The Five Key Factors of a Successful Lease
Regardless of how thick a lease document is, you can reduce any lease offer down to five key factors. If any of these five factors cannot be successfully negotiated, then there will be no deal:
1.Rate—How much can or will you commit to pay? The first step in determining this is to completely understand what the rate is and then what your occupancy cost will be. The price quoted for a particular space can have different meanings. Some landlords quote monthly and some quote annually on a price per square foot rate. This can be confusing and you should be certain you and your landlord are speaking the same language. The next thing to clarify is the total occupancy cost. Office buildings will typically charge rent based on a "gross lease." A gross lease states you will pay your rental rate plus "additional" expenses above the base year or expense stop. Retail and single story professional buildings will typically charge rent based on a "net lease" basis. The net lease includes "additional" expenses, a triple net lease (the norm for this type of lease) includes maintenance, insurance and taxes.
Once you know how your rate is calculated, you can determine your occupancy cost by multiplying the square foot rate by the square feet of your space.
2.Size—While this, for the most part, is a judgement call, you will need to consider how much space you need today and how much space you may need in the future. You don't want too much space, that will be difficult to pay for and use, or too little space, that may squeeze you in between two other tenants, not allowing you to expand. A good real estate broker can always attempt to negotiate a right of first refusal (ROFR) on contiguous space. Since a ROFR clause will encumber a landlord, they will not automatically offer it and thus it must be brought up as part of the negotiating process.
3.Term and Renewals—Since most leases run three, five or 10 years, you will need to think through what the future may look like. A good broker will be able to negotiate away from a typical lease into an atypical lease to allow you more flexibility for future events. They may be able to negotiate multiple options, term clauses, etc.
For example, fixed increases on renewal options can be highly desirable, especially to businesses such as medical related practices, where location is part of the business value. Negotiating a fixed increase option into the lease will protect the tenant for the life of the practice. Additionally, a fixed increase eliminates the mysterious "fair market value" option found in most leases. Fair market value is an invitation for a disagreement at the end of the primary term—the landlord's view vs. the tenant's view and rarely are they the same.
4.Improvement/Build-Out Allowance—For office buildings, standard tenant improvements or build-outs traditionally consist of new paint and new or cleaned carpet. If a tenant
1.Rate—How much can or will you commit to pay? The first step in determining this is to completely understand what the rate is and then what your occupancy cost will be. The price quoted for a particular space can have different meanings. Some landlords quote monthly and some quote annually on a price per square foot rate. This can be confusing and you should be certain you and your landlord are speaking the same language. The next thing to clarify is the total occupancy cost. Office buildings will typically charge rent based on a "gross lease." A gross lease states you will pay your rental rate plus "additional" expenses above the base year or expense stop. Retail and single story professional buildings will typically charge rent based on a "net lease" basis. The net lease includes "additional" expenses, a triple net lease (the norm for this type of lease) includes maintenance, insurance and taxes.
Once you know how your rate is calculated, you can determine your occupancy cost by multiplying the square foot rate by the square feet of your space.
2.Size—While this, for the most part, is a judgement call, you will need to consider how much space you need today and how much space you may need in the future. You don't want too much space, that will be difficult to pay for and use, or too little space, that may squeeze you in between two other tenants, not allowing you to expand. A good real estate broker can always attempt to negotiate a right of first refusal (ROFR) on contiguous space. Since a ROFR clause will encumber a landlord, they will not automatically offer it and thus it must be brought up as part of the negotiating process.
3.Term and Renewals—Since most leases run three, five or 10 years, you will need to think through what the future may look like. A good broker will be able to negotiate away from a typical lease into an atypical lease to allow you more flexibility for future events. They may be able to negotiate multiple options, term clauses, etc.
For example, fixed increases on renewal options can be highly desirable, especially to businesses such as medical related practices, where location is part of the business value. Negotiating a fixed increase option into the lease will protect the tenant for the life of the practice. Additionally, a fixed increase eliminates the mysterious "fair market value" option found in most leases. Fair market value is an invitation for a disagreement at the end of the primary term—the landlord's view vs. the tenant's view and rarely are they the same.
