Carlo Brignardello is a Principal with CresaPartners, a national corporate real estate advisory and brokerage firm that exclusively represents tenants/space users by providing fully integrated real estate services. Mr. Brignardello has spent his 21-year business career representing corporate clients and users of office and industrial space on a local and national basis. He has completed several million square feet of lease and purchase/sale transactions on behalf of his corporate clients across the country. Mr. Brignardello and CresaPartners choose not to represent landlords which avoids any potential for conflict of interest.
CresaPartners’ corporate services include strategic planning, site selection-incentives, transaction services (leases/purchases), dispositions (subleases/sales), project management, lease administration, capital markets and facility management. With over 50 offices in North America, CresaPartners is the largest pure tenant representation firm in the U.S.
Office Leases & Strategic Planning
A Common Oversight by Tenants
Most companies and management teams have in the past negotiated an office lease or been part of a relocation of their offices. This event often only occurs every five years (as five years is a typical lease term that landlords like to secure) and most tenants working on a new lease have a real estate broker representing them. For the most part, tenants do a good job (or at least try hard) in securing the typical business points that landlords and real estate brokers are used to negotiating – rental rate including any increases, operating and tax expenses including caps and exclusions, parking rights and charges, tenant improvement allowances, length of the lease term, options to extend, expansion rights, limiting or removing landlord’s relocation rights, and a few other ones.
Nevertheless, in spite of market conditions, we sometimes see that tenants did not in fact secure the most favorable typical business points in a lease. What we see too often afterwards is that tenants did not implement a “strategic approach” during the project of dealing with a new lease. A new lease can be part of a tenant not relocating (lease extension, early lease restructure and extension, lease renewal option, etc.), or a tenant relocating to a new facility. In either case, the tenant should follow the same rigorous and strategic approach in order to ensure a successful project.
When it comes to securing a new lease, strategic planning includes several key components:
Leverage – No matter what the market conditions are, landlords do not like to have their existing tenants relocate out of their buildings as it is too costly for them to re-tenant the vacant space. They will typically sit empty for a few months, have a construction period to remodel the space, and often provide free rent to attract the new tenant. The construction costs for a new tenant are often higher than those for a tenant already occupying the space. Also, an existing tenant is a proven-paying customer for the landlord; does the landlord know the financial strength of the future tenant? Understand the landlord’s existing debt structure in the building or his portfolio. Is the loan coming due soon? Know the other tenants in the building and the expiration of other leases. Is another tenant in the building expanding, shrinking, or relocating, and when? Always having a relocation alternative (the landlord does not need to know that the tenant does not really want to relocate) is very important. These and other points should be quantified and qualified, and will play a key role in creating the optimum leverage during discussions with a landlord, and if properly negotiated, would yield a better result for the tenant.
Flexibility - Most landlords, of course, want long-term leases such as five, seven, or ten years. They can use this for refinancing purposes, better income stability, and improving asset value. While that is great for the landlord, how does a long-term lease fit within the plans of the tenant? Most companies business plans are for no longer than three years. While there are benefits in or sometimes the need to sign a longer lease term, securing favorable terms in a down market like the one we currently have, or a location that cannot be easily relocated due to infrastructure costs by the tenant, having “flexibility” in a lease term can save tenants enormous amounts of money.
Aligning the business plan of the company with the lease term should be goal number one. Industry reports state that over 30% of companies that signed 10-year leases do not complete their lease term often due to growth, attrition, or a merger and acquisition. If there is a need or requirement to sign a longer term lease, the tenant must try to secure a Lease Termination Option. Most landlords and their brokers would quickly say no to this. But if properly integrated and presented during negotiations most often than not a “Right to Terminate the Lease” can be secured.
Budget and Schedule - Having a thorough budget & schedule well in advance of the signing of a lease can avoid costly surprises and headaches for the tenant. Starting the project far enough in advance will ensure having adequate time to integrate leverage into the overall strategy, as well as having sufficient time to define the size of the space based on current and future employee headcount, design the space, secure permits, and construct the tenant improvements. Although typical budgets include the estimated costs for tenant improvements, what they often miss are costs associated with the lack of infrastructure or deficiencies of the building’s shell & core (electrical, HVAC, code compliance, etc.) Completing detailed due diligence in the target buildings as part of the process would minimize costly pitfalls in this arena.
It is often said that the cost of a lease is the second most expensive line item for a company aside from human resources costs, so tenants must take a strategic approach to ensure the best results.