At Tenant Realty Advisors we work with many local companies that occupy office, industrial and retail spaces. We also work with sophisticated national corporate occupiers. These corporations tend to have an advantage over smaller companies when it comes to real estate: With their full-time, in-house real estate teams, they bring to the table a consistent, powerful combination of process and predictability.
The best leases capitalize on that process and predictability. There must be a clear and consistent process by which to seek, evaluate and secure real estate, and this process must result in predictable future outcomes as they relate to both the financial and flexibility aspects of a long-term lease.
Of course, most local companies don’t have the luxury of an in-house real estate team whose full-time job it is to plan for and secure favorable leases. But we here at TRA can bring the sophistication of corporate level representation to hand with our local clients as they approach real estate transactions.
Here is some of what we have learned from the big nationals.
Whether negotiating a renewal or a new lease, leverage is key. Leverage is established in the following ways:
- Engaging a Tenant Representative to work for you on your side of the table.
- Starting the process early…in some cases as much as two years prior to a lease expiration date
- Gaining a full understanding of the current real estate market and landlord motivations.
We begin the process by taking an early look at future needs and desires of the client. Once we have a thorough knowledge of the need, we then look to the current market for a solution. This may include a tour of available options and, in a tight market, meetings with appropriate developers.
If a renewal is possible or desired, there may be value in creating a visible search campaign in order to create some noise in the market about our potential actions. On the other hand, a relocation may involve some covert action in order to preserve the upper hand or confidentiality.
Our local market expertise can provide additional leverage. Is the landlord facing a refinance or hoping to sell the building soon? Is the building losing or gaining a significant tenant in the near future? These can be important bits of information and care should be taken to understand the other side’s motivations.
At the correct time in the process, a Request for Proposal (RFP) should be issued to the current landlord and/or prospective landlords. Asking for a proposal rather than ‘making an offer’ is a key step in the process to preserve leverage and maintain a clear and detailed understanding of the options available in the market. After a fully vetted RFP process, an informed decision can be made to secure the proper facility.
As we negotiate, our aim is to secure a lease that provides as much predictability as possible. That’s not the case when a landlord works directly with a tenant on a proposal. Their standard wording usually includes language allowing surprise rent increases and hidden costs related to building expenses. They’ll often give themselves the right to relocate a tenant on their own terms. The flexibility in a landlord’s proposed lease is entirely on the landlord’s side.
In order to obtain a predictable lease, key points should be negotiated in the RFP. These points can include:
- Clear language as it relates to occupancy, rent and lease commencement dates. This is especially important if tenant improvements are involved.
- Predictable rent escalations
- Clear expense language with exclusions and caps based on market terms
- Clearly written options to renew, expand and even options terminate or purchase in some cases.
- Clear language on who takes care of what, when and how as it relates to building maintenance.
If the RFP response contains acceptable language regarding the above terms and the financial details are acceptable, a lease will be drawn up to reflect these intended terms. A thorough legal review would be the next step in mitigating risk and ensuring predictability, and we always advise our clients to engage a good real estate attorney at this point. You can be sure the other side has one!
We have found the above process is time tested and worth the extra effort, time and planning. Remember, once signed, a lease is a long-term commitment and you will be bound by its language. Be sure to call us with any questions or thoughts!