Getting The Lease Deal You Really Want!
Theodore F. Bayer
Film critics often say that the best scenes of a box office bomb must have been left on the cutting room floor. Unfortunately, the same is often true for many commercial lease transactions. The bumpy road from the optimistic “opening credits” (preliminary discussions), through the challenging “character development” stage (letter of intent), to the frequently-disappointing “final scene” (lease document) has become—like a Stallone film—relatively predictable. With a little creativity and planning, however, you can rewrite your script and, with persistence, maybe win an Oscar for your efforts.
- Understanding the Medium. Although occupancy costs are typically the second greatest line item on a business’s income and expense statement, leasing rarely receives the focus that it would seem to merit. Commercial leasing is often viewed as tedious; to be honest, sometimes it can be. But actually, it’s alchemy: converting dirt (raw land) or air (unimproved office/retail/industrial space) first into paper ( a lease) and ultimately into a functional environment (a premises). Alchemists —and filmmakers—understand that there’s a mathod to the magic. Although the manifestations may differ, certain essential elements are present in every good deal and every good film. Add a bit of good luck and some inspiration, and you’ve got yourself a great deal.
- Defining The Concept. Just as every acclaimed film has a well-defined concept or story-line, so does every successful commercial lease deal. Simply trying to get “the best deal”, the lowest rental rate or the highest tenant improvement allowance is no more effective than setting out to make a classic film. You must clearly define your primary objective(s). What exactly do you want? Is it a deal for office/industrial space for a start-up venture that must include the ability to expand and to extend the term? Or perhaps you’re trying to secure light industrial space for a company that will use it for diverse purposes. Yet, even if you’re seeking the fiftieth location for a national retailer, defining the essence of your deal is the first, often over-looked, step to achieving it.
- Developing the Treatment. Once your concept is firmly in mind, you can begin to put some meat on the bones. List as many essential deal points as you can: rent, term, options to extend, leasehold improvements, allowances, use rights (including exclusives), cancellation rights, assignment/subletting rights, contingencies. Many people prefer to address these “details” later in the process, but an alchemist knows that you can’t save an element for later unless you’ve conjured it up now. If there is any step in the process where expansive, time-consuming brainstorming is in order, this is it. As you outline your “ideal” deal, you also can begin to visualize provisions in the letter of intent and, ultimately, the lease that will embody your treatment. If you expect to negotiate multiple leases for the same tenant, start to formulate customized provisions that further your objectives; try to incorporate each issue into your concept. You can develop a consistent approach that will produce, at least, a good deal.
- Casting. This may seem out of sequence; however, like the screenwriter who has a specific actor/actress in mind as he develops a character, identifying your team members at this stage will increase your chances of a successful outcome. Selecting your cast is not a simple task. Typically your team will include yourself or another representative of the tenant who understands the tenant’s objectives, a broker, an attorney, an space planner/architect and possibly a lender. Team members must have experience with the specific type of transaction involved; just as importantly, each must be available (avoidable delays poison what could otherwise be a good deal). You can formulate other criteria: affiliation, education,etc.; but the most critical factor is a team member’s “fit” with your objectives. If a prospective member just is not working out, get someone else—chances are the landlord will have a well-practiced team, so don’t put yourself at an unnecessary disadvantage.
- Writing The Script. Assuming you have devoted the necessary time and attention to the preceding steps, this can become a very rewarding stage. Think “great deal.” First, develop a projected task list for each member (but remember to be flexible). Next, set a timeline for all of the tasks on your list; solicit input from each team member as to what he/she expects to do, and communicate clearly any desired changes to those expectations. Do your homework: have your space planner figure out the rough costs of any leashold improvements, even if you expect the landlord to pay for them (otherwise, you’ll “pay for” these costs elsewhere in the deal); work with your attorney to develop a lease form, or at least important lease clauses, that addresses your concerns (in the landlord’s form lease, the tenant has no rights, only obligations); and then instruct your broker to develop a letter of intent format that includes most of the concerns which appear in your form lease/lease provisions. This may seem like a lot of extra effort—and expense. But think of it as Oscar insurance, particularly when you consider how much you can save in the hidden expenses of a bad lease deal!
- Action And Editing. As you and your fellow cast members start to put your script in play, remember that, like filmmaking, the script does not exist in a vacuum. Not only will the landlord have its own script (in many instances, diametrically opposed to yours) and cast, but also your relative inexperience, as compared to the landlord, and understandable fear of “losing” the deal can wreak havoc. Don’t panic; simply revisit Step 2 and BE PERSISTENT. You may have to edit, i.e., compromise, on certain issues (but then, unlike a purchase, a lease is just the start of a long-term business relationship between you and the landlord) but not the ones that are most important to you. And remember, the deal isn’t “in the can” until the lease is signed by both parties.
Whether or not you choose to see the magic in commercial leasing, always be aware of the method. Formulating your concept first, then developing your treatment, assesmbling your cast and scripting your gameplan gives you the advantage you’ll need to get a good deal. Combine that with creativity and persistence, and you’ve got a great deal. Still not convinced? Just remember “Rocky.”
About the Author
Mr. Bayer is a San Francisco-based transactional real estate attorney with extensive experience in California property tax and documentary transfer tax matters. He is Of Counsel to the transactional real estate and business law firm Starr Finley LLP. Email is [email protected]; direct line is (415) 743-2847; cell number is (415) 519-5586