by Alice Devine
Prepaid Rent
A third alternative is to ask for six to twelve months of prepaid rent. Similar to an increased security deposit, this option takes away the hassle of dealing with a potential late- or non-payer of rent, but it’s a fairly tough proposal to negotiate, as tenants dislike tying up their cash. An appropriate compromise might be for the landlord to discount the early rent payment in order to acknowledge the time value of money.
Lease Guaranty
In addition, sometimes a lease guaranty eases a landlord’s jitters over the prospective tenant’s financial state, if it’s signed by a different entity than that on the lease (if your tenant goes belly up, a guaranty from a different entity is not swept up in bankruptcy procedures). Of course, a guaranty is only as good as the strength and liquidity of the guarantor’s financials that support the promise. If the guarantor is a company, it should have US-based assets that can be accessed in the case of tenant default. And if an individual guarantees the lease, you need to consider whether that agreement could be compromised by a move, divorce, or other extenuating circumstance.
Leasing personnel can take a protective stance by requiring increased security deposits, letters of credit, guaranties, and prepaid rent to shore up the risk of a tenant with less than stellar financials.
Limited Rights for Credit-Risky Tenants
Leasing representatives also tinker with lease language that disallows tenant privileges if the lessee fails to meet rental obligations. For example, landlords can insert a clause into extension or expansion options that renders those options null and void if the tenant pays rent late twice during the lease term. Better yet, landlords do not give expansion or extension options to tenants with wobbly financials. And prudent landlords retain substantial late-payment and interest-charge clauses in the contract for nonpayment (or late payment) of rent so tenants have a disincentive to miss payments.
Ongoing Financial Reports
Yet another tool in the defensive leasing arsenal, landlords can insert lease language requiring tenants to provide audited financial statements at regular intervals or upon request during the lease term. Refer to your own legal counsel for the language.
Finally, think creatively and intelligently. It takes some work to achieve a professional comfort level with companies that have mediocre credit or are not yet profitable. Measures such as a lease guaranty, an irrevocable letter of credit, or a large security deposit should also take into account any capital investments (commissions and tenant improvements), plus several months of rent to cover leasing downtime in the event of tenant default. Defensive leasing makes good business sense in any real estate environment.
Part III
Closing the Lease Deal
Chapter 8
Craft a Proposal
“Strike while the iron is hot.”
—Any old blacksmith
Goal: Craft and Deliver a Proposal That Will Lead to a Signed Lease
In the third portion of this book, with a successful tour, space plan, and financial analysis behind you, the focus turns to presenting a winning proposal that leads to the next stage of lease negotiation and, hopefully, a fully executed lease document.
Present a Compelling Proposal
Successful proposals contain many important elements, each vitally important: good timing, an understanding of your tenant, a winning tenor and attitude, and clarity of deal terms in conjunction with deal terms (rent, tenant improvement package, rights, and concessions) that compete relative to the local market.
Good Timing
Timing plays a critical role in proposals. At a certain point in the deal (after tours and space planning), the landlord and tenant are understood to be negotiating primarily with each other. Exclusive daters, the implicit or explicit understanding is that they are headed to the altar. As in romance, real estate commitment can become a little blurry around the edges. Take the space off the market too early and you lose other prospects and some negotiating leverage. Fail to commit until too late and your prospect may become jittery and bolt. So when is the right time? More art than science, superb professionals develop a sense of timing over years of experience. For mere mortals, typical right times might be when the tenant’s broker says your building has made the short list, when the tenant comes back to see the building for a second or third time, when you ask if the prospect would like a proposal and the answer is yes, when the tour went so well that the tenant is eager to proceed, and so on.
I’ve seen deals unravel during innocent cocktail parties. Some rumor surfaces—like a company moving—and a partygoer says his brother’s best friend is a broker who can get a better deal in a nearby building . . . the next day the broker calls your prospective tenant. The tenant hesitates, filled with uncertainty, and boom, momentum cools. That’s why there’s no time like the present to close a deal.
Conversely, flags that demonstrate a prospect’s disinterest can also be reflected through timing. For instance, if more than two weeks elapse between the tour and any proposal discussion, the space (or location or rent) probably does not make sense for the tenant. If the prospect (or the broker) does not take your telephone call, or doesn’t respond to a call or email within twenty-four hours, continuing on to the proposal stage becomes less likely. At the end of the day, a proposal is just that, so don’t sweat the decision of the precise right moment, but do pay attention to movement and trends: forward, stagnant, and backward. After several deals, you will develop a sense of momentum.
