Real Estate Leasing Guide

Beware of Landlords That Think They Know Everything About Leasing

Posted on November 12, 2011

If you work in commercial real estate agency, you will come across a variety of landlords that think they know everything when it comes to leasing. Some landlords are just plain slow when it comes to accepting your recommendations on vacancy marketing and rental alternatives.

Landlords can have very fixed opinions regards the property market, the rentals, and the performance of their property. Importantly you as the real estate agent have the market knowledge which they lack. You also have experience of other comparable lease deals that have happened on other properties recently. Real hard evidence of recent leases will always help your negotiation with the landlord of the lease.

Here are two of the most common problems that you get with landlords in commercial property leasing.

Beware of Landlords that are Inflexible on Asking Rental

A fixed attitude on rental makes it difficult to find new tenants. In leasing property, is not necessarily the beginning rent that really matters; it is where the rental matures to over the years or before the time of property sale if that is relevant. The rent review profile of the lease document can take care of that, providing you have a well-structured lease to start with.

Landlords that are inflexible on rental generally fail to accept the trends of the property market. It is important to give them details regards the comparable properties and lettable space they compete with. It is also essential to give them details of the supply and demand for space in the local property market. An empty property achieves nothing.

When vacancy factors are high in the market, it is common to drop the start rent and lift the incentives. Any landlord that fails to accept these facts will suffer an extended vacancy.

Beware of Landlords that will not spend on advertising the vacant space

To lease vacant space in commercial property, it is essential to advertise in a variety of ways. That will include the Internet, local newspaper media, and circulation of flyers to comparable properties and businesses, and direct call marketing to tenants in the local area.

In only this way can the real estate agent can connect with all the potential businesses that may have an interest to relocate. In this property market, you cannot wait for the enquiry to come in the door. It is essential to comprehensively market the property; this requires landlord funded advertising.

Without a comprehensive marketing package, the property can remain empty for some considerable time and drain the landlord's cash flow. The outgoings for the property do not disappear, and the longer the vacancy remains, the greater financial pain it is to the landlord.

If the landlord is reluctant to spend money on advertising the vacant space, give them some alternatives in the marketing campaign. This is easily done through offering the landlord a selection of gold, silver, and bronze advertising packages. At the basic minimum, the bronze advertising package will at least get the property advertised on the Internet and will allow you to put a signboard on the property.

The silver and gold packages for marketing will be more comprehensive and obviously more expensive. When you give the landlord alternatives in marketing is much easier to get a decision and some landlord paid advertising. In this way you can lease the premises faster.

Conclusion

In this property market, it is essential to advise landlords of the key issues that will impact the vacancy. When you shorten the vacancy time, the property cash flow improves, and the lease occupancy can strengthen the property value through well designed rent review structures.

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Setting Goals to Help Your Agency Success

Posted on November 7, 2011

In commercial real estate agency it is essential to have personal goals and targets for each salesperson. It is important that those targets and goals are aligned to the property market and the economic climate. In this way the agent or salesperson can move forward and achieve benchmarks and results.

In every property market there are pressures and changes that impact the lease listings and commissions that you can achieve as a property agent. Look at some of these variations:

  • Number of properties sold and rented
  • Type of properties sold and rented
  • Changes in property zoning in the local area
  • Changes in business sentiment
  • Comparable prices achieved that impact yields for investors
  • Comparable rents in your area
  • Size and types of the incentives offered for new leases
  • Time on market to lease vacant premises
  • Fees and commissions charged for leasing property
  • The number of agents in your market servicing leased properties
  • Vacant properties currently on the market
  • New property developments coming up that have an impact on supply and demand

All of these will have impact on the goals you set. There is no point putting your goals together on leasing a property type that has little future or no solid enquiry.

So many salespeople set goals because it seems like a good idea, and then they do nothing about them. Rarely will they get the goals out and refresh them or revisit them. Goals without action do nothing for your career.

To set realistic goals in the commercial leasing market it pays to use these rules for setting a basic goals model:

  • Know the property type that is likely to generate the most leasing enquiry
  • Find out what tenants need to expand or shift in the local market
  • Get figures on the levels of supply and demand for space in the next 18 months
  • Understand the local business sentiment and where growth is likely to occur

Setting goals in your career is an annual event that is tracked monthly. In that way can you identify any changes that have to happen to shift course. The goals you set will be centred on measurable quantities. They are:

  1. The number of listings you create each week (open, sole, and exclusive)
  2. The number of leased properties per month
  3. The number of tenant enquiries in your database
  4. The growth or size of your database
  5. The size of the commissions you create from the leases closed
  6. The number of new landlords you serve
  7. The number of new property management appointments you work with

When you set the right goals in property leasing the business becomes easier because you can see where you are headed. All you then need is a work plan to help the process. The people that struggle in the industry are those that operate off plan or with no plan.

