In today’s business world, virtually every business person is required to develop significant negotiating skills for responsibilities such as hiring, working with vendors, or selling the firms’ products or services.
Nevertheless, those same managers often find themselves ill-prepared
to negotiate a lease for office space with their prospective
landlord or the landlord’s broker/representative. That
inadequacy stems from the fact that most business typically
negotiate a new lease once every five to ten years, while
the party on the opposite side of the table goes through this
same process virtually hundreds of times every year. However,
if you are faced with the task of negotiating for the lease
of new space, you have an opportunity to turn this disadvantage
into your advantage by first bringing together a team of professionals
to work on your behalf. That team will gather all pertinent
data and assist you in analyzing the impact each lease proposal
will have on the cost of your businesses’ occupancy.
SELECTING YOUR NEGOTIATING TEAM
Probably the single most important step to reviewing lease
alternatives is selecting an effective negotiating team to
work for your company. These professionals must be able to
put aside their own financial gain, overcome conflicts of
interest due to relationships with building owners, and eliminate
any other issues that could pose a conflict of interest to
your negotiating and financial success. Your team should consist
of the following:
- A lease strategy person from your own corporation, and
- A tenant representative from a reputable brokerage firm, and
- An architect/space planner, and
- A legal professional with extensive experience in commercial real estate.
Lease Strategist
The “lease strategist” should be very knowledgeable
about your corporation, its operations, its personnel, and
its personality. This person does not need to have extensive
real estate experience, but he or she should be able to analyze
a complex situation, direct the resources of the corporation,
and, most important, have good listening and communication
skills.
This person might be a senior individual in the finance department, a partner, or someone with a similar background. Once selected by senior management, the strategist will need to coordinate with the other team members and attend all lease-related meetings, including strategy sessions, landlord interviews, building tours and all other discussions that will help formulate your position on the suggested alternatives. He or she should have a direct and open line of communication to, and the absolute support of, senior management.
Naturally, the selection of this person does not preclude
senior managers or partners from participating in the process.
However, experience has proven that it is better to appropriately
time and strategize the appearance of senior individuals to
support your negotiation strategy.
Tenant Representative
The selection of a tenant representative
or broker is also crucial to the entire process. This individual
should be a veteran of the real estate industry, and be extremely
familiar with the local environment, from both a real estate
point of view and a general economic point of view. The
tenant representative must also be highly regarded in the
brokerage and real estate industry, and he or she needs to
be able to coordinate vast amounts of data and know a great
deal about potential buildings and landlords.
One of the most important elements this person can bring to the process is the ability to eliminate any conflicts of interest. Specifically, the negotiation process could be skewed if this individual represents a landlord that could potentially become your landlord through the lease selection process. This individual must be able to understand that all of his or her fiduciary obligations are to you, the tenant, and not to the landlord. Finally, this individual should also have access to information regarding properties on a national scale. This can be beneficial in coordinating with a national real estate department if one exists, particularly if the department is not located in the subject city.
Architect
The next member of the team, the architect or space planner
is quite often overlooked until after a particular group of
buildings has been selected for your review. However, it is
imperative to include this person on the team from the beginning
to give him or her a true understanding of all firm’s
needs, operating relationships, etc., that could affect your
ultimate lease decision. The architect’s or space
planner’s major role will be in determining the structural
amenities and deficiencies and evaluating the difference between
the usable and rentable square feet of space alternatives. Additionally,
he or she will be very involved in deciding whether or not
you can function effectively within the demised space (the
usable space that will you occupy) and what alternative methods
could be employed to ensure your long term beneficial occupancy.
Much like your tenant representative, the architect or space
planner needs to 1) eliminate any conflicts of interest with
potential landlords, and 2) fully understand that he or she
is representing you and no one else.
Real Estate Lawyer
The final selection is the real estate lawyer who will provide the team and the management group with competent advice on the strength and weaknesses of the various landlords you may be considering. The individual will also help formulate the request for proposal, review the landlord’s response, understand ownership documents, do a detailed review of the actual lease document (if not the
development of the lease itself), and advise the management group on the legal issues that could arise.
Like the architect and tenant representative, legal counsel should be chosen at the beginning of the process to allow time for a thorough understanding of your needs and long term goals.
Although the negotiating team need not act as a committee, the individuals should be able to interact and assist each other throughout the various stages of the negotiation process. Obviously, it is important that, in addition to technical skills, these team members be selected based on their personalities and their ability to interact with your management and other team members; a cohesive team will be more apt to successfully work together over a sustained period of time.
NEGOTIATING FOR YOUR RENEWAL RIGHTS
Most landlords derive a substantial share of their profit
from the expansion and renewal of space existing tenants,
yet most tenants neglect this area since the need for is seems
far into the future. No matter how far off it seems,
considering your future space requirements and the negotiating
position you will enjoy at the termination of the original
lease is as important as negotiation your original lease. Two
methods of negotiating for renewal lease rates are 1) utilizing
the then-current market value, or 2) using a fixed renewal
rate. Typically, either one presents risks for both the
landlord and tenant, but the fixed rate method is superior
to market value. When using the market value or a percentage
thereof you, as the tenant, are exposed to substantial cost
increases should your lease expire at a time when there are
not ample alternative spaces available to you. The larger
the space that you are leasing, the more important this is,
for it is typically easier to find smaller spaces than space
for larger tenants.
The argument against a fixed rate renewal is that, should your lease expire at a time when a soft market exists; the tenant could be exposed to a higher rate. However, even soft market conditions you should always have the alternative of simply not exercising your renewal option and opening negations with your landlord for renewal at a preferential market rate.
If you are not able to negotiate for a fixed rate and are
forced to use a market value, be sure to define that market
value and how it will be established. Find out what comparable
buildings will be used to determine the market, the size of
your space, the degree of the tenant improvements that will
be required and other items that could affect market value. Furthermore,
be sure to define your space as broad as possible and possibly
even state, “for any legal and lawful use.” Having
the right to change the use of the premises gives the tenant
the flexibility to expand and modify a successful use or to
completely abandon an unsuccessful business and pursue a new
one.
Also, your architect and tenant representative should take
special care in defining what tenant improvement allowances
would be available to you at the time of renewal. It
is typical to require a minimum of paint, carpet and other
fixtures; you may also require of your layout, perhaps to
add more private offices or other items. The extent of your
improvements and who pays for them should be defined at the
time of renewal.
Finally, your tenant representative and legal counsel should be careful to negotiate a favorable holdover clause. This will allow you ample time to negotiate with your landlord or to lease new space outside of your existing facility at a minimum cost increase. It is not uncommon for a landlord to require that during a holdover period the tenant pay 200 percent of the then-current rent. Obviously, this would be a costly oversight for you as a tenant.
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