November 10, 2016
Whether you are renewing, renegotiating, or signing a new lease for your Market Center, this special KWU Interview designed for MC owners has a lot of great ideas to help you get a better deal on your lease—one of the biggest expenses on your budget.
When we’ve seen Market Centers with problem leases, the most common underlying issue is that those leases were originally negotiated without the help of a tenant rep agent. The urge to save money and negotiate your own lease can be tempting. After all you’re in real estate, right? Commercial real estate alone has 19 different specializations from Health Care to Industrial to Land Development and more. So even if you’ve done some commercial business, unless you are a tenant rep specialist with years of experience and current market knowledge, have someone on your side who is.
Bill Langley, Chris Rosprim, Darrell Nevin, Nancy Lemas, Paul White, and Ron Fredette are six of the many KW Commercial agents who specialize in tenant representation. We hope the wisdom they shared in this round-table interview about Market Center leases helps you increase your owner profit and profit share by negotiating better leases.
Bryon: Thanks so much for joining us today. If I could ask for just a quick introduction. Paul, why don’t we start with you.
PAUL: Paul White, KW commercial, managing director in Miami with over 43 years in the commercial real estate industry.
BILL: Bill Langley in Atlanta, Georgia. About 27 years in the commercial real estate industry.
NANCY: Nancy Lemas. I’m in Boise Idaho and I’ve got 30 years in the commercial real estate business. I’m a tenant rep for a national company. I do 130 locations. I handle their leases for 130 different locations in the U.S.
RON: Ron Fredette. Located out of the Bedford New Hampshire Market Center, CCIM designee and also I’m an OP in the Handover Massachusetts Market Center.
CHRIS: Chris Rosprim from Denton Texas. 46 years in the business so I’m still learning. Just glad to be here.
DARRELL: Darrell Nevin. 32 years in the business. 11 as a landlord rep with the commercial corporations in the Columbia Maryland area and the remainder of that time as a tenant rep agent in and around Maryland.
BRYON: All right. Great.
NANCY: I forgot to mention also I’m a commercial coach with MAPS coaching.
BRYON: An important mention too. This is Bryon Ellington. I’m the chief learning officer for Keller Williams Realty. I’m really happy to have you all on the call today to talk about this topic because it is such a timely one with so many of our operating principals in the very near future renewing their lease according to a research study by KW Research. So Paul, coming to you first, what are the basics of a commercial lease? What are the main types of leases used for market centers?
PAUL: Okay well in most business transactions, the market drives the deal. That’s true in commercial real estate leasing. Supply and demand applies. A lot of supply then the tenant’s in the driver’s seat. There’s a lot of demand, the landlord’s in the driver’s seat. There are a lot of components to a commercial real estate contract that people don’t understand. Real estate rates. They’re quoted off. Gross basis, net, net net, triple net. And everybody has their definition of those terms in their minds but they’re vary around the country so you got to be sure you understand what the definitions are. And then concessions. Depending on supply and demand, you can have free rent, tenant improvements. Even the term security, moving expenses. Everything’s negotiable in a commercial transaction. You’ve got caps on operating expenses that can save a tenant a lot of money. The most critical factor in that representation is that somebody doesn’t know what to ask for, they surely do not get it. Rent can be very confusing. Rent can be a useable basis or a rentable basis. And if a perspective tenant does not understand that they can wind up anywhere from five to 25 percent less square footage than they thought they were actually renting.