They’re Just Not That into You
Prospective tenants who are slow to return a call or email, who wait weeks to ask for a proposal (to shop it in the market), or who send a low-level employee for the space planning meeting (they are not invested in the office layout) indicate disinterest.
Understanding Your Prospective Tenant
Taking the tenant’s business temperature allows you to tailor a competitive proposal. First, pay attention to what the tenant values and highlight those features of the property in the proposal. For example, let’s suppose you toured a fitness fanatic whose eyes lit up when he saw the weight room available to all tenants. You might feature the fitness center and outdoor basketball court in the proposal. Then, when delivering such, you let him know about the regular pickup basketball games. Corny perhaps, but this type of interaction shows that you’re the type of landlord who cares about tenants and their interests. And that mindset goes a long way in assuring tenants that your service will extend to their facility concerns.
In addition, in our technological age of text, cloud, and cell, determining the best communication method for the client helps your leasing efforts. Massachusetts Institute of Technology professor Sherry Turkle underscores the importance of strong communication by balancing electronic exchanges with face-to-face conversations that allow for deeper dialogue and nuance.1 By learning how colleagues prefer to communicate—email, text, iMessage, meetings, and so on—you can improve your level of service to prospective tenants and brokers. Of course, certain documents, such as proposals, need to be written, but the communication around and delivery of formal documents can be adjusted for your client.
Pay Attention to Your Prospects’ (and Their Brokers’) Habits
Are they morning people? Do they stay late on Friday afternoons? Become animated after a morning swim? By keying into personal preferences through observation and conversation, you improve your chances of successful communication.
Striking a Winning Tenor and Attitude
The proposal stage perches the landlord in a delicate position between courtship and commitment. The tenant is, oh, so attractive. Yet, you still want to be sure you can strike a good rent deal with an acceptable level of capital investment. This strange dance of letting tenants know you want them while simultaneously outlining lease obligations has a seesaw movement. While this phase of leasing requires dialogue and compromise, you need to keep your eyes on the prize: a long
-term, strong landlord-tenant relationship. As computer scientist and author Randy Pausch observed, “Brick walls are there to give us a chance to show how badly we want something.”2 Allowing the goal of winning the prospective tenant to underpin all of your discussions makes negotiations more workable. Thus, framing your proposal in a positive manner communicates your intended goal: to welcome the prospect as a tenant.
Recognizing Potential Tension
In order to handle conflict, today’s literature lauds persistence as a critical ingredient of success. In researching success, both psychologists and business professors zero in on resilience, the ability to recover from or adjust to change or plain bad luck. The term adversity quotient (AQ) has gained traction in business nomenclature. As a result, many MBA programs incorporate AQ theory courses into their curriculums. Indeed, Stanford University’s Resilience Project states that setbacks should be considered “bona fide revenue through which new perspectives are gained and critical shifts in thinking are heralded.”3 Persistence and resilience seem worthwhile habits to cultivate, especially because real estate is a long-term business with tenants gained and, sometimes, lost.
My company CEO believed that those frightened of conflict would not succeed in real estate leasing. While every property manager and leasing agent may not have the iron stomach of a litigator, encountering some level of conflict seems inevitable. Multiple parties, different economic goals, and long-term commitments create a certain degree of potential strife. For those who avoid conflict, it can be tough to iron out differences and close a lease deal. The good news is that, in my experience, once the negotiation points are resolved, the lease signed, and the tenant moved in, it’s full steam ahead. Short-term memory can be a beautiful thing.
A Clear Proposal
Use an Introductory Summary to Highlight Your Property
A proposal’s brevity can be deceptive. Although just a few pages long, proposals contain all the financial terms and important rights of a lease. These business points provide the infrastructure on which the remainder of the lease document will hang, so they need to be thorough.
Open your proposal with a description of the property, its amenities, and so on, with an overview similar to the property introduction you used on the tour. Seemingly redundant, the summary assists the tenant, particularly any decision-making executives who have not yet toured the site or specific suite. In addition, this transmittal gives leasing personnel an opportunity to reiterate the attributes of the property, rather than relying on others to communicate such.
To pave the way for ensuing business terms discussions, thoughtful landlords express how much they look forward to welcoming the prospect as a tenant and to a continued, strong relationship.
Offering Business Terms
A proposal contains most of the quantifiable elements of a lease: the rentable square footage, rent, term length, tenant improvements, brokerage acknowledgment (if any), security deposit, operating expense obligation, rights such as expansion or extension, parking spaces, storage space, and a contingency clause that clarifies there’s no deal until the lease is fully signed and delivered to each party.
