Use a project manager and a commercial real estate advisor to protect you from budget-busting issues in a commercial lease.
When a company conducts a real estate transaction, project management typically is not considered until the ink is dry on the lease documents.
Smart tenants of commercial real estate in Tucson, Arizona, and elsewhere realize the value of bringing project managers into the strategic phase of the process. They can create a stable foundation for cost savings throughout the lease transaction and the project.
An integrated team that includes a project manager and a real estate advisor allows for more aggressive negotiation and reduces the potential for costly mistakes. Such a knowledgeable and skilled team cuts expenditures by
- identifying both short- and long-term space and infrastructure needs
- assessing building deficiencies
- establishing a project budget inclusive of technology, furniture and relocation costs
- determining a realistic occupancy date.
A Scenario for a Commercial Real Estate Lease
A company has signed the perfect lease. The space is in an ideal location for client visibility, workforce recruitment and current employee commuting.
The rental rate on the 45,000-square-foot lease is $5 per foot below current market rates over a seven-year term, plus three months of free rent. At first glance, this equates to a $1.9 million savings.
However, problems arise. Logistically, the company is unable to meet the scheduled occupancy date. Scheduling delays due to unanticipated permitting back-ups and furniture lead times have pushed occupancy out by at least three months. That means a loss of the negotiated free rent and a costly holdover penalty on the current lease.
Another unfortunate reality sets in. The company discovers it actually needed only 40,000 square feet, not the 45,000 committed to in the new lease.
Finally, a closer review reveals that the tenant improvements allowance negotiated at $20 per foot really needed to be $35.
Taken as a whole, the perfect lease is not so perfect anymore. Bottom line: The inaccuracies and improper planning tally up to major expenses.
- The 5,000 square feet of surplus space at $30 per foot over a seven-year lease term equals nearly $1.1 million.
- At $15 per square foot, the additional out-of-pocket tenant improvement expense comes to $657,000.
- The cost of the lost free rent is another $337,500, not to mention the corresponding holdover penalty.
That’s a total loss of at least $2.1 million, more than eliminating the originally perceived savings.
Create a Team Working in Your Best Interest
This hypothetical, yet plausible, example illustrates how project management’s up-front involvement can not only increase cost-saving opportunities but also help avoid unnecessary expenditures and schedule delays.
The importance of bringing project management into the due diligence and negotiating phases of the project does not lessen the importance of using an experienced corporate real estate advisor. It is the early integration of project management and transaction services that generates maximum benefits.
Combining the planning expertise and management skills of project managers with the market knowledge and negotiating savvy of corporate real estate advisors generates efficiency, continuity and accountability.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States, Latin America, Europe and Asia as a member of ITRA. For more information call 520-299-3400.