And operating expenses. They vary around the country too. The definition what’s included. How to pass through to a tenant. And then you run into different names for it. CAM, common area and maintenance basically the same concept but sometimes CAM does not include real estate taxes and or insurance. So you’ve got to understand what’s included in operating expenses and CAM. And then there’s all kinds of ways to increase the rent. You can do a stepped rent, which can be fixed each year going up or a percentage annual increase every year. You’ve got to understand the implications of what these clauses mean. You got even still I see CPI increases. Sometimes I see a combination almost all of these if the market’s strong enough and landlords demand it. So what a tenant rep does for a perspective tenant is help quantify all these costs, project them out over the life of the lease. So the perspective tenant has a clear understanding of what the rent potentially could be each year depending on how they increase but at least what the contract rent is. So they don’t have a surprise at the end of each year when they get a notice of a rent increase that’s factored into the lease. It’s automatic. Then a big concern of landlords that impacts tenants is tenant improvements. As a landlord, if I’m going to give tenant improvements, I want to make sure that I’m dealing with a credit worthy tenant who can pay the rent. If not and in many cases it’s the OP and TLs, the owners of the market center, the landlord’s asking for a personal guarantee. Well there are various forms ways of doing that in order to minimize exposure of the tenant while still giving the landlord the security he wants. Sometimes it’s just a matter of asking a tenant to make a large contribution to TI and there are different ways to handle that. How it’s financed, how it’s factored into the lease. One of the more critical issues to KW Commercial is not using a KW commercial associate can actually hurt your local KW Commercial team, especially if you wind up using a KW Commercial competitor. And that had actually happened to us here in Miami where an OP went out in the market, was going to do it themselves, called on a couple buildings, went and toured and one of the agents to one of those buildings said hey, I can help you find the space that you want. I know a couple buildings I think that have it. And the response was oh great, please help me and they did not realize that broker who is a tenant rep. Sure enough tenant rep showed three buildings. One was satisfactory, negotiated the deal and it hit the newspapers that a national company represented Keller Williams in leasing their space. So when I went to a CCIM meeting, commercial real estate meeting, people would ask me, I thought you were part of Keller Williams. And it had a rather devastating effect on our KW Commercial associates. So it works both ways. What if the KW Commercial associates referred all the residential business to ReMax. How would the OPs and TLs feel? So we need to work together to be able to protect the interest of the market center because commercial real estate leasing gets complex and you need a pro to represent you, to educate you and walk you through the process and protect your interest.
BRYON: I know Mark Moreno and Sam Hasty with KW Commercial are available to help any OPs who are in need of a commercial agent and not sure if there’s one in their area, they’d be happy to. So if you just OPs contact the KWRI we’d be happy to help you there. Gang, anybody want to jump in on Paul’s there and add to if you have anything?
DARRELL: This is Darrell Nevin chiming in. Paul, good summary and review. I always tell folks that there are 150 separate pieces of a lease that are negotiable. And when I say that to an OP or someone who thinks they know what they’re doing, all they’re thinking about is what is the rent going to be. And landlords’ agents love when they hear a client, a prospect say that well I need another 50 cents off and they give it to them not knowing that they’re going to spend another dollar fifty or two with hidden costs or hidden fees in that lease if they’re not careful.
BRYON: Could you give us a sense of what sorts of hidden costs, hidden fees you might be talking about?
DARRELL: Well you know there’s the annual increases in rent. Sometimes if they’re tied to a CPI you don’t know what that’s going to be in the future. Pass through of costs in the building that might be capital expenditures that could hit you with a bill for 5000 or 10,000 dollars you didn’t expect. Ways in which the pass through of costs are divided up. Paul touched on this issue of rentable versus usable square footage. I can’t tell you how many tenants, OPs too go into these deals and they don’t ever confirm the square footage of their space. It should be part of the lease that you as the tenant have the right to confirm the measurement based on a standard or any of the other standards out there. With an architect, many many many landlord will buy a building that’s 100,000 square feet and when they go to sell it, it’s 110,000 square feet of rental income. So those are all situations in which it’s a factor if you will of not trusting everything the landlord says. It all has to be in writing and every little piece needs to be examined with a magnifying glass and a microscope.
BILL: And another big one, this is Bill, is just the upfront cost of fitting out the space in terms of just dollars. To, to the point of yeah they may say hey yeah, we’ll knock off 50 cents in rent and you’re all focused on the rent only to find out you know, you’re going to spend an extra 25,000 dollars upfront building out your space that if you had that assistance, you know, looking at that issue before you sign the lease. A lot of money can be saved just by having somebody on your team because again, the landlord, it’s not a matter of trust, they’re just, they’re legally bound to representing you know, the landlord.
