This article discusses the details of a tenant’s needs and desires to be considered by a broker when locating space for the tenant.
Get the negotiations rolling
A broker negotiating nonresidential leases on behalf of a client needs to possess a high level of knowledge and expertise on the consequences of leasing, including:
- the economic and financial aspects of lease agreements;
- the legal consequences of each document affecting the lease; and
- the tax implications of the transaction.
These aspects of lease arrangements are separate and entirely unrelated to the physical condition and operating costs of the property.
The level of the broker’s technical expertise determines his ability to quickly ascertain the needs and requirements in a property which must be met to attain the objectives of the client, whether the client is a landlord or a tenant.
On comprehending the client’s objectives, the broker can either locate a suitable tenant, called a user, or property, called space or premises, and begin lease negotiations.
Most nonresidential tenants are totally consumed by their business. They have insufficient time to devote to real estate leasing decisions. Further, rent for space is generally less than 1.5% to 4% of their gross revenue, with the exception of high-traffic retail locations.
Conversely, most landlords are concerned solely with getting the vacant space rented.
Consequently, both the landlord and tenant frequently rely on the broker to put the lease package together (property data and lease documents).
The final lease agreed to will be the result of:
- the relative bargaining strength of the landlord and tenant;
- the time the landlord and tenant are willing to devote and the urgency given to negotiating the leasing details;
- the expertise exercised and attention given to details by their respective brokers; and
- local market conditions affecting demand for the property.
The broker typically gets the negotiations started. Once negotiations are underway, the broker’s advice helps shape the final terms. The broker generally drafts the offers and leases and closes the transaction. Landlords with larger leasing operations often prepare their own documents “in house” or retain legal counsel to do so.
The broker can best determine the tenant’s intentions for leasing property by preparing:
- a tenant lease worksheet so he can assess the tenant’s space requirements and the financial condition of the tenant’s business [See Form 555 accompanying this chapter]; and
- an offer to lease to commit the tenant so an acceptance by the landlord will bring about an enforceable agreement to enter into a lease. [See first tuesday Form 556]
List the tenant
With or without a written retainer agreement with a tenant, the broker who undertakes the task of locating space for the tenant assumes agency obligations to act on behalf of, and in the best interest of, the tenant.
However, without a written agreement, the tenant does not owe the broker an obligation to pay, or see that he is paid, a brokerage fee. [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]
Thus, the prudent broker undertakes to represent a tenant when the tenant enters into and signs an exclusive authorization to locate space. [See first tuesday Form 111]
Under a tenant’s exclusive authorization to locate space, he formally retains the broker as his representative. Thus, the broker will be paid a leasing fee, either by the landlord or the tenant should the tenant enter into a lease for the type of property described in the exclusive authorization agreement.
A leasing agent should investigate and confirm for himself why the tenant wants to move.
For example, the tenant’s existing space may have become too large or too small for his current or future needs.
Alternatively, the tenant may be arguing with his existing landlord over:
- the rent, common area maintenance charges (CAMs) or assessments when renewing a lease;
- current space requirements conflicting with space under an option to renew or extend; or
- a lease assignment or sublease of a portion of his present space.
By uncovering the exact reasons for moving, the broker is better able to find a suitable new location and premises or to negotiate a renewal or extension of the tenant’s current lease.
When a prospective tenant is starting a new business, the broker must pin down the tenant’s business projections at the outset. A tenant’s new business projections may be overly optimistic. He may want space which is simply too large or in too expensive a location. The tenant may have to settle for incubator space in a less desirable location which accepts “start-up” business tenants.
Conversely, a tenant may underestimate the potential of his business. The premises he favors may be too small to absorb his growth, frustrating any attempts to expand. The tenant will be forced to relocate again prematurely. Options or the right of first refusal on additional space may be the answer.
Also, overprojection of the potential income of a business under a percentage rent lease will reduce the landlord’s projected rental income.
Unless the broker considers the space needs and gross income of a user, the broker provides little long-term service to either the landlord or tenant.
