You’ve figured out what you want in your Tucson office, retail or industrial space. You’ve checked out what’s available and taken a look at the top prospects.
Now it’s time to create proposals to lease that will be sent to landlords or their brokers. Also known as a letter of intent to lease, this proposal indicates your interest in a commercial real estate space and presents your offer to lease that space. It’s the opening salvo to lease contract negotiations.
Let’s say you’re ready to take the next step in leasing Tucson industrial space, although the advise is the same for retail or office leases. If you are sending out more than one proposal to lease, do not go much beyond the first round of proposal responses or into multiple space-planning sessions without informing the property owners with whom you’re contacting.
Creating competition in a softer market can work well in your favor, so letting the other owners or landlords know that you have other options for industrial space can garner some nice concessions.
A request for proposal (RFP) is a powerful way to create some of that competition. In this strategy, you are asking landlords to provide you with reasons why you should lease their industrial space. In essence, you’ve set the tone of negotiations to having the owner pursuing your tenancy.
Not all owners will respond to RFPs and some will encourage you to make your offer first. If you send out several RFPs and some owners respond, use those responses to encourage the reluctant owner to come forth with a proposal. If you’re eyeing a particular space as your top choice, frame your own offer with the other RFPs in mind.
Be sure to use an experienced broker to draw up your proposal to lease industrial space. That person will know what to include and what to hold back for further negotiations. A tenant representative can advise you on how to frame the best proposal to meet your needs and desires.
Typically, a broker will advise you to take the simple approach to preparing a letter of intent. Create a proposal that gains agreement on the big issues first and set aside smaller issues to work out later in the lease negotiations.
This strategy relieves much of the inherent tension in negotiating and makes agreement on the side issues easier to obtain.
Here are some issues that should be addressed in the proposal.
Common area obligations. Tenants are required to pay for any increases in the cost of operating the building after the first year of the lease. This will extend to common areas in a multi-tenant property.
The first year of the lease is called the base year because it is the year to which all future operating expense budgets are compared. Base years are most often calendar years. Make sure to select the base year that will provide the best cost savings to you.
Tenant improvements. Be aware that if you are offered a reimbursement for tenant improvements that you provide, it could cause a taxable event. Consult a tax adviser before negotiating any cash allowance that comes as a reimbursement.
If you have been provided with a floor plan of existing conditions, mark it up with your improvement requirements and include it with your proposal.
Planning for growth. Most tenants are concerned about expansion rights so they can avoid moving if they outgrow the initial leased space. Owners are reluctant to grant any options since options never serve the owner’s interests. Options to expand or renew are definitely considered concessions by property owners.
Use your proposal to ask for what you want, but expect that in negotiations the owner may attempt to water down your rights as much as possible. In tight markets, option concessions tend to dissipate.
Taking more space than you need initially is one way to deal with planned growth of your business. If you use this strategy, you will want to ensure you have the right to sublease a portion of the space.
First month’s rent. Owners expect that the first month’s rent will be paid upon lease execution even if there are several months before the date that the lease goes into effect.
Security deposit. Unless you represent a major corporation with very high credit, expect that you will be required to provide a security deposit. Security is important to owners, especially when they provide a significant amount of tenant improvement dollars to secure a tenant.
Hazardous materials. If you use hazardous materials, it is important to discuss that upfront to avoid wasting everyone’s time. In industrial space you will want assurances the space is clean before occupancy. Be sure to ask the owner for a complete written disclosure about prior uses of the premises.
Here are some provisions you might want to include in your proposal in order to sweeten the deal for the landlord or owner.
Rent abatement. An owner might be more willing to grant rent abatement if you propose paying half rent for a longer time rather than free rent for a shorter period.
Free rent also can be spread out over the term, which is often more palatable to owners.
Rent delay. In most retail transactions, which commonly use net rents, the onus is on the tenant to make their own improvements or install fixtures. Therefore, it is customary to start the lease, but delay the start of the rent for a time to allow the tenant to do this work.
Space expansion. If you are leasing more space than you initially need, you may be able to structure the rent so it starts lower, then gradually increases. Or you might ask that the first year’s rent be calculated only on the portion of the space you will be initially using.
Plan payments. If you are providing your own space planner, it is sometimes possible to negotiate for payment of your architect by the owner. Typically this occurs when space-planning services are already being offered by the owner to attract tenants. It is always worth a try.
A well-written proposal to lease will get you well into lease negotiations.
Once the proposal stage is complete, you will be provided a draft lease for you and your legal counsel to review and fine-tune into a contract that accurately defines your agreement.
Once you’ve signed the contract, it’s time to plan for improvements, move in and resume business operations.