CHRIS: This is Chris. There’s a lot of costs involved that was alluded to a little bit earlier that the tenant may be expected to bear that, you know. A lot of people just think well I’ll pay the rent and if I have a problem I’ll call the landlord. Well when the tenant calls me the first thing I do is go read the lease and see what’s in the lease. Of course if I negotiated it, I probably already know, but sometimes I inherit leases so I got to go read the lease and see well actually sure that’s your expense so you need to take care of that. And a lot of them are extremely surprised that they’ve called in for a maintenance item and lo and behold they got to take care of it and they’re surprised very frequently. So that area of the lease, in Texas there are some very specific items listed and it’s a checkbox situation as to you check it as either not applicable and it’s a landlord and it’s the tenant expense. And a lot of times tenants don’t read leases when they sign them and it’s not a problem until they call and say my toilet’s stopped up, come fix it. And they get the word that that’s your expense, call a plumber and they’re extremely surprised. So that’s got to be gone over with a knowing insight into how that’s handled and whose expense it is.
DARRELL: Good point, Chris. This is Darrell again. Many times landlords are trying to lease their space without spending any money and they’re going to say in the lease that you’re going to expect the premises in “as is, where is” condition. And often the tenant doesn’t bother to really inspect the premises like they should to be sure they’re not inheriting problems much like in residential you can get hit with an awful lot of costs. Maybe there’s something that doesn’t fit code and you can’t get your use and occupancy permit that can delay you for weeks and months. It’s just so many pitfalls that can happen if you’re not careful, carefully looking at this with a professional.
CHRIS: Absolutely.
BRYON: Bill, what are the dos and don’ts of commercial leasing? We’ve already kind of started talking about that a little bit, but what are some of the easily preventable problems people get into with their market center leases and what are the things that many people don’t know about that they should be doing in leasing?
BILL: And as we’ve already kind of said even with Paul’s introduction and I’ll reiterate now, I don’t know that they’re not necessarily easily preventable unless you really do have somebody on your team and this is not again a self-promotion or again it’s just I had an old partner used to say you just, you know, sometimes people don’t know what they don’t know and commercial leasing is certainly that. And you know, you started the conversation about how there’s differences between residential and commercial and I think anybody on this panel would tell you there’s differences between office and retail. I mean there’s experts in each property type. The leases are different. The lingo is different. How you negotiate those deals are different. What’s you know, typical. We’ve got market centers in office buildings and market centers in real centers. So easily preventable is probably setting somebody up to think oh I can go down this checklist and I’ll be okay. But to answer your question or to kind of touch on some, one thing I see sometimes from market centers or just tenants I represent in general is they don’t give themselves enough time. It’s easy a 9-12 month process to really do this correctly, especially if you got to move or there’s construction involved. You want time on your side. If you’re in an existing lease with a renewal option, you know that date for a renewal option usually comes you know, six months in advance which means you may even have to start earlier. Another I guess common thing is not doing enough homework on your construction needs before you sign the lease. I think somebody touched on again, a lot of people look and say oh here’s the rate, here’s a good location and they think that they’re halfway done but really they’re just starting what the process of what a tenant rep needs to do which is get some construction estimates, really understand the allowance this landlord’s providing me. If two landlords both offer me 100,000 dollars and a construction allowance that really is meaningless until I know how much each space is going to require, you know, to get it configured the way I need it. So that’s another big one that I see. I’ve gotten calls from OPs. Hey, can you come take a look at this and they’re so far down the path of their negotiations that I’m having to try to undo things to get back to here’s what we really need to be looking out and these type of reasons. And then that’s really just you know the tip of the iceberg. Again these leases are typically 30 to 50 pages long and I think one of the reasons there’s misconceptions is it is all negotiable. It’s not a fill in the blank type of lease process. You just really need to have someone working with you hand in hand to go through all these different topics.
BILL: And even relative to the document, I actually have one attorney that’s kind of my go to attorney for office deals and a totally different attorney I go to for retail deals. And neither, I would say problem is a lot of times people turn to a closing attorney. Not necessarily a residential closing attorney but even closing attorneys, even if they’re commercial closing attorneys, if it’s not somebody that’s doing leases just a regular part of their their business, you’re just doing yourself a disservice by not having, you know that level of expertise on your team.