Business terms that are usually specified in a proposal to lease
Rentable square footage
Rent
Term length
Tenant improvements
Parties to the lease (defining specific landlord and tenant)
Commission (not necessarily the amount but the acknowledgment that a commission will be paid to a named brokerage firm)
Security deposit
Operating expense obligation
Parking spaces
Storage space (if applicable)
Rights such as those to expand, extend, terminate, or relocate
A contingency clause that says the terms of the proposal are not binding until the lease is signed
Lease Rights and Concessions
Whether you manage tenant space rights electronically or on paper, here’s a word to the wise: double-check the existing rights on any space before offering it to another prospect.
Because most encumbrance clauses specify that the rent (and other general business terms of the deal) the landlord will offer to the new tenant needs to be congruent with the existing tenant’s—oftentimes within 90–95 percent—you need to know that the proposal terms are within this margin before you formally notify the existing tenant of the offer. Should a deal evolve to be outside of these parameters, the landlord might need to restart the entire notice process.
To further complicate matters, most rights of first refusal have a response time of three to five days (and ten days, in some instances). This waiting period—after the space has been offered but before the tenant is obligated to respond—can cool a landlord’s leasing efforts in the market. So, in order to start the clock ticking, landlords often offer the space to the existing tenant prior to doling out a proposal to another prospect, but only after the prospect has become somewhat serious (otherwise, the landlord has to send a notice every time a prospect tours the space).
Electronic Stacking Plans
Software programs that track existing tenant rights (by displaying spaces with colors, ticklers for expirations, and important notification dates, etc.) can prevent proposal errors such as offering space without notifying an existing tenant who has a right on the same space.
Be Parsimonious with Rights
As you can see, managing rights becomes a cumbersome process, which is why landlords prefer not to concede them easily. When a tenant requests a right, the landlord can counter by giving examples of tenants who have expanded sans formal lease rights. Although this scenario may seem one-sided, the reality is that by encumbering space, the landlord limits his ability to accommodate growing and new tenants. In general, landlords are motivated to satisfy existing tenant renewals and expansions—they’re less costly, they require less paperwork, and the credit risk is already known.
When a tenant insists on such rights, size matters. Typically, the more square footage a tenant leases, the more willing a landlord is to grant rights and other special concessions.
In addition, the type of right you give makes a difference. Typically, there’s a right of offer, a right of first (or second) refusal, a right to expand into a specific space, and so on. Understanding the nuances between these various rights is helpful. (More discussion on this in chapter 10)
The Contingency Clause
Most proposals contain a contingency clause that specifies that the proposal is not a reservation of the premises and is also dependent on the review and approval of the tenant’s financial statements. Be sure to ask your legal counsel about this important clause. (See appendixes C and D for examples of lease proposals for both new and existing tenants, but note that they are intended as reference only. You should review your own lease proposal with your legal counsel.)
I once had a broker go absolutely ballistic with me over the telephone. He swore. He yelled. Why? He claimed he hadn’t understood that the offered space was contingent on an existing tenant’s renewal, even though we’d included such a clause in the proposal. While the broker may have blamed us to avoid embarrassment in front of his client, I realized I could have done better. I could have personally told the broker that the space was hot and that we were negotiating with others too. Then, he could have relayed the news to his client. Or at least he would have known and been able to decide what to do with that information. I resolved that in the future, I would have a conversation with the broker in addition to emailing or mailing a proposal with the written contingency clause.
Present the Proposal
When the proposal is complete, imitate your local florist and make the delivery in person. Arrange a convenient time, letting the broker and/or tenant know you’d like a few minutes to review the proposal with them. This face-to-face meeting allows you to explain the proposal, ad
dress any questions, and, most importantly, gauge the tenant’s and broker’s reactions. While brokers are accustomed to maintaining a poker face, over time you will develop a feel for the proposal response based on comments, body language, type of questions, and so on. If, however, brokers and tenants can’t meet or geography limits you, one approach is to let the broker know you are emailing (or mailing) the proposal, and then set up a videoconference chat or telephone call for review. Ultimately, a smoother proposal delivery saves time.
While our busy lives may tempt us to just press the Send button, prepping your proposal delivery with a call to arrange a review minimizes confusion. Calling ahead is of the utmost importance if a proposal contains variances from prior discussions, expectations, or potential misunderstandings. Few business people like surprises, especially the ones that lighten their wallets. For instance, if you are going to require a hefty letter of credit for a start-up company, it’s best to let the tenant and broker know in advance of the proposal delivery. When a proposal arrives but is incongruent with prior discussions and interactions, tenants get nervous. Understandably, the tenants wonder what other surprises await them. Bam! There you are, with a skeptical–or worse, distrustful–tenant before even digging into the meat of negotiations.