real estate broker or anyone outside the immediate circle of decision makers.  In far too many instances, brokers and others, whether accidental or otherwise, have told landlords or landlord’s broker that the tenant is looking at other space, but they are not serious.  Clearly, this negates the entire strategy.

Conclusion

While the principles espoused above work in all market conditions, the current conditions are exceptionally favorable to tenants.  Landlords in most markets today are desperate to keep tenants and sign up new tenants.  What I suggest in this article is not intuitive to most tenants, but if kept in mind I am reasonably certain that tenants will get a much better lease deal than waiting for the landlord to approach the tenant a couple of months prior to expiration.  Knowledge of the market place and time to pursue all options equals leverage for the tenant.

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”- Archimedes

This article was republished from Robert S. “Bob” Lowery’s original post, “Tenants: Leverage is Key”, published on May 14, 2010.

A Well-Crafted Letter of Intent

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Plain and simple: We, as partners in a real estate transaction, need to resolve as many issues as possible for your business, before the lease is drafted.

While we have encountered several competing brokerage firms using letters of intent / tenant proposals based on basic business terms such as rent, area, and escalations, we understand that dozens of other issues typically surface with the presentation of the landlord’s draft lease. From our point of view, this is the worst time for disagreements or misunderstandings to emerge. Your urgency to close the deal and get the relocation program underway can now pressure you to concede to unfavorable lease provisions.

A well-crafted letter of intent / tenant proposal can prevent this situation from occurring.

This type of proposal covers, in detail, the terms and conditions of the deal. It is delivered to the landlord, or landord’s leasing broker, to demonstrate intent to lease or purchase as well as for qualification and negotiation purposes, prior to the drafting of a lease.

What does this accomplish?  Your legal fees are reduced, and your leverage is conserved.

Comprehensiveness is crucial and when we draft a proposal with the highest attention to detail, nothing is taken for granted.  While listing broker’s tend to cast as little light on detail or imperfection, it is assumed that any issues omitted or inadequately addressed will ultimately be resolved in the landlord’s favor.

Among other questions that our tenant representation team has catered for industry specific needs, we find these proposal inquiries commonly omitted from letter of intent / tenant proposals, which should be clearly addressed in ours . . .

  • What restrictions will be put on the use of the premises?
  • Which of the landlord’s expenses will be included in calculating operating escalation, and which will be excluded?
  • How will you be charged for electricity usage? If sub-metered, what is the landlord’s profit margin?
  • What rights will you have to sublease the space? If there is a profit, which party will get the benefit?
  • What rights will you have to renew the lease? How will the renewal rent be determined?
  • What rights will you have if the landlord defaults on a mortgage or a ground lease?
  • What rights will you have to make alterations to the space?
  • What will your obligations be at the expiration of the lease?
  • Which party will pay for working drawings?
  • Which party will bear the cost of bringing the space into compliance regarding any Disabilities regulations?
  • During what hours will the space be heated and air-conditioned?
  • What penalties will accrue if the landlord does not deliver the space on time?

These are only some of the potentially deal-breaking or otherwise costly issues that the proposal should address. If they are resolved, final lease negotiations will be relatively swift and painless. If not, you preserve your options while looking elsewhere.

This post was republished from Robert S. “Bob” Lowery’s original post, “Resolving Issues Prior To A Landlord’s Lease”