BRYON: So Nancy, beyond price and length of term, what are the elements of a lease to consider? We kind of talked about some of them, but give us a sense.
NANCY: I think some of the important items that I put on my list is discussion of course of expansion possibilities, TI allowance. What that is versus a turnkey. Personal guarantee is obviously a concern. Who’s going to be signing on the lease. What’s included in the operating costs which we talked about earlier. Full service versus triple net versus modified gross versus absolute triple net. I’ve seen landlords come back and ask for the entire HVAC system to be replaced when it went down because the way that industrial lease was written on a retail, on an office space. I think it’s important to know the ownership of the, of the building during the recession. I put together a lease and it turned out that the owner actually went bankrupt and the 25,000 square foot lease became null and void. So that’s something that especially if we go back and do another shift like we did back in the ’08 period. Parking ratios of course are important. How you handle the security deposit, free rent signage. The tenants around you are important. I put a deal together in New York City for a call center and above the call center was a boot camp so fortunately the boot camp was going on at a time that we were looking at the space and that obviously negated that space. Who’s handling the commissions I think is important every state that has different commission rates. Options renewal we talked about what was the building electrical. After hours HVAC. If you’re dealing with a real estate office obviously we have a lot of afterhours and weekends. It might be additional money added up to 40 or 50 dollars an hour to turn that air conditioner on during the week, weekends. If you’re actually in an office plan that you’re sharing space as opposed to standalone. How well-lit is the parking lot. I think that is important especially with agents working late at night. Amenities around the office area is important so that people can grab a quick lunch and get back to the office. Traffic flow is always important because you don’t know if you’re going to end up with walking employees trying to get theirs. Telecom I put in fiber telecom. Knowing who your telecom. Make sure it’s fiber into the area. Rate increases, renewal rates, holdover clause. That’s obviously a concern. Any upgrades that are required by the municipality. I see that in leases which means essentially they could come back and get you to do the ADA compliant if it is not compliant. Or in some areas such as California they can actually come back and claim that you have to retrofit the building because it required earthquake modifications. And basically that was kind of my list that I had put together on terms to be considered in a lease, as well.
BRYON: That’s great stuff. Thanks for sharing.
BILL: I can jump in on a few. It’s kind of a little bit of a continuation of your last question. You want to look at renewal options, rights of refusal, rights of opportunity which are a little bit different than rights of first refusal. You know, Paul touched on operating expenses. There’s just different ways to try to negotiate those clauses to you know, make sure you’re not paying for any more than you have to. I mean there’s just really. I think someone on the call said 150. You Darrell? And that’s really true. Now do you negotiate every one of them? Not necessarily but you, sometimes you got to go to the lease. Some landlord leases are more favorable than others and.
DARRELL: Right. Right.
BILL: You do kind of go down your checklist.
DARRELL: Yeah another one Bill is the right to audit the landlord’s expenses, especially larger tenants in office buildings where there’s all sorts of slight of hand that occurs. You know the accountants if you will many times are applauded if you will for making errors in the landlord’s favor and so many companies they just pay the bill. When it comes at the end of the year on the reconciliation of those expenses when in fact they’re making a lot of mistakes or they’re misappropriating some of the accounts. There are actually people out there, that’s all they do are these audits for big companies.
BILL: Sure.
DARRELL: Find all sorts of things to watch for. So the right to audit’s key. A lot of landlords will say in the lease well you only get 30 days after we send you the reconciliation statement to complain or challenge or whatever. You want to give yourself as much time as possible to at least look at that with your accountant or your broker, your tenant rep broker to determine whether there’s a reason to pursue that.
BILL: And a lot of those things even need to be in your letter of intent stage. If you wait until you have the lease there’s certain things that are just, you’ve kind of lost your leverage at this point in time which you say okay, I’m ready for a lease. There’s, you know, it’s not binding until it’s done but there is kind of a change in energy and negotiation I think when somebody says okay, now we’ve got them, they’ve asked for the lease. And I try to address some of these same items at the LOI stage not in the lease. And you know that audit issue I usually ask for rights to audit in my LOI if I know it’s not going to be in a standard lease.
