An Overview of the Commercial Leasing Process

7/23/2019 An Overview of the Commercial Leasing Process

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An Overview of the Commercial Leasing ProcessBy Craig Wagener, PhD, MBA, MCNE

Many landlords, as well as tenants, are taken aback by unpleasant surprises that arise in connection withterms set orth in an operati!e lease" #ten such surprises are the result o a poorly crated document,containing ha!ing signed a document that was poorly understood or a document that was poorly crated,with either ambiguous clauses which are open to interpretation or e$treme bias to one party"

%his occurs more oten than not with smaller, less sophisticated tenants who ha!e signed, or whate!erreason, ha!e chosen to sign the landlord&s '(tandard )orm *ease' with ew or no, i any, changes andusually in the absence o without legal representation" *ess e$perienced *andlords will oten present ado the same by the use o a standard, oten outdated lease agreement, without really understanding theterms and conditions o their obligations under that agreement will impose on them"

A lease is really a partnership agreement between the landlord and tenant+ in which it sets orth lays downthe speciic parameters o this business relationship" n a perect world, e!erything goes as planned,most lease agreements will ser!e both the parties well" -owe!er, the true test o a solid lease agreementoccurs when there are issues arise that must be resol!ed" that need to be resol!ed" the lease has notbeen careully drated, a small issue can become a ma.or issue problem or one, the other or both or theother o the parties" %enants may not understand that the landlord/s '(tandard )orm *ease' represents

his ideal situation, and may not ser!e the interests o the tenant when issues arise" Con!ersely, aknowledgeable sophisticated tenant will oten re0uest changes to the lease that will be biased to hisposition as a tenant which may be detrimental to the landlord" %he best situation occurs when both partiesare protected and there is a win1win or all"

2sually the ocus o lease negotiations is typically limited to the issues o base rent andconcessions" -owe!er, there are a host o other important issues that are oten o!erlooked,misunderstood or under1negotiated, e!en by sophisticated landlords, tenants and their real estaterepresentati!es"

t is important that As a landlords you need to, ind out how to you can better ser!e their your owninterests as well as and those o the your tenants"

%he n the art o leasing commercial real1estate re0uires the e$amination o se!eral areas, the ollowingneeds to be addressed3

• 2nderstanding the lease process, rom beginning to end" is .ust good business practice

• 2nderstanding key commercial real estate terms"

• Analy4ing a tenant&s needs and determining their s0uare ootage re0uirement"

• Pro!iding a method o property comparison analysis based on a market sur!ey"

• De!eloping the *etter o ntent"

• Negotiations, including terms, lease clause analysis and other issues o signiicance"

THE PROCESS - LEASING COMMERCIAL REAL ESTATE

%he process begins with a comparison an e!aluation o the tenant&s needs with the a!ailable properties" ,to see i they match up with the real estate that the landlord is oering or lease" (hould a match beound, a basis or these initial discussions result in a match between what the tenant needs !ersus whatthe landlord can oer, a basis is established or continued negotiations is established, ultimately sa!ingtime and money or all in!ol!ed", and this will ultimately sa!e money, time and wasted eort"

Essential to any successul negotiation is each party/s understanding o key terms and the workingdynamic o each business in!ol!ed in order to gain balance between the needs o the landlord and theneeds o the tenant" re0uires that, each party ha!e some understanding and le$ibility regard to the



signiicant issues aced by the other" (o a balance between tenant and landlord needs and desires willneed to be made to ensure airness"

A knowledgeable real estate broker, who can successully guide the tenant and the landlord through theprocess, is imperati!e"

