by Alice Devine
Landlords oftentimes agree to 95 percent of FMV because they do indeed bear fewer expenses and uncertainties with an existing tenant than a new tenant.
Some landlords consider the notice period the most significant aspect of this clause. Consider a 10,000 square foot tenant with only a three-month notice period. It generally takes a landlord a certain amount of time to clean the space, place it on the market, tour prospective tenants, negotiate a lease, and construct tenant improvements. Depending on the market conditions, a larger space might take quite a while to lease. Landlords often make the notice period consistent with the time anticipated to market the space.
Right of Offer
A right of first (or second or third) offer clause gives tenants first (or second or third) dibs on the right to lease a specific space. The landlord provides written notice of available space, at the same rent and on the same terms that the landlord intends to offer other prospective tenants. The tenant usually has a specified number of business days to accept the offer, after which the landlord can offer the space to other prospects. The clause usually requires the landlord to reoffer the space to the tenant in the event the landlord proposes to lease the space at an effective rent less than a certain percentage (e.g., 90%) of the rent or upon other terms which are substantially more favorable to another prospect.
Common Objections and Concerns
Tenants sometimes lobby to exercise their offer at a percentage of the rental rate that will be offered to other prospective tenants, arguing that they are a known quantity. Tenants also try to obtain longer response times, in order to give themselves maximum flexibility.
Landlords will sometimes accommodate a slight rent discount or modify the time frame required to respond to the offer.
When weighing rent versus response time, you need to ensure that you stay nimble in the marketplace. Response times of three to five days are often deemed appropriate, especially because the tenant, as an existing occupant, knows the property.
Right of Refusal
A right of first refusal is similar to the right of offer discussed above, but it assumes that the landlord has procured a viable prospect for the available space (as opposed to offering the space to the existing tenant without another interested prospect . . . hence the difference between offer and refusal). This type of clause is even more burdensome to landlords than a right of offer clause because they need to market the space, reach an approximate agreement on business terms, and then tell their prospects to wait while the existing tenants who enjoy a right of (first) refusal clause decide if they will take the space on the same terms. Whew! That’s complicated.
Further, if the existing tenant declines and the landlord and prospect move ahead on the lease negotiation, the lease terms must usually be within certain parameters or the landlord will be forced to reoffer the space to the existing tenant. It is exhausting work for the leasing agent. Once you recognize this scenario, you will be reluctant to offer tenants a right of refusal clause. Instead, if you give away a right, it will be a right of (first or second) offer. Thus, the semantics of a right (offer vs. refusal) can significantly alter your leasing obligations and flexibility.
Common Objections and Concerns
Generally, tenants express similar objections as those under the right of offer clause (see above).
Expansion Rights
This clause gives the tenant the right to expand into a specific space by giving written notice to the landlord by a prescribed date. The option’s timing and available space are generally associated with another tenant’s lease expiration, subject to any other rights on the space. Again, this type of right is restrictive because when (and if) the space becomes available, the landlord is obligated to lease the space within certain parameters. Many times the rent mirrors the rental rate under the tenant’s existing lease.
Common Objections and Concerns
Tenants may try to get a discount on the rent for the expansion space. Also, tenants may try to obtain the shortest possible notice period for exercising their option.
Many landlords try to keep the notice date as early as possible and the rent close to or at fair market value, or they try to avoid giving this right altogether. Landlords will sometimes talk about the benefits of having a great working relationship rather than a right on a specific space that may or may not suit the tenant in the future.
When I give a property overview at the start of a tour, I say, “We pride ourselves on long-term, quality relationships. Your company’s growth is the type of problem we love to have! For example, our tenant XYZ initially leased 5,000 square feet of space, grew to 10,000 square feet, and now we’re proud to have them as our anchor tenant with 30,000 square feet in Building B.” I emphasize that we will do our best to accommodate the company’s growth via ongoing dialogue and a strong relationship.
Lease Signatures and Delivery
Once lease clauses have been discussed and agreed upon, there’s the logistical process of distributing the lease for signature, arranging its full execution, and delivering it.
Lease Forms
Landlords usually present their own lease forms for tenants to sign. Lease document lengths can vary dramatically depending on the size of the tenant, the length of the lease term, and even the quality of the space leased. Some examples include:
Fast Track Lease Forms
Many landlords employ fast track lease documents, a simplified or abbreviated version of the standard lease. Particularly well suited for a small or short-term lease, these documents allow for quicker negotiation because of their brevity. A pleasure to use, fast track leases streamline the process for all involved.
