Suite Deal
Page 10
As author Wallace Stegner’s character Larry Lang from the novel Crossing to Safety asks, “Can I think of anyone in my whole life whom I have liked without his first showing signs of liking me?”9 All prospects want to know that a landlord wants them, because attentive landlords value and treat their tenants well.
After the tour, contact the tenant’s broker (or the tenant, if not represented) on a weekly basis, noting the prospect’s leasing status. As part of your follow-up, prospective tenants may want to revisit the space or bring others from the company. This extremely positive sign shows that the tenants envision themselves in the space, and soon, you may be asked to submit a proposal for lease. Most tenants will progress to the proposal stage or move on to another building within a month. Sometimes, prospective tenants will return if negotiations at another building go awry, so act politely and professionally if a tenant initially passes on your property. And ask the broker what made the other property work better initially so that you might close the gap on any competitive differences.
Chapter 6
Create a Space Plan
“It’s not just what it looks like and feels like. Design is how it works.”1
—Steve Jobs, co-founder, Apple Inc.
Goal: Create a Practical, Appealing Space Plan for a Tenant Within Budget So the Landlord Can Estimate Construction Costs and Structure a Lease Deal That Pencils
Note: architect and space planner are used as interchangeable terms in this chapter.
With pencil poised over tracing paper, an architect sketches plans for a new office. A cornice here, a spotlight there. Five minutes and four exposed brick walls later, the space planning meeting has careened wildly out of control. The property manager silently rehearses ways to tell the prospective tenant it cannot afford this Taj Mahal of an office. This all-too-common dilemma can arise because of miscommunication between the leasing representative and the architect, poor timing, or unrealistic expectations on the tenant’s part. Space planning, the initial layout sketch of a prospective suite, informs the level of tenant improvements, which then influence the financial package of the entire lease deal. You, the leasing representative, must guide the process so as to arrive at a space plan that fits both the tenant’s vision and the landlord’s wallet.
So how do you work with a prospective tenant and architect to design a suitable space and, in doing so, move toward a signed lease deal? Specific office layouts are a result of each tenant’s values, priorities, work style, and, yes, budget. And while the process resembles a loose recipe more than a precise formula, cutting a bit of this and emphasizing some of that, great space plans do result from the following general practices.
Time It Right
In large part, space plans succeed because of appropriate timing. Early in the leasing process, the landlord and tenant haven’t agreed on economic terms yet, including the tenant improvement budget. As such, space planning without economic parameters becomes nearly impossible. But if space planning is deferred too long, tenants may latch on to a competing building where they can visualize themselves and have become economically and emotionally invested in the space.
As an additional layer of complexity, market conditions influence space plan timing, as landlords typically bear space planning expenses. In tight markets with few vacancies, landlords may require a signed letter of (lease) intent prior to space planning. In soft markets, landlords may commit space planning resources once they evaluate a tenant as a viable prospect and not one simply shopping the market to use in renewal negotiations with its existing building. Wise landlords gauge the local market before investing space planning dollars, to get the most bang for their architectural buck.
Evaluate Your Prospect
To proceed with your own space planning, evaluate the prospect within the context of the local market. First, consider the prospective company’s viability as a tenant. Because landlords typically foot the bill for space planning expenses, tenants can exert pressure to complete a space plan simply because it’s all upside for them (i.e., the chance to plan future offices) with little downside. The planning process adds value for tenants whether or not they sign a lease at a particular building. As such, the landlord needs to decide if the tenant is a real prospect. Otherwise, you squander dollars creating plans for companies that fail to sign leases and, in a worst-case scenario, help your competitor’s building by designing offices for its tenant on your dime.
Another important consideration is your property’s electrical capacity relative to the prospective tenant’s needs. In recent years, population density and the prevalence of electronics place demands on building infrastructures (especially true for older properties). Understanding your properties’ capabilities relative to tenant demand will become crucial to proceeding with any proposed deal.
Should You Open Your Space-Planning Purse?
• Do the tenant’s credit and financial statements appear strong?
• Is your building the tenant’s first or second choice?
• How generous are your competitors in terms of space planning services?
Review the Financials
Although a prospective tenant’s financial strength should ideally be assessed prior to space planning, many landlords proceed with space planning based on a somewhat loose understanding of financial strength and company integrity. Space planning expenses are generally considered a necessary marketing expense. The whole process is a little chicken and egg; without a bona fide prospect you do not do a space plan, but without the space plan you may not be able to convert a prospect into a tenant. At the end of the day, space planning remains a calculated risk and necessary marketing expense.
