Time equals leverage in lease negotiations
“MY LEASE IS NOT UP for another six months. I have plenty of time, don’t I?” The answer is, “Not really.”
Although each real estate transaction is unique in some way, most follow the same basic steps. Typically, commercial leases take about six to nine months from start to finish — larger projects take longer.
If you are under this time frame, don’t panic. By taking the proper actions, you can expedite the process as needed. But remember, only a carefully orchestrated process — even an expedited one — will yield good results. The following guidelines have proven successful:
Set your criteria. Take some time up front to ask the important questions. What are your operational and financial objectives? How much space do you need and what can you spend? Do you need to be located near your customers, or will the home addresses of your current workforce drive the location decision? What image do you wish to portray? Because the answers to these questions directly tie back to your overall business plan, they will prove helpful in setting your lease criteria.
Getting locked into a great deal on space that doesn’t ultimately meet your needs isn’t a deal for anyone but the landlord. Only by setting your criteria before going to the marketplace can you be sure that the space you secure will fit your business needs.
Search the market. This step typically takes 60 to 90 days, depending on your initial criteria. When handled properly, this step represents your biggest opportunity to leverage your standing as a potential tenant. The earlier you start and the more visible you are in the marketplace, the more leverage you will have.
Consider hiring a tenant-representation firm to streamline the process and maximize your position. A trusted consultant has the market knowledge and online resources to make your search more efficient and save you time.
Upon determining a list of properties that specifically meet your criteria, tour each property. Have your architect draft a preliminary fit plan for each building to help you determine which properties most efficiently accommodate your needs. Once tours are complete and space plans are drafted, narrow your options to two or three properties that best meet your criteria. Now it’s time to get serious.
Negotiate deal terms. Generally, you can count on at least a month for this process. It is essential to have more than one acceptable option as you enter this stage. Since you haven’t yet entered into a contract with any specific landlord, you can use the offers and counteroffers to negotiate a better deal.
Look carefully at the non-economic aspects of a lease, such as expansion rights, improvement allowances, or guarantee provisions. Once your terms are negotiated, prepare a letter of intent outlining the agreed upon terms. Always remember, it is imperative to get all terms in writing!
Negotiate/execute final lease. With your letter of intent in hand and some confidence about the layout of the space (including good construction cost estimates), it’s time to take the landlord’s first lease draft to your attorney for legal review and to your real estate adviser for an operational and business review.
Confirm with your insurance company that your coverage is consistent with the lease requirements. Know which maintenance obligations are your responsibility and which are the landlord’s. Most of all, know that leases are negotiable. Your attorney and real estate adviser should be able to help you structure and sign a fair lease.
Design and construction. Once the lease is signed, the real work begins — it’s time to design, build and then occupy your new space. Final design can take up to 30 days; permitting and construction another 60 days or more, depending on the project, the municipality and the owner.
If your schedule is tight, make sure the design process is under way while the lease documents are being negotiated. The landlord or the tenant can manage construction. Smaller jobs are often landlord-run, mainly because the economies of scale favor the landlord’s leverage with various subcontractors. On larger jobs, many firms retain a real estate project management team to oversee the work.
If you do manage the work yourself, be sure to look at cost, quality, and schedule when choosing contractors — and be sensitive to any union issues that might arise. No matter who is in charge of the construction, make sure you check in often and you are getting the finishes that were agreed upon up front.
Move in. You’re almost there — but keep in mind the moving process is more complicated than simply hiring a moving company and packing some boxes. The lead-time required to relocate phone and computer systems can mean a painful gap in productivity if the move is not properly planned.
With your design team, think ahead about any new furniture that might be needed. Understand that choosing finishes that are not in stock could significantly delay your occupancy date. A move also requires notifying clients and vendors well in advance of your move; sending change-of-address cards with your new address and phone numbers is always a good idea. With the myriad of details involved in a corporate relocation, it is essential that your relocation manager be experienced.
Bottom line: Start early, know what you need, work with someone you trust, and leverage your time in negotiating a real estate deal that fits your business.
[contact] Jim Vos and Gwen Schultz are principals at CRESA Partners in Minneapolis, a corporate real estate advisory firm specializing in tenant representation, corporate portfolio services and project management: 612.337.8498; www.cresapartners.com