The broker needs to develop a system to match up the right landlord with the right tenant.
Using a tenant lease worksheet
Consider a tenant who runs an insurance agency which has more employees and files than the premises it now occupies will accommodate. The tenant has three agents and a support staff of eight people, including secretaries, an office manager and a full-time computer technician.
The tenant expects the business to continue to grow. New space is required to meet his expanding needs.
The tenant contacts a broker to locate a new facility with tenant improvements suitable for him to occupy the space. The broker explains he is the leasing agent for a number of landlords in the area and should be able to find suitable space for the tenant. If needed, planners are available to design the use of the space and the tenant improvements for occupancy.
The broker prepares a tenant lease worksheet. [See Form 555]
The worksheet itself covers three key areas the broker must consider and analyze:
- the tenant’s current lease and existing space;
- the tenant’s current and future needs for business space; and
- the tenant’s financial condition and creditworthiness.
Regarding the tenant’s existing space, the broker will determine:
- the type of the building;
- the square footage;
- the monthly operating and utility costs; and
- the tenant improvements and trade fixtures.
A necessary review of the tenant’s current lease includes:
- the expiration date;
- monthly rent and period adjustments and assessments;
- the obligation to continue to occupy the premises;
- the obligation to restore the premises or remove fixtures;
- options to renew the lease or buy the premises;
- the tenant’s ability to assign or sublease; and
- the amount of the security deposit.
These facts will help develop the broker’s insight into the tenant’s obligations under his present lease.
When representing the tenant, the broker must point out and explain to the best of his ability the effect of lease provisions which he knows to be beneficial or detrimental to the tenant.
When representing the landlord, the broker will advise the landlord which terms the tenant is unhappy with and which lease provisions are “throw-away” clauses in negotiations since they are of little or no concern to the landlord and can become “bargaining chips.”
Locating new space
Next, the broker ascertains the tenant’s needs and goals for the new space.
Regarding the space requirements, the broker will need to uncover the tenant’s:
- current square footage needs;
- future square footage needs;
- phone, utilities and computer facility needs;
- heating and air conditioning requirements;
- parking, docking, turn-around and shipping requirements;
- access to freeways, airports and other public transportation;
- access to civic, financial, legal, governmental or other “downtown” facilities;
- access to housing areas; and
- any other needs peculiar to the tenant.
Some tenants may want to focus on specific geographic locations in the business market. Others may need the lowest rent possible, the exact location not being important.
The importance of each rent or maintenance provision in a lease will vary according to each party’s needs.
On completing a tenant lease worksheet, the broker discovers the tenant wants to:
- stay in the same community because of his wealth of strong business and social ties to the area;
- keep his rent fixed or have predictable (fixed) annual adjustments over the next three to five years; and
- move closer to the freeway for quick access to customers in outlying areas.
The tenant currently needs 4,000 square feet to accommodate:
- four private offices;
- a computer room;
- a reception area;
- a conference room;
- a storage room;
- a lunch room; and
- areas for sales staff and secretaries.
Financially, the business is profitable, but the tenant wants to keep rent at a minimum. Additionally, the tenant is concerned future inflation will mount. Thus, he does not want his rent adjustments tied to the Consumer Price Index (CPI). If they must be, then a ceiling needs to be set.
Also, the broker might suggest an option to lease additional space should the tenant’s business increase, requiring more space for expansion (and an additional fee for the broker if exercised).
Finally, the broker and the tenant need to discuss the rental terms available in the leasing market.
Several provisions in leases have a financial impact, favorable or not, on the landlord and the tenant. Financial provisions in a lease include:
- base monthly rent;
- periodic rental adjustments (CPI, percentage or rollover);
- responsibility for maintenance expenses (CAMs);
- assessments of real estate taxes and insurance premiums;
- lease assignability and subletting authority;
- options to renew or extend, or to buy;
- personal guarantees or letters of credit; and
- tenant improvements.