Evaluate the Prospect’s Interest in the Space
Does your prospective tenant have a vision? Oftentimes, you can gauge a tenant’s interest by the forethought the tenant demonstrates. When prospective tenants speak as if they already occupy the space and have specific requests, they are envisioning themselves as occupants. Conversely, when tenants cannot articulate their needs and make no specific references to the suite, the space plan might be just an exercise (on your dime).
Just a Paint Swatch, Please
Sometimes, space plans prove unnecessary. If the suite can suffice with cosmetic changes such as paint and carpet, the tenant chooses from building standards or engages an interior designer for minimal time and cost. As is (or almost as is) spaces can work for tenants on a tight budget or with brief lease terms, in an effort to reduce costs and keep rent low.
Assess Within the Context of the Market
Sometimes, circumstances—either a tough leasing market or a red-hot prospect—necessitate a space plan before a landlord can qualify a tenant’s financials. One solution to this dilemma is for the tenant to indemnify the landlord for the cost of the space plan until the tenant provides solid financials. (Refer to appendix B for an indemnification letter when proposing such an arrangement to the tenant.) Once the landlord reviews the financials and decides that the tenant prospect would have qualified for space planning, the indemnification disappears. Another, even better, solution is for the tenants to pay for the architect and have the landlord reimburse them once the financials have been reviewed and approved.
Sometimes, circumstances—like a red-hot prospect who’s in a rush—necessitate a space plan before a landlord can qualify a tenant’s financials. One solution to this dilemma is for the tenant to indemnify the landlord for the cost of the space plan until the tenant provides solid financials.
As a note of caution, while indemnification letters allow the parties to leapfrog the natural deal progression, they can lessen pressure on both parties to deliver promised items. If a tenant pays for its own space planning because of the chore of collating financial information, both the landlord and tenant can be tempted to proceed full steam ahead. Later, should the tenant reveal its weak credit, choosing not to consummate the lease b
ecomes more difficult as both parties have invested time and resources. So use space planning indemnification letters judiciously, opting instead to complete the crucial credit check process in most cases (more on that later).
I once showed space to a Fortune 500 tenant whose decision maker wanted the deal–the terms and space plan–tied up in one neat package. He planned to review the deal in the airport lounge, between flights. The office manager knew that without an office layout scheme, the decision maker’s attention would shift to other concerns or another building. Because of the company’s sterling reputation and the office manager’s confidence that the decision maker would like the suite, I made an exception. Prior to reviewing the formal tenant financials, I agreed to bear the immediate expense for a space plan. The office manager and architect developed a space plan that afternoon. Before the airplane’s wheels lifted, the executive approved the deal and we moved on to the formal proposal stage.
Understand Space Planning Expenses
Commercial space planning costs can account for a quarter to nearly one-third of the total architectural expenses, which include full-blown construction documents. According to Archinect, an online discussion forum for architects, space planning costs are approximately $0.35 per square foot with complete architectural drawings hovering around $1.25 to $1.50 per square foot. So your typical 5,000 square-foot tenant will cost $1,750 in architectural fees for space planning alone, enough to toggle the marketing needle. Even with the reduced costs of an in-house planner or office planning software, space planning still amounts to money and time.
While the tenant may not feel the pinch of the space planning expense initially, such costs may become part of the eventual lease terms. In order to recoup funds, space planning costs may be amortized at current interest rates over the lease term into the tenant’s rent.
A Fat Wallet
The American Institute of Architects (www.aia.org) provides cost information on space planning and construction documentation, which vary by market.
Communicate the Budget to the Architect
The interconnected nature of space planning and tenant improvements, and thus rent, makes understanding the budget critical. While it’s not the architect’s job to negotiate rental rates, common sense tells you that it’s prudent to have the architect understand the deal parameters. Further, if a tenant plans to contribute tenant improvement dollars for the space, the architect should confer with the tenant at intervals to make the design fit the tenant’s desires and pocketbook. Otherwise, the tenant won’t get that living green wall that’s undeliverable on a bare-bones budget.
I know a wry developer who says he stays within “shin-kicking distance” of his architect. The quip underscores the importance of a landlord’s communication with the architect in order to design a space the parties can afford. It’s hard to recover from dashed expectations when the tenant learns the designed space is way over budget. In fact, it may be enough to drive them from the building. After all, if the landlord and architect don’t communicate well enough to create a workable space plan, what does that say about the landlord’s professionalism?