4.Improvement/Build-Out Allowance—For office buildings, standard tenant improvements or build-outs traditionally consist of new paint and new or cleaned carpet. If a tenant
needs additional build-outs, the landlord will usually provide a reasonable allowance, but will then require the tenant pay all costs above "standard."
For new construction of retail and single story professional buildings, the landlord typically provides a "shell" with a build-out allowance. This allowance can range anywhere from $12 to $25 a square foot (with such a range it is very important to utilize the services of a qualified broker). With today's cost of construction, even the higher allowance will rarely be enough to accommodate your needs and you should plan on funding additional build-out requirements.
For second generation retail space, the landlord will typically provide up to a $3 per square foot one time allowance. Some landlords will provide the services (cleaning, new carpet, painting) for you and some will reimburse you upon their receipt of paid invoices and lien waivers.
5.Lease Security—this takes many different shapes and forms:
• a personal guarantee
• one month's rent
• letter of credit
• multiple months rent
• corporate guarantees
With so many alternatives available, this is truly an area where a real estate professional can help you decide the best security for your situation. Keep in mind that a landlord will require significant security as collateral for significant cash outlay relating to build-outs. A landlord wants to be certain they get paid back for this outlay and the opportunity risk of "leasing to you" is part of the security fee calculation.
These are just a few of the things to consider when signing a lease. In the end it can all be tied back to the value you receive. Each of the five key elements represents points to consider when determining the overall business value of the lease transaction. Consult your broker or tenant representative for questions relating to these key elements.
More Information? If you would like more information on this important topic, please fax a note on your letterhead to 713-977-7288 or zip us an E-mail to elberger@concorderealty.com.
Author's Note: Bob Elberger is the co-founder of Concorde Realty Development and a leader in the Greater Houston business community for more than 15 years. Founded on Bob's focus on value and creative problem-solving, Concorde Realty Development has a unique ability to recognize hidden opportunities in the real estate industry. Concorde Realty Development is based in Houston, Texas and can be reached by phone at 713-789-3600 or at www.concorderealty.com.
For new construction of retail and single story professional buildings, the landlord typically provides a "shell" with a build-out allowance. This allowance can range anywhere from $12 to $25 a square foot (with such a range it is very important to utilize the services of a qualified broker). With today's cost of construction, even the higher allowance will rarely be enough to accommodate your needs and you should plan on funding additional build-out requirements.
For second generation retail space, the landlord will typically provide up to a $3 per square foot one time allowance. Some landlords will provide the services (cleaning, new carpet, painting) for you and some will reimburse you upon their receipt of paid invoices and lien waivers.
5.Lease Security—this takes many different shapes and forms:
• a personal guarantee
• one month's rent
• letter of credit
• multiple months rent
• corporate guarantees
With so many alternatives available, this is truly an area where a real estate professional can help you decide the best security for your situation. Keep in mind that a landlord will require significant security as collateral for significant cash outlay relating to build-outs. A landlord wants to be certain they get paid back for this outlay and the opportunity risk of "leasing to you" is part of the security fee calculation.
These are just a few of the things to consider when signing a lease. In the end it can all be tied back to the value you receive. Each of the five key elements represents points to consider when determining the overall business value of the lease transaction. Consult your broker or tenant representative for questions relating to these key elements.
More Information? If you would like more information on this important topic, please fax a note on your letterhead to 713-977-7288 or zip us an E-mail to elberger@concorderealty.com.
Author's Note: Bob Elberger is the co-founder of Concorde Realty Development and a leader in the Greater Houston business community for more than 15 years. Founded on Bob's focus on value and creative problem-solving, Concorde Realty Development has a unique ability to recognize hidden opportunities in the real estate industry. Concorde Realty Development is based in Houston, Texas and can be reached by phone at 713-789-3600 or at www.concorderealty.com.
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