By Erich Schultz, SIOR
Never leased space before? Or perhaps it has been years since your last experience. You might be surprised at the many action items that go into a well thought out process of leasing commercial space. Below are the steps that go into the process.
I. Identification of Real Estate Objectives
The first step in the process is for the company to identify its real estate objectives. What does the company want to achieve by relocating? Cost reduction, improved location and convenience for its employees and or customers, image enhancement, flexibility, are just a few of the many possible considerations.
II. Determination of Specific Facilities Requirements
Every facility need has specific requirements. It is critical to accurately define and prioritize the requirements unique to the transaction. Possible criteria include size, location, budget, product type, length of commitment, etc. Each alternative should be measured by how well it meets this set of requirements.
III. Market Research — Analysis and Presentation
Having defined objectives and requirements, a company’s next step is to gather information on available alternatives which meet the need. It is rare when there is a property that can meet all of a company’s requirements. Therefore, it makes sense to remain flexible at this point and include several options that meet a majority of the requirements. Two other reasons for this are: companies should always consider multiple alternatives in the event an agreement can’t be consummated on its first choice. And, multiple alternatives allow a company to create a competitive environment for its tenancy which provides leverage in negotiations.
IV. On-Site Observation
Once the available property alternatives that meet the minimum requirements have been identified, the decision makers for the company should tour the properties. Generally, the leasing agent for the landlord will be present to conduct the tour.
V. Requests for Proposals or Letters of Intent
After the property tours, the company should narrow down the list based upon qualitative aspects of the alternatives and preliminary quantitative considerations. Requests for Proposals (“RFP’s”) should then be submitted to the landlords of the buildings on the short list. An alternative is to submit lease proposals. The difference between the two is that with an RFP a company is asking what a landlord can do for them. With a proposal, the company is telling the landlord what it would like in the way of business terms. Either way, the RFP or letter of intent forms the basis for further negotiations.
VI. Evaluation of Proposals
Upon receipt of the landlords’ responses, the terms and conditions should be summarized in a form that allows for simple comparison of the alternatives. Both a quantitative and qualitative analysis of the alternatives is recommended.
VII. Selection of Preferred Properties and Negotiations
The properties on the short list have been evaluated. At this point, a minimum of two alternatives should be selected as the finalists. These should be the ones that best meet or exceed the companies previously established criteria. In this step, the company should negotiate with the landlords to get to their bottom line best terms. The quantitative analysis of should be updated and reviewed.
VIII. Final Selection
Based upon the results of the negotiations and the review of the resulting quantitative analysis, it is time to make the final selection. This generally is followed by the execution of a letter of intent by the tenant and landlord. This document is a non-binding summary of the negotiated terms and conditions.
IX. Lease Preparation & Negotiations
Generally the lease is prepared by the landlord and presented to the tenant. The business terms of the letter of intent should be reflected in the document. The tenant should consult with its attorney to assist in the review of document. There may be several rounds of lease comments that are exchanged and discussed between the parties.
XI. Execution of Lease
Once the parties are satisfied, the lease document is signed by both. Typically, the tenant is required to submit a check for the first month’s base rent and operating expenses along with a negotiated security deposit along with the signed lease. Only after the lease is fully executed and the consideration is passed between tenant and landlord are the parties bound by the lease.
At this point you might be thinking, “Who has time for this? I need to focus on my business.” This is a common refrain. For the average Central Oregon company, leasing space is something they do infrequently. Moving is expensive and can be disruptive to a business. It is hard enough for a business to stay ahead of the competition without being distracted by the time and effort required to lease space.
Fortunately, there is help available. The most efficient way to move through the leasing process is to enlist the services of a qualified commercial real estate broker. Find a qualified broker by getting referrals from friends and colleagues who have been through the process. Interview brokers and find a good match. Look for years of experience in tenant representation. The SIOR and CCIM designations are another way to separate the career professionals from the casual practitioners.
The benefits of using a broker to represent your company and lead you through the process are many. First, they are experts at it. They assist a large number of clients with leasing throughout any given year. Second, they know the steps involved in putting a successful lease together. Third, a good tenant representative will save his time by conducting the market research, scheduling the on-site observations, preparing the short list, leading the negotiations with the landlords, and teaming with the company and its attorney in reviewing the lease.
A knowledgeable and experienced tenant broker can save clients’ money in a few ways. As you know, time is money. If the decision maker doesn’t have to dedicate core work hours to steps in the leasing process, they are ahead of the game. In addition, an active commercial real estate broker will have knowledge of the terms of recently completed leases. Thus, they have an intimate knowledge of the market. This knowledge can be used in negotiations to get the landlords to offer their best possible terms.
If you are concerned about the cost of hiring a broker, be sure to have a conversation regarding this with the brokers you interview. You should hear that hiring a tenant representative is like adding an in-house real estate professional without the budgetary impact. 97% of the time your broker is paid by the landlord. There is a fee that is going to be paid to a broker or brokers for putting the transaction together. If you go it alone, you do not capture this fee. If you have a broker on your team, he or she will receive compensation out of this fee.
If you foresee needing to lease space in the future, my recommendations to you are:
- Hire a commercial real estate broker to assist you. Having one point of contact will save you time and money.
- Get started early. For office and retail tenants that will require tenant improvements, 9-12 months before the space is needed is suggested. If you can’t find what you are looking in the existing inventory, you may require a developer to build a facility to suit your needs. In this case, you should start the process a minimum of 18 months ahead of the desired move in date.
- Remember that real estate is generally the second largest expense for businesses behind human resources. The way you handle facilities acquisition will have a direct and perhaps dramatic impact on the bottom-line of your business.
Erich Schultz, SIOR was a co-founder of Compass Commercial Real Estate Services.