Run an Effective Space Planning Meeting
The space planning meeting is where the tenant, architect or designer, and landlord’s representative gather to design the tenant space. By organizing the various aspects of the space planning meeting, you allow the lease process to proceed. Here’s how:
Stay at the Hub
The most effective leasing agents act as sane traffic controllers at the hub of a deal, directing the process. Creating space plans provides the landlord with an understanding of the tenant’s business, preferences, likes and dislikes, and office culture. Further, good landlords recognize space planning as an absolutely critical bonding time in the lease process. Controlling? You bet. Resist the temptation to delegate the process to the architect or contractor. In this role, you host all meetings; approve all correspondence, estimates, and plans before they are sent to the tenant; and oversee the completion of all work. Moreover, your oversight and attention to detail indicate a high level of service to your prospective tenants as they choose a landlord.
The Right Guest List
From the building owner’s side, invite the landlord’s leasing representative and the architect to the initial space planning meeting. From the tenant’s side, the decision-making executive in charge of the office, along with the office manager, should attend. Sometimes the tenant delegates the task internally to an employee who doesn’t have decision-making power, or worse, to a large committee. Either of these scenarios is a recipe for disaster. In the first instance, individuals without enough clout can fail to articulate space needs, oftentimes because of political considerations or long-term business goals they might not understand. In the second scenario, large groups can require a lot of work to reach consensus.
As the fearless leasing leader, your task is to ensure that you invite meeting attendees who have the decision-making authority to arrive at a viable space plan. Ask yourself (and the tenant) where the buck stops, and then extend invitations to those people. If the executive in charge declines to attend, ask if the individual that will attend has decision-making authority. Explain that the space planning budget allows for an initial plan with only minor revision so the tenant recognizes the significance of creating a quality plan at the first meeting. Finally, if the prospective tenant has an in-house planner or facility person (often toting a company standard layout), all is well because the tenant’s internal team will have experience mapping out the office configuration.
Red Flag Warning
Your antenna should perk up if the tenant’s decision maker declines your invitation to the space planning meeting, as it may signal a disinterest in the potential suite (and in doing a deal at your property).
Adding Engineering or Mechanical Experts
Sometimes a tenant expresses concern over a mechanical or technical aspect of the building. In those situations, invite your building engineers (or subcontractors) if they articulate technical issues well. If engineers do attend the meeting, they usually depart after addressing any building-systems discussions and do not stay for the remainder of the space planning meeting. This added level of service speaks to the landlord’s willingness to hire experts to handle tenant concerns.
A Building’s Integrity
Whether the landlord engages a general contractor or allows tenants to provide their own, most landlords specify the subcontractors that can affect building systems: approved plumbers, electricians, HVAC, and roofing contractors. Also, those landlords who do permit outside contractors insist on a review-and-approval procedure for plans and construction.
Advance Preparation
You—and possibly the space planner—should visit the tenant’s existing office in advance of the meeting, noting the differences between the existing space and the prospective suite. This visit may help ascertain any special space needs the tenant has overlooked. Also, visiting a tenant’s existing space gives you a deeper look into that world. The more you learn about your clients, the more you can service and negotiate with them, both for architectural purposes and other lease issues. Is the company bursting out of the space? Then you should have a motivated prospect, ready to reach agreement in good time. Is the parking lot packed with cars? If so, your building with ample parking will look attractive and you can emphasize the easy access. Your observations will help you capitalize on the advantages your property offers, both during the initial space planning meeting and beyond.
Our finish board that displays building-standard paint colors, carpet samples, and baseboard and countertop materials is the envy of Vanna White. It simplifies all the finish choices for the tenant. Oftentimes, lease decision makers will defer to the office manager’s (or someone else’s) selection of such finishes, engaging them in the leasing process. After all, most people appreciate having a say in their office environment.
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bsp; Checklist: The Right Materials on Hand
As-built blueprints (or at a minimum, a floor plan)
Building-standard finish boards (including paint colors)
Building-standard carpet choices
Building-standard laminate and/or stone samples
Tracing paper
Pens and pencils
Architect’s (scaled) ruler
Tape measure
Keys to unlock the vacant suite, for an impromptu visit
Any computer-aided design (CAD) tools, if appropriate
Computer charging cords
Virtual reality tools/technology, if used Note: while CAD sketch tools have become prominent in the architectural and construction fields, tracing paper and pencils have their brainstorming advantages.
The Meeting Kickoff
At the start of the meeting, introduce the architect and explain the space planning process to the prospective tenant, who may be inexperienced in office design. Tell the tenant that the architect will ask a series of programming questions to ascertain the tenant’s most critical needs, such as “Do you need a conference room, and if so, for how many?” and “Do you prefer an open or closed office plan?” Then, the architect prepares a preliminary sketch of a potential office with the tenant’s input. By the close of the meeting, the goal is to reach a workable design that the tenant can take home and the landlord can send out for construction estimates.