What goes into the leasing process?
I received a call from a business owner recently who told me he needs to be in a new office space within 60 days, and only wants to sign a one-year lease. Another recent caller told me his current lease expires at the end of 2011, but he might have a chance to leave sooner. Although their time frames are dissimilar, each tenant will have to go through the same basic process, with some modifications.The first step of the process is a needs analysis. Does the tenant plan to renew an existing lease, relocate or buy property? What kind of time frame does the business have? Are there image requirements? What about amenities? Has there been consideration of a budget for occupancy costs?One aspect of this step that I go through with each client is an analysis of the pluses and minuses of the current space. This gives me a good idea of what the client?s expectations are. I often ask clients to write down their ?wish list? of features, including square feet, parking, power, ceiling heights, loading docks, office space and expansion needs. All of this information forms a profile of the ideal replacement space.Our next step is to conduct a market survey of available properties. In most cases, we can draw from listed properties, but when working with tenants we try to identify all potential spaces that meet the client?s needs, whether listed or not. After the client has had a chance to review the catalog of properties generated by the survey, the list is narrowed down to those that appear to best fit their needs.A property tour is the next step. This is generally arranged by the broker working with the client (generally a “tenant rep”) who contacts listing brokers or owners and sets up times to visit each property.There is no hard-and-fast rule for how many properties should be visited in one tour, but in my experience, five seems to be appropriate. Beyond that, the differences in the spaces get too confusing and blurred, and the tour is far less effective. It’s very important for someone to take notes during the tour, and to have a debriefing as soon as possible after the tour is completed.After the list is further narrowed, the next step is to generate either a request for proposal (RFP) or a letter of intent (LOI).The RFP is generally in the form of a letter from the proposed tenant asking the landlord to provide information as to all of the business terms that are important to the tenant — including length of lease term, rent amount, term of lease, options to renew or expand, payment of operating expenses, parking, tenant improvement allowances and signage. The landlord will generally respond with offering terms.An LOI also is generally in the form of a letter that sets forth a proposal outlining the terms under which the tenant will lease the space from the landlord. Both documents are generally non-binding and are subject to back-and-forth negotiations until a final agreement is reached on the business terms.Prior to lease negotiations, there may be some financial analysis of the agreed-to terms of, especially if there are multiple properties involved and the tenant needs to get a firm understanding of the financial ramifications of each option. This step is generally used only with respect to larger spaces.Once the parties have agreed to business terms, lease negotiations begin. Leases are generally prepared, or at least reviewed, by attorneys, so that the business terms agreed to by the parties can be fleshed out by whatever legal provisions are required in the given situation. There are some “standard lease” forms floating around out there in the office supply stores, and most lawyers have a standard master form that they start from, but every lease situation is different, and the lawyer must have a thorough understanding of the business terms in order to prepare the lease.Concurrent with the negotiations, the tenant may need to do some space planning in order to efficiently utilize the new space. Again, additional professionals are called upon to provide this service ?architects or space planners are typically used.Once the tenant is satisfied with the space planning and lease negotiations, a lease is signed.At this point, any required construction or fit-up work will commence (after all appropriate permits are obtained), and upon completion the tenant will commence occupancy of the space. The lease will address at what point rent commences, as it is common for rent commencement and lease commencement dates to be different.
How long does all of this take? For smaller spaces, especially where there is a time crunch, all of this can occur within 45 to 60 days, and the RFP/LOI process is avoided. For larger spaces and more demanding tenant improvement requirements, it can take six months to a year. Unfortunately, there also can be cases when the entire process can take more than a year because the tenant’s needs are so specialized that there are very few properties that can meet them.
So you can never call a tenant rep too early, but you can reach out too late for the rep to help you to the fullest extent possible.
In a future column, I will discuss the role of a tenant/buyer representative in this process.
Dan Scanlon, JD, CCIM, is an adviser with Grubb & Ellis|Coldstream Real Estate Advisors Inc., Bedford. He can be reached at 603-206-9605 or email@example.com.