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Top Leasing Tips for Commercial Space Tenants

Posted on October 29, 2011

Does Your Company rely on CPAs for financial matters, Attorneys for legal matters, and Managers for productivity matters? Of course!

Relying on a Tenant Representation Broker is essential to handling Corporate Real Estate, particularly when considering real estate is the second largest line item expense on a company's Income Statement. Companies save thousands of dollars when they hire Tenant Reps to serve as their outsourced "Corporate Real Estate Department."

If you are thinking you can save money by not hiring a Tenant Rep, think again. Listing agreements compensate the Landlord's Broker with an industry "standard" fee which the Landlord's Broker shares with the Tenant's Tenant Rep Broker, if there is one. The Landlord's Broker would prefer there is no Tenant Rep Broker so they can receive the entire fee even though the Landlord's Broker isn't representing the Tenant. There is no discount to a Tenant by not hiring a Tenant Rep as the full commission is paid on every listing whether you're represented by a Tenant Rep or not. The savings generated by a Tenant Rep Broker typically ranges between 15- and 40-percent off occupancy costs.

Understand Your Objectives: Most Tenant Reps run through a detailed Needs Analysis with corporate clients to understand the strategic needs of their company and how the corporate real estate component can help them be more competitive in the marketplace, attract strong talent, be easily accessible for their customers, and what are their specific geographic, facility, and financial requirements.

Negotiate Smartly: One of the best books out there on negotiating, is Getting to Yes. And, the best piece of advice in that book is in understanding your BATNA (Best Alternative To Negotiating an Agreement). When you know your BATNA, you know that if current negotiations fall apart, this is the course of action you will likely pursue. Looking at your current situation, what happens if negotiations fail? What are your alternatives? Do you have options available in your current lease to create the flexibility you desire?

Start the Process Earlier Than You Think You Should: If your lease is ending in the next 12 months, it's very important to engage a Tenant Rep now. It takes time to understand your company's ideal real estate solution, and the space that you're looking for may be like finding a needle in a haystack-it takes time. "When we've located several possibilities-ideally, we want to have the landlords competing for your business-if time is on your side, you've got leverage. The more time you have, the more leverage and negotiating power," explained Jonathan Lee, a tenant rep broker in Charleston, South Carolina.

Read the Lease (including all exhibits and regulations): Once you have worked with your Tenant Rep to hammer out the most advantageous letter of intent, the next step is drafting a lease. Lease Agreements are written by the landlord's attorney (translation: the lease is written FOR the landlord, not the tenant). Be mindful of provision in a lease that would pose problems for the daily operations of your business. Always ask your Tenant Rep to review the lease for business points that adhere to your Company's needs and find an efficient attorney who can ensure the lease is enforceable.

Know Your Landlord: Frequently, Landlords want either a Personal Guaranty or a hefty-sized security deposit to ensure the performance of the tenant. In today's market (201-2012), we also need to be concerned about the "credit" of the Landlord-are they going to go "belly up," or do they have the reserves in place to maintain their property? What happens to your Tenant Improvement Allowance if the Landlord files for bankruptcy? What about the level of service you expected when you signed your lease-how do you maintain this level if the Landlord is under financial stress? These are valid questions, especially when numerous landlords are in default of their loans and lenders are shying away from helping those who are cash-strapped already. Hire an experienced Tenant Rep to guide you to landlords with strong reputations and those with a strong financial history.

Beware Less Than Market Rent: Many times a low asking rental rate is simply the base rate. Then, there are additional operating cost pass-throughs which add to the base rent as additional rent. Ask for a cap on annual increases and understand what calculation method is normal in your market.

Limit Operating Expenses to Limit High Rent: Be sure your rent payments cover building or retail center operating costs not inappropriate expenses. "I had one client who recently lamented about paying for 1stclass air travel expenses for their landlord to fly from Vermont to Charleston," said Lee. Avoid having to pay for capital improvements, high executive salaries, markups on utilities and above-market payments to affiliates of the landlord. Insist on your right to audit Landlord records.