BRYON: We’ve been talking about negotiating a lease upfront. Let’s kind of fast forward. Let’s say I’m an OP. I’ve got a lease that I either need to renegotiate or renew. Ron, how am I going to do that with more favorable terms and can I manage the competition in there to get more favorable terms as well?
RON: I think the first thing I do is I just want to make sure I align my real estate commitments with my business plan. For instance, you’re in a thriving marketplace. You’re attracting more and more agents. You know oftentimes we talk to one of our clients and say what’s your plan for the next three to five years because you don’t want to renew or or renegotiate your lease and realize you know, your business plan is really cause for your market to double in size and there’s no available space in the building. So just to realize that you need to kind of realign your commitments with your business plan. But some of the examples or levers to point out that would help you to renegotiate would be first of all, you need to resolve any disputes that you have between yourself and the landlord because it’s going to create some resurface some hard feelings and everything. So think ahead a little bit. Oftentimes I think tenants have some issues with their landlords and maybe develop some problems, so try to resolve any disputes that you might have. When you go back in and you expand and take some additional space, so you get an opportunity to renegotiate certain terms. Oftentimes as Darrell pointed out, 150 separate pieces to negotiate, you might not be able to renegotiate lease, price per square foot but you may be able to. But let’s talk about you know, you can expand your space and reset your base year. So your base year would be 2016 and then any increases in prices of triple nets increase off of 2016. So if the taxes go up 1000 dollars you’re going to get hit with an increase there. So you can reestablish your base year when you’re going in and I think that that’s a good opportunity for you to take care of maybe some of the cam and real estate tax escalation tracts that come forward. TI costs. You know obviously the landlord is going to participate in that. So you could actually get the landlord to participate in that additional expense. At the very bear minimum, if you’re just going to renew your present lease get them in there to get the space a face lift. For instance, new carpeting and paint. Give the market center a fresh look. Liability. You could reduce or remove security deposits, personal guarantees, letter of credits that you have extended to the landlord. Obviously you’ve been paying on time and you have the opportunity to get rid of some liabilities. You could secure some favorable rights to expand your space. In other words the right of first refusal. You could also put a clause in for a lease termination. For instance you triggered your five year plan, you might expand beyond the space that’s available to you. You might want to put in a termination clause onto your lease. I think managing or eliminating the past expenses that a tenant gets charged is really important. And if you could just eliminate it, that would be great, but a lot of times you get that so you could manage it a little bit like on that reconciliation statement that one of my clients mentioned. You know if you could manage your base year, that’s going to be very helpful. You could also, there’s usually a gross up. John mentioned this. A lot of landlords in our region use a 95 percent gross up charge. And I just got mine back from the landlord and I have to pay an extra 1000, 1100 dollars for gross up because they gross up to 95 percent. Well now they have a larger vacancy factor in the building. So when I go back in and renegotiate, I’ve got to change that that gross up or try to eliminate it totally. And there’s a lot of hidden fees that are inside the lease that I think by having a proper representation, you can benefit from. Let’s face it, you know. I think we all know as brokers that the lease terms that are offered to existing tenants are often less attractive than the lease terms that are offered to new tenants. And these landlords they’re in the real estate business and they negotiate with professional guidance all the time. So you’re at a disadvantage and you really do need some professional help. I think in order to manage the competition to get some more favorable terms, I think you know, the three biggest mistakes that people make when they’re renewing or renegotiating their leases, one is not developing alternatives because once a landlord believes that you’re a tenant and you’re going to stay, you’re at a disadvantage and you lose control in negotiating leverage. So even though you plan on renewing your lease, you got to find some alternatives to your lease and show the landlord that you have other options or else you’re going to lose your competitive advantage. I think number two is starting too late. Start early before the renewal option ends and give the landlord notice that are you are interested in renewing and extending. So if you have a six month renewable option, you know as Bill said, you should be out there a year ahead of time because you want to get a survey done of the existing spaces and what they’re going for. I think number three is trusting the landlord’s broker to negotiate a good deal for you. The easiest way that you could lose control is to hire the tenant rep, hire as a tenant rep the landlord’s rep. So your broker that you hire, they’re going to do all the work and the landlord’s going to pay the fee. So you know, don’t trust the landlord’s broker to give you a good deal. Never start too late and always have alternatives for negotiating the present lease that you’re trying to renew.