Similarly, lease renewals can be a short addendum to the existing lease, modifying the financial terms and updating only those paragraphs in the lease that are outdated or which both parties wish to change.
Tenant Lease Forms
Conversely, national (or international) companies with significant square footage and multiple locations often develop their own lease forms. These companies try to insist on signing their own form rather than the landlord’s lease. Obviously, this type of arrangement favors the tenant and may require a significant time investment on the landlord’s part to reconcile the property’s standard lease with the tenant’s form and ensure all the salient points are addressed. The question of whether or not to use a tenant’s form depends on how intractable the prospective tenant remains regarding this issue and how badly the landlord wants the company as a tenant.
I once leased a 50,000 square foot office to an insurance company. At the tenant’s demand, and because of its size and creditworthiness, we allowed the tenant to use its own lease form. It became critical to understand the tenant lease form because it would lack the nuanced advantages contained in our own lease document. My homework? To compare, clause-by-clause, the tenant’s lease form to ours. The silver lining? Once the lease was signed, its administration became easier because of my familiarity with every clause. Honorary law degree not included.
Routing the Lease for Signature
Standard lease packages include multiple copies of the lease, with each signature or initial area tagged for ease. The documents are usually signed first by the tenant and then go to landlord for signature and final distribution. Most leasing professionals place a summary and financial analysis atop the lease forms for internal company review. The summary outlines the tenant, its business, the financial lease terms, and the tenant’s credit strength. By shepherding the documents through the signature process (and communicating along the way), you eliminate the potential of a lease sitting on someone’s desk (or in email), lost in a paper (or electronic) pile.
Using Technology to Expedite the Process
Technology provides tools to assist you in the lease documentation process. For example, video conferencing calls shrink the distances between continents and time zones. And word processing tools with markup fun
ctions allow edited lease language to be underlined or colored, which makes reviewing changes more efficient. On a larger scale, web-based transaction management systems let brokers and clients collaborate online during the entire transaction process; a single log-in shows all the pending deals, action items, responsibilities, and time lines. These tools change transactions in a meaningful way by streamlining leasing tasks, especially administrative ones.
While technological iterations offer potential time savings, there is a tension between the learning curve of technology and the efficiencies realized. Lease transactions have a pace of their own, and unless the deal coincides with an adaptation of new technology (or already skilled users), leasing professionals often prefer to finish a deal using their current practices, leaving the learning curve of new technology for future deals. The underlying concern is that the longer a deal drags on, the less likely it is to be consummated.
To complicate matters, the real estate industry has traditionally been a slow adopter of technologies. In a sector that places high value on personal relationships and, to some extent, protects its competitive edge of relationships and information, technology can seem threatening. As such, it’s important to adopt the local technological tools of your marketplace so you are on the same electronic page as other negotiating parties.
Signed, Sealed, and Delivered
Leasing is for the superstitious . . . or just plain paranoid. I’ve seen deals unravel over an innocent remark that led to unintended consequences. I once overheard two airline passengers discussing a nearly complete office lease. By the time we’d crossed a time zone, one passenger had referred the other to his best friend’s brother-in-law, a broker. Hmmm, I wondered how this deal might change once others became involved. For that reason, I’ve learned to stay mum until the deal is closed. And I mean a lease that is completely signed, sealed, and delivered.
So you’re almost at the finish line. Once the tenant signs multiple copies of the lease, the landlord does the same. The landlord distributes the fully executed lease or lease amendment to the tenant, landlord, and, if applicable, any other building ownership entity. The landlord banks the security deposit, the architect and contractor are notified to start the tenant improvement process, the landlord submits the brokerage commission invoice for payment, and it’s full steam ahead.
Now the work of constructing the space and cultivating happy tenant relationships begins. In the meantime, utilize the good skills you’ve developed by leasing a space successfully, and your tenants should remain with you for the long term.
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Glossary
Some commonly used real estate terms and their definitions.1
BOMA measurement: A standard for measurement as established by the Building Owners and Managers Association (BOMA) with its published “Standard Method of Floor Measurement for Office Buildings, an accepted and approved methodology by the American National Standards Institute (ANSI). Throughout the years the standard has been revised to reflect the changing needs of the real estate market and the evolution of office building design.”
construction documents: The multipage, detailed set of architectural drawings that are prepared for permitting and used to construct space.
comparable: Used to discuss lease deals that can be considered worthy of comparison and/or of equivalent quality.
common areas: Areas of the building that are used by all tenants and their guests. Examples include the building lobby, hallways, bathrooms, fitness centers, etc.