Abate Rent if Damages Prevent Business Operations: You should not have to pay rent during the time you cannot use your space. If a fire on another floor prevented your employees from reaching your office or the ceiling collapsed due to a leak, this will make operating your business difficult. You shouldn't pay rent during those times.

Have the Right to Assign or Sublease: There are a number of reasons your company may need these rights. The company could be sold, merged, or the company may outgrow space or need to downsize. At the very least, be sure your lease allows you the right to assign or sublease which shall not be unreasonably withheld, delayed or conditioned.

Demand a Concession if Your Lease has a Relocation Clause: For smaller tenants, the landlord typically reserves the right to relocate your company to an alternate space in the building. If this sounds like a horrible disruption to your business-you're absolutely correct. This means you'll have to pay for the move, print new stationary, and the new space may not be configured as well as the old. Be sure the landlord pays for the move and related expenses incurred. The new suite needs to meet your needs and you shouldn't pay more in total rent simply because the space they moved you into is larger. If the space doesn't work, demand a termination option and compensation for moving into an alternate building.

Condition upon Return: Some leases, particularly Retail Leases, require the tenant to return the premises at the end of the Lease term in the same condition as when they were at the beginning. This is unreasonable if you started out with a "vanilla box," which was then built out to your specs. Be sure to qualify that "with normal wear and tear and any damage by casualty excepted."

Landlord Consents: Similar to the rights of an assignment or sublease, always be certain that a Landlord's consent will not be unreasonably withheld, delayed, or conditioned.

Review Default Language Paragraph: This paragraph can put you in default by simply not sending in a copy of your certificate of insurance which is absurd. Another reason of tenant default could be that you didn't fulfill an obligation in a timely fashion. At the very least, be certain you are entitled to a written notice of a default and a period of time to cure the default prior to the landlord being entitled to take any action against you.

Never Depend on Verbal Commitments: I met with a tenant who told me his landlord's property manager had promised they would install new signs within a retail center. It was never done. Never rely on verbal commitments-if you expect something to be done, it must be in writing.

Insist on a Nondisturbance Agreement: This ensures that if the landlord's lender forecloses on the property, your lease cannot be terminated. Also be certain the lease states any future lender that acquires the property via foreclosure cannot terminate the lease.

Insist on Self-Help Clauses from Smaller Landlords: if you state in your lease that you can fix a problem if the landlord does not, and then reduce your rent payments by the amount it costs you, you provide an incentive for the landlord to do the work themselves.

Negotiate a Low Holdover Rate: The holdover rate is that rental rate charged to a tenant who stays in the space after the initial lease term has expired. The holdover rate can often be equal to 200% of the current rent.

Know what services you're paying for and what is paid for by the landlord. Your lease should describe in detail the condition of the space you are leasing and all services for which the landlord is responsible. Be sure the lease describes the list of services included in the rent such as utilities, heating, electric power, restrooms and maintenance thereof, janitorial services, and any others you might expect the landlord to provide on their nickel.

Build Flexibility into the Lease with Options: Consider having these options in the lease if they relate to your situation: Option to renew; option to purchase; option to terminate; option to expand; and, option to relocate. Each type has its own advantage.

Distinguish between Net Leases and Full-Service Leases: Net leases make the tenant responsible for all expenses of the pro-rata proportion of space they occupy, as if they were the owner. Full Service Leases keep the responsibility upon the Landlord.

Always have a No-compete Clause in a Retail Lease: This prohibits a person or business from operating a nearby business that would compete with one of the parties to the contract.

Right of First Refusal: Unlike the options, this right can only be fulfilled when it is offered by the landlord. A right of first refusal might give a tenant the right to buy the building. Other "rights" include the right to take contiguous space or right to renew.

Know the Difference between Usable Square Feet and Rentable Square Feet: Landlords often quote the square footage of a space in rentable square feet which, in a multitenant building, is higher than the usable square footage due to the core values. Landlords may offer tenant improvement allowances on a usable square footage price per square foot. When analyzing space alternatives on a quantitative basis, be certain comparisons are using the same type square footage and that spaces are based on the BOMA quality standard of measurement.

Many company owners don't realize that hiring a tenant rep broker is free due to the built-in brokerage fee paid by the landlord. Essentially, the tenant rep locates the proper space solution, negotiates the ideal terms, and gets paid by the landlord. When it's time to dust off your lease in three to five years, contact a tenant rep who can serve as your office finder/negotiator to save thousands of dollars.

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