CHRIS: You got to know your competition and that’s exactly what he was saying. Look around in your area and find two, three, four more billings that might work and see what kind of a deal that they would offer, then you’re armed with solid information to go back to your landlord and say you know, we’d like to renew but here’s some other properties that we might look at. How good of a deal can we get and what can we negotiate. And that certainly depends on where you’re at relative to what is available from the competing properties but you got to know your competition in order to help yourself out.
DARRELL: This is Darrell. I was just going to tag onto something that Chris said about the renewal negotiation for an OP. It’s always best that you take the OP out on tour, an official tour of available space. Not only to be able to gather market data, but because those landlord reps talk and some, your landlord rep’s going to find out that you’re shopping, you’re shopping your space as a possible relocation, that really helps the negotiation when they find out. You don’t need to tell them. Let them find out from the the brokers when they meet each other socially or whatever. If you’re 10,000 or 15,000 square foot market center and you’re out there in a year in advance shopping the market, word’s going to get around and that’s a good thing for the negotiation on the renewal.
BILL: Yeah. And even in our RFP’s that I use again the request for proposal which is very common in the office industry out here. I mean, I craft that request for proposal to let that landlord know, hey a renewal is not a foregone conclusion. I mean here’s, we need you to respond to these criteria. It’s written in a manner that’s still specific to his building, his or her building but they know, these guys are serious. They’ve got somebody representing them. They’re issuing these RFPs to different landlords and it kind of puts them on their toes so to speak. I’ve been fortunate to represent my OP which has six market centers here as well as our regional office in Atlanta and I think it just goes a long way. What we’d have to do I guess as KW Commercial is again educate our team leaders and OPs and regional owners to what we’re doing and how we’re doing it and how it’s really going to help, help them have better terms all the way around for their business.
BRYON: Good points. Hey Chris, I’m coming to you. So we’re going to do it two ways, right? So let’s say I’m an OP. First we’re going to handle the negative and then we’ll go positive. What if I have too much square footage? I was betting on the come, thought I was going to be much bigger but I really need to drop back my market center’s footprint to be more appropriate to my current agent count and where I’m going to be in the near term. How can a market center negotiate to drop back and then how can they keep that flexibility for future growth?
CHRIS: Well I certainly think you would need to sit down with your landlord or landlord rep and have a frank and honest discussion with them about where you’re at and how much space you may feel that is excess space. As you said, back to the original footprint perhaps if there is such and see what can be done for the excess space. How can that excess space be utilized either by another tenant or perhaps the market center can sublet out some of that space to another party. But one way or another, identify whatever excess space there is and how best to try and get somebody to take that space over either short term or long term. If it’s a short term deal, I mean you might could turn your market center or situation around in six months, a year or two and need that space back. So you don’t want to shoot yourself in the foot and give that space up and then in a year or so wish you had the ability to get it back and locked into a long term deal where that space is not available to you. And I would say the same thing on the future flexibility issue is if you’re leasing a space, if it’s in a building where you can expand, then make sure that you stay in touch with the landlord’s rep for any space that might come up in the future and you can negotiate that upfront. A lot of times in the first right of refusal for space in the building or adjacent space or whatever and just make the landlord rep aware that if that space becomes available that if you have first right of refusal, of course that takes care of it. Other than that, to let them know that you’d like to have the opportunity to consider taking some additional space in the future if it’s appropriate for the market center needs.
DARRELL: Yeah I was just going to chime in on the opportunity for subletting. It’s really critical in the lease that the landlord’s right to approve anybody that you sublease to or assign the lease to, not be subjected and unfettered as they like to say in the lease. It’s really important that the lease language restrict if you will the landlord’s right to approve, that it not be reasonably withheld condition or delayed. So that if there’s some dispute that a tenant’s having with a landlord that they don’t use their unfettered right to just tell you well you can’t sublet space or assign the lease to another company so you can move onto other places to handle your expansion.
