Delivering the Unexpected in Commercial Real Estate
Facility Planning: Presenting an Offer
Section 9
By now, your broker has been busy sifting through the numerous spaces presented to him by the market. She/he should now narrow your possibilities down to between six-eight options, of which you should further narrow down to between four-five sites to actually visit. If you followed this process correctly, the four-five sites should all meet your needs.
WARNING
Do not decide on one space only. The only way to be sure you are getting a real market deal is to have the market compete against itself. Choose three (3) buildings that you feel comfortable with. While you may think one is better than the other, approach the market as if all three are your first choice.
Putting Together the Offer
The offer, which is usually referred to as ”Intent to Lease” coming from the tenant (or an “offer to lease,” if it’s coming from a landlord), is considered a non-binding outline of the terms and conditions under which you can/will lease space. More importantly, it should serve as a paper trail of the negotiations. This way, there will be no surprises when it comes time to negotiate the lease, especially if attorneys who had no part in the negotiations are drafting the lease.
The most critical mistake in any offer is that you do not address all the issues.
What's Typical?
More often than not, we see proposals that consist of eight or ten basic deal points, such as in our first example. Unfortunately, when it comes to the lease, you now have to renegotiate (or start to negotiate) additional deal points. Here's what we typically see from area landlords or local brokers:
Example One
Issue: What The Offer Contained
1. TENANT AND LANDLORD
Stated name of building. How about the size of the building? What about the project? What’s the load or loss factor?
2. LOCATION AND SIZE OF PREMISES
Contained suite number, what floor the suite was located on, and which BOMA standards would be used to measure suite. Usually states that solely the landlord's vendor would determine measurement.
3. TERM
Stated length of term and estimated commencement date. Provided no clarification on what would be done if commencement is delayed or what mechanism would be used to memorialize the actual commencement date.
4. RENT PROVISIONS
Defined monthly per square foot rate for each year of the lease and that the lease would be a full service gross lease. Not too much else needed here, unless you wanted a definition of FSG.
5. OPERATING EXPENSES
Stated "Base Year" based on 95% occupancy. Contradictory wording often made it unclear whether this was lease was a base year or expense stop.
6. TENANT IMPROVEMENTS
Stated dollar amount of allowance and that tenant would be responsible for overages. Also stated what fees would be included in landlord's allowance as part of landlord's contribution. Provided no description of how overages or change orders would be handled.
7. PARKING
Stated number of spaces available to tenant and cost per space. Also stated how tenant (at the tenant's expense) could handle visitor parking. Are prices fixed, or can landlord change during term?
8. HVAC
Stated hours of operation and cost for after hour usage. Many proposals don't address this issue.
9. OPTION TO EXTEND
Stated number and length of option and that the new rate would be at "market value." No definition of how "market value" would be determined.
10. FIRST MONTH'S RENT AND SECURITY DEPOSIT
Simply stated that pays tenant pay first month's rent and a security deposit based on a percentage of last month's rent. Due upon execution of the lease.
11. COMMISSION
The landlord would pay broker 50% of the commission upon execution and 50% upon commencement based on landlord's schedule. No schedule was submitted or rationale given as to why the payment was to be split.
12. SIZE OF PREMISES AND ADJUSTMENT
An agreement that, upon completion of improvements, landlord could increase or decrease actual size—interesting.
13. APPROVAL CONTINGENCY
The proposal was subject to landlord's approval and the premises would not be taken off the market until the leases were signed. That is confusing in that the assumption must have been that the landlord authorized the broker to submit the offer in the first place.
While this gives you some idea of what you're getting (or more precisely, what you're asking for), we believe a lot more detail is required. Remember that the same proposal will go out to all three finalists.