By Stephen A. Cross, CCIM
When it comes to leasing commercial space, time can be either your ally or your enemy and waiting until the last minute to think about the undertaking, and your options, can cost you plenty. In commercial real estate terms, “last minute” means 2-3 months prior to the date space is needed or the expiration of your current lease.
This article discusses the essential tasks and time frames typically required to plan for, select, negotiate, and actually occupy leased commercial space. Regardless of the size requirement, these insights will be as meaningful to the healthcare practitioner as they are to those who utilize office, industrial, automotive, educational or hospitality space.
The various steps of the process include preparing one’s credibility package, establishing a budget, determining the right size space for current and future needs, deciding on the type of building you wish to occupy, the configuration and occupancy date, touring to identify the most suitable properties, negotiating economic/business terms and conditions, monitoring tenant improvements and negotiating the provisions of the lease.
Preparation. Before looking for suitable space, devote some time to the preparation of documents that will present the business or practice in the most favorable light. I refer to this as the “credibility package,” which consists of a narrative about you and the business and financial statements. Taken together, these documents are used by landlords when deciding whether to lease space to your business and under what terms.
A good narrative explains the what, where, why and how of the business. “What” describes your product or service and the purpose/history of the business. “Where” chronicles your professional and educational experience. “Why” addresses the reasons your business will succeed. “How” focuses on your source(s) of financing for capital improvements and initial operating expenses.
Startups should be prepared to submit the last three years’ tax returns and a net worth statement. Existing business should provide the current and prior year’s profit and loss statement and a YTD balance sheet. If income was low, or shows a loss, attach a brief description of the cause. Remember, landlords are looking for reasons to lease space… and most understand the challenges faced by small- to mid-sized businesses.
Budget. When establishing a budget for rent, set a not-to-exceed monthly amount and be certain to consider all occupancy costs, which include: base rent, building operational expenses (property taxes, insurance, maintenance costs and the like), utilities, and janitorial expenses, as well as telecommunications and internet services.
Forecasting. I suggest allocating a couple of months to forecast your current and future space requirements. The search for space should then target the maximum amount needed in the types of buildings you are seeking. During this period, it is wise to contact movers to obtain a sense of the time needed to complete a move and the cost. Time frame: two months.
Research. Your broker/advisor should prepare comprehensive reports showing space advertised as being available in your target area(s). I say “reports” because the inventory of available space is fluid and you want to be continually apprised of what’s available and how asking rates and incentives are fluctuating. In this regard, targeting space that has been on the market for several months can strengthen a tenant’s negotiating position. I suggest allowing a minimum of 30 days to tour and evaluate properties. However, three to six months is preferable. Time frame: one to six months.
(Early) Occupancy Date. I suggest asking for early occupancy (at no charge) once all construction is completed and the space is move-in ready, and that this date be two weeks before the commencement date. This is a transition period during which you can install communications and complete the move without undue stress or expense.
Improvements. Where significant renovations (i.e., those requiring architectural drawings, construction bids and a building permit) are needed, this process typically takes 90 to 120 days. Modest updates (paint and new flooring) could be completed in as little as 30 days. Time frame: one to four months.
Purposeful Negotiating. I am a proponent of conducting simultaneous, non-binding negotiations on multiple properties. This is a time-tested, effective strategy savvy business people employ to flush out which landlords most want (or need) their tenancy, and the revenue it represents.
In this regard, always be ready to move on to another property when dealing with landlords or their brokers that demonstrate curt, unprofessional negotiating characteristics – if they are heavy-handed during the courtship, expect a rocky, unpleasant relationship ahead.
In my experience, it can take from two weeks to two months to finalize lease negotiations, depending on whether a space plan and construction estimates are needed, and another two weeks to a month to obtain a draft lease document that is ready to be reviewed. Time frame: One to three months.
Lease Review. Once the economics and business terms have been negotiated and a lease is prepared, your attorney should review the agreement to opine on legal sufficiency matters. Their job is to make reasonable recommendations that serve to bring balance to the document and negotiate any modifications. Time frame: two weeks to one month.
Summary. The process of leasing space, including renegotiating an existing lease, ideally begins in earnest six to 16 months prior to the date occupancy is needed. This period provides ample time to prepare, forecast, tour, gain a clear understanding of the state of the market, generate negotiating leverage among landlords, finalize a lease, complete improvements and finally, occupy the space.
Stephen A. Cross, CCIM, owns CROSS Commercial Realty Advisors (CrossRealty.com) and is a licensed real estate broker. Since 1984, he has advised over 2,700 business owners, attorneys, physicians, facility executives, investors and corporate decision-makers on ways to lease and purchase property at the lowest cost and most favorable terms. Mr. Cross is also a consulting expert on matters involving the conduct of agents and property owners, the fair market value of leasehold, and the analysis of commercial leases. Contact: 480-998-7998 or firstname.lastname@example.org.