BILL: And you know Darrell, another point that shows up that clause often which even gives the landlord to right to recapture that space when you come asking for approval, you can trigger a situation where the landlord says okay you know what? We’re going to take that off your hand and to Chris’ point, you can’t get it back. And so again these are things that you know, even a leasing attorney, they’re not going to negotiate these things for you. It’s not their job really. They’re looking at lease from a legal perspective, but these are business points that will come up and when you need them, you need them and when you find out you don’t have it, it is really, you just go to that lease to determine how you’re going to deal with the situation.
DARRELL: It can be quite a pester at times.
BILL: Even on the right to refusals. I mean there’s, if you get one from a landlord, their language is usually going to say that it’s a onetime right. Well you can actually negotiate ongoing rights which means if you’ve passed on that right of refusal, and they do a five year lease with somebody or that somebody doesn’t take the space, you don’t want to have waived your rights to that space forever. There’s ways to negotiate these deals where that right comes back around to you and that lease expires should that tenant vacate you know, three or five years from now. Sometimes you can even get it to the point that their right to renew might be subordinate to your future expansion. Those are all you know, tough things to get but you got to know even how to ask for them and try to negotiate for them.
BRYON: You know that’s an important point right there. In our last big shift, the great recession, we helped a number of OPs through Operation Heart to Heart with their leases. And what I learned from that experience was that it wasn’t just what you horse trade to get your square footage down, but how you horse trade that’s sometimes important in protecting you in the future. as well.
DARRELL: Definitely.
NANCY: You can also do it upfront. Let’s say that you can do a five year lease and maybe an opportunity after three years to downsize. Just have to repay a penalty in the form of advertised TIs and commissions that were paid upfront. That might be another way and I’ve done that successfully with landlords and tenants.
BRYON: Great point. Darrell, let’s take this question in a different direction. I’m an OP. My market center’s doing okay. I don’t need to negotiate space away, but I’ve got a new team leader who seems like a rock star and I want to make sure that I negotiate for expansion in a sound, sane manner. How would I go about doing that?
DARRELL: I’m glad you asked. We’ve covered some of the points. The very first point of six I have on my list is the language that’s in the right to sublet or assign. Because if in fact no matter what your language says in the lease that you have the right to expand somewhere in the building, if you can’t or you’re landlocked, you got to be able to get out. And you don’t want to be subject to landlord’s review and approval in a way that can really restrict your flexibility. So that’s really, really, really key. There are a number of ways you can add clauses to a lease that typically is not going to be in the landlord’s standard lease and I do want to quickly point out that OPs should not rely on their business attorney to review the lease. You need a commercial real estate attorney to do it. They’re much more thorough and much more protective of the OPs rights. But there’s a right of first refusal clause. There’s an option to expand clause. There’s a right to terminate clause. And there’s also many considerations about what the cost is to expand. So let’s take a right of first refusal. We did talk about it briefly already. Many times landlords will say yes you can expand into adjacent space, but you really want to have as much flexibility as possible and you’d like it to be in the whole, anywhere in the building or in the complex so that if a landlord owns a three or four building complex, you’re not restricted to just where you are now and the possibility of the space next door might become available and you can expand it. The option to expand is different. That’s an ongoing right that you would have the option to expand, especially if you’re a large player in that building or on that floor, that you would have the right to determine that well I need another 2000 square feet for this mega agent I’m bringing on board and I really don’t want it to be separate from my space. Hey Mr. Landlord can you bump the guy that’s small 1000 or 2000 square footer next door out of the way so that I can grow without being in two separate locations for a period of time. That’s very different than the right of first refusal. The other considerations are how long do you have as the tenant to respond to the notification of a right that a tenant next door or someone where you might have the right to expand is taking the space. That’s usually has to be based on a signed commitment from that other third party that the landlord has to come back to you and say hey, you know, here’s the deal. Take it or leave it. And sometimes there’s leases say you got to do that in two or three business days and you know, that’s not near enough time to consider what the ramifications of that might be. OPs can be in a crunch to have to make a decision before