5ey components o a successul match between tenant and landlord3

1. Analyze Tenant Needs

a" *ocation

b" Amenity and (er!ice 6e0uirements

c" (pace Component

2. Market Surey t! Sele"t #ual$%$ed Pr!&ert$es

a" *ocation

b" Amenities and (er!ices

c" -istory o Current *andlord

'. P(ys$"al T!ur

a" (how the property to conirm suitability

). Pr!&!sal Pr!"ess

a" Prepare a letter o ntent to *ease

b" (end to landlord

c" 6e!iew landlord responses

d" E!aluate landlord terms

e" satisied, re0uest a lease document

*. Ne+!t$at$!ns

a" De!elop the negotiation checklist

b" (olicit input rom legal counsel

c" mplementation o tenant resources

d" Mutual e$ecution o lease document

,. u$ld!ut Pr!"ess

a" Planning

b" Permitting

c" Construction

. Tenant Needs

a" Eiciency and desirability o current space

b" (i4e o oices, open areas, corridors, and bathroom areas

c" (i4e o common use areas 7conerence, copy, break and storage rooms8

d" Computer room re0uirements

e" )inish standards



/. T(e Market Surey

a" 6eal estate broker will obtain all inormation necessary to produce a market sur!ey,including, but not limited to, general market conditions, rental rates, !acancy rates, timeon the market etc" (uch inormation will be e!aluated to establish terms and conditions o prospecti!e leases, including uture rental rates, probability o ac0uiring a tenant at thecurrent rate as well as landlord9tenant lease negotiations"

b" Based on the results o a market sur!ey using websites like *oopnet, Co(tar etc", !ariousspace alternati!es can be located which meet the tenant/s stated ob.ecti!es" Decisionscan then be made as to which properties 0ualiy or the property tour"

0. Pr!&erty T!ur

a" #nce a :short list/ o suitable properties has been ascertained, arrangements can be madeto tour these buildings" t is helpul or the tenant to ha!e a written copy o each o thecomparable properties in hand as it can become diicult to remember speciic details oeach property as the tour proceeds rom one building to the ne$t" %enants should also beencouraged to write notes on each property during the touring process" %his small step isimportant and remains useul when a inal decision must be made between prospecti!e

buildings in the choice o the inal selection"

1. u$ld$n+ C!&ar$s!ns

a" ;i!en the results o the property tour, decisions can now be made on how a!orably eachbuilding compares to the tenant&s ideal, as delineated in the Needs Analysis and pre1deined architectural re0uirements" %he eiciency with which one building accommodatesthe tenant&s needs o!er another building ser!es as a method used to trim a list opossible choices"

b" #nce a inal choice has been made the process can continue with the Proposal Process"

11. Pr!&!sal Pr!"ess 3 Letter !% Intent 4LOI5

A *etter o ntent ormali4es the many considerations that a tenant might ha!e and should becustomi4ed to relect their speciic needs" <ust as the building&s standard orm lease documentrepresents the landlord&s 'wish list', the *etter o ntent ser!es in that same capacity or the tenant"

a" %he tenant&s negotiating le!erage will be reduced i pro!isions such as options to e$tend orterminate, liability limitations, escalation and security deposit pro!isions, rights o irstreusal, and other items o signiicance are not included in the *#+

b" t is in the best interests o the landlord and tenant to spend e$tra time on the details o theletter o intent to minimi4e misunderstandings, which might otherwise occur during thecourse o negotiations, and minimi4e the associated cost o attorney/s ees, etc"

c" %he *etter o intent is non1binding, and should document that act by a clause that imposesno legal obligation to continue negotiations to reach agreement" %he parties are obligatedto negotiate in good aith and, i no ormal agreement is reached within a prescribedperiod o time, either party may terminate the negotiations"

d" %he negotiation process may take time, as both parties continue to counter1oer and indcommon ground that hopeully, will inally reach a :meeting o the minds/" At this point a*ease Agreement can be created to include all the agreed upon terms"

12. Lease Clause Analys$s 3 Issues !% S$+n$%$"an"e

A good attorney, knowledgeable and e$perienced in lease analyses, is a !ery important part othe process" Attorneys/ ees can be oset against the cost o a bad e$perience due to



misunderstanding lease clauses that may be limiting to either tenant or landlord" %hese ees shouldbe understood to be the costs o doing business+ proessional legal counsel should not be wai!ed"%his may also in!ol!e urther negotiation between attorneys, where certain clauses o the leaseagreement may be amended to protect each party"

#nce a inal agreement has been reached, the *ease Agreement can be e$ecuted"

1'. u$ld Out Pr!"ess

-ereater, architectural plans can be commissioned that will become the basis or all subse0uentbuilding alterations" %he tenant&s stated needs should be planned around the 'usable' s0uare ootage!ersus the 'rentable' s0uare ootage"

%aking time to ully understand the tenant&s needs will help pre!ent poor planning and betterinsure that the unctionality o the leased space will meet those needs, both initially and o!er the termo the lease" %his is E((EN%A* in making the process work or you"

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An Overview of the Commercial Leasing Process