elevation view: A frontal view, as if you are standing on the ground looking at an object in front of you.
encumbered space: “A block of space offered for lease by a landlord to which another tenant has some right to lease or occupy at some future date.”
floor plate: “The gross square footage of each floor in a multistory building. Individual floor plate sizes may vary according to the design of a building.”
gross lease: “A legally binding contract in which a landlord receives stipulated rent from a tenant and is obligated to pay all or most of the property’s operating expenses and real estate taxes.”
letter of intent (LOI): “A letter of intent is an agreement(s) between two or more parties before an actual agreement, such as a lease, is finalized . . . While LOIs may not be binding, provisions of them can be, e.g., non-disclosure and exclusivity.”
load factor: “The load factor is calculated by dividing the rentable building area (RBA) by the usable area.” (Synonym: add-on factor, the percentage of the common area attributed to each tenant’s suite to calculate the rentable square footage.)
net lease: “A lease in which the tenant pays a share of operating expenses in addition to the stipulated rent. Disclosure of the specific expenses to be paid directly by the tenant is required.”
partition: A wall which usually stops at the ceiling level.
personal property: Movable property, not permanently affixed to land or buildings.
plan view: A bird’s-eye view, the perspective from looking down at a space.
real property: All structures (also called improvements or fixtures) integrated with or affixed to the land and/or building.
rentable square footage: A method of calculating floor area in office buildings that involves combining the usable square footage of a building with the common areas of the building (usually expressed as a percentage share per tenant) to arrive at the total rentable square footage, often per the method established by BOMA.
slab to slab: A fire-rated wall, built from the floor to the underside of the next floor.
space plan: A schematic or rough drawing by architects or designers to sketch the layout of an office space.
tenant improvements: Fixed (i.e., attached) construction improvements made to an office space.
turnkey: A complete product or service that is ready for immediate use; in real estate, it refers to a finished suite, ready for occupancy.
usable square footage: A method of calculating the square footage in tenant spaces that accounts for the area that can be used, but excludes common area measurements. The method for measurement typically refers to BOMA standards.
Appendix A
Market Research
Resources for market research (type market and/or research report into the search fields):
CBRE Group; www.cbre.us
Colliers International; www2.colliers.com
Cushman & Wakefield; www.cushmanwakefield.com
Jones Lang LaSalle; www.jll.com
Marcus & Millichap; www.marcusmillichap.com
National Association of Realtors; www.nar.realtor
National Real Estate Investor; www.nreionline.com
Newmark Knight Frank; www.ngkf.com
Subscriptions and/or databases for market research:
CoStar; www.costar.com
LoopNet (owned by CoStar Group); www.loopnet.com
Accruent; www.accruent.com
42Floors; www.42floors.com
Appendix B
Space Planning Indemnification Letter
Disclaimer: The legal language used in this letter is intended for reference only and you should confer with your own attorney for legal advice.
Dear Mr. Prospective Tenant,
It is the intent of [TENANT NAME] to occupy its premises at [BUILDING NAME AND ADDRESS] by the anticipated suite improvement completion date of [Month/Day/Year]. Upon execution of this letter, [TENANT] (“Tenant”) agrees to indemnify [LANDLORD] (“Landlord”) for the cost of space planning up to an amou
nt not to exceed [$DOLLAR AMOUNT] in the event that Tenant does not consummate a lease with Landlord at [BUILDING NAME AND ADDRESS] by [Month/Day/Year].
Upon receipt of this executed letter at my office, I will authorize [ARCHITECT’S NAME] to commence space planning.
Sincerely,
[LEASING CONTACT]
AGREED TO AND ACCEPTED BY:
NAME: ________________
TITLE: ________________
Appendix C
Lease Proposal for a New Tenant
Here’s the big, bold disclaimer: Every property has its own proposal, and your attorneys should review and approve your particular proposal, but for discussion purposes, a generic format is shown below. As a note, the name Main Street Office Center and any other sample names are fictional and intended for illustration purposes only.
Proposal to lease office space at 123 Main Street
Dear Prospective Tenant:
[Brief introduction, something like: We are pleased to present the following proposal to lease office space to your fine company . . .]
Main Street Office Center
Main Street Office Center has emerged as one of the premier office environments in the ABC area. Developed by a partnership of Big Insurance Company and the principals of XYZ Development Company, 123 Main Street has the distinct advantage of being in an almost completely self-contained development. The Park features over one million square feet of first-class office buildings, an array of restaurant facilities, a high-quality hotel, and several freestanding financial institutions, all of which are combined into a richly landscaped, campus-like environment.