they’re ready under right of first refusal. The option to expand is much more difficult to get because of those, put the landlord a little bit on their heels about having to accommodate you but the bigger you are and the more successful that you are, the landlord’s going to want to clear the way for your opportunity to expand as much as possible. And again we talked it about it briefly that the critical issue that that should not be a onetime right. That if you don’t have it available to you for the rest of your five or ten year lease, it should always be a continuous right and that’s really tough to get, mainly because landlords don’t like having to be responsible for remembering that exists out there in the building in the rent role that you have that right and they go off and lease as pace to somebody that maybe you have the right to expand to or they didn’t give you the right of first refusal because there are new leasing agents in their office. They’re very nervous about that and so that could be a very sensitive negotiation to try to get as much as you can into the lease to give you that ultimate flexibility. The costs associated with that expansion sometimes can also be very difficult. The right of first refusal is usually tied to matching the deal that they have in hand. And sometimes that can be very painful with a landlord that’s worked out a deal with us on tenant coming in to an adjacent space and it’s an as is where a deal and the rent is over market and all these other things weren’t negotiated. And you have to actually agree to those terms. Sometimes you can renegotiate those things depending on your relationship with the landlord’s rep but often not. In consideration of that, you really would like, you would prefer to have the terms in the lease for expansion related to matching the deal you have currently. The lesser of that versus market. So if the market has crashed, you don’t want to be matching your current lease deals on the expansion space. You want to be able to get the better deal. And again you have to put as much flexibility into that language as possible. Another issue is about market rent. Sometimes the landlord says well you know whenever it is that you’re going to expand over these next five or ten years Mr. KW Office, you’re going to pay market rent. Well market rent is very subjective and it needs to be clear whether or not you’re going to get some kind of discount off of that market rent related to concessions that are out there, TI that you may or may not have be spending, escalations at the time that could be much higher or lower than what’s currently in your lease. All of those things factor into how that negotiation is going to go. And if you’re a good tenant rep broker you’re going to also want to be sure that your tenant rep agent gets paid on that expansion as well. Many times that’s left undefined in the lease and the landlord disputes as to whether you are still representing that OP. The last thing I was going to mention is on the downsizing concerns with the shift coming. In ’08 to ’11, there was so much, so many situations where tenants needed to downsize. And the landlords were resistant about that but if you were able to give them some additional term, they would work out what they called a blend and extend. I’m sure all you guys and Nancy know that term but I’m sure OPs don’t, are not familiar with that. But that’s an opportunity for someone to say look, in the next year or two, I can’t pay this rent. I need it to be reduced by 50 percent. And the landlord doesn’t want to lose everybody in their building or see them go bankrupt so they’ll say all right, I’ll give that to you but why don’t you extend your lease now for three more years and with the market rate of X we’re going to get it to be X plus 20 percent for those three years. It gives you a chance to recover in your business and then you’re going to be paying the piper a little bit more in the latter years. It’s a reasonable compromise to accommodate things that could happen in a shift.
BRYON: So one of the things that strikes me in hearing you all talk about the details is I’m sure not you but maybe a tenant rep agent that you know might approach negotiations differently if they know that the other side has a competent broker representing them, versus if they don’t.
NANCY: Absolutely.
CHRIS: Definitely.
BILL: Well they’re just not going to offer up these things. And somebody pointed, there’s things that aren’t in the lease that should be in the lease. Even if you’re relying on getting the document and think you’re just negotiating the document and you’re going to deal with what’s in it, there are things that aren’t in it. A lot of what we’re talking about are things that aren’t even in the document when they send it to you. So the landlord is not, I mean, they’re not going to offer up points that are not to the favor of the landlord.
DARRELL: And to that point Bill, it’s one of the reasons why I really insist that the all the OPs, they have to use an experienced commercial real estate attorney because they know all those clauses or should. And every market I think has you know, one or two good commercial real estate attorneys. Often the OPs or even my client list, they’re going to use their friend, they’re going to use their divorce attorney. And I always say to them, have them do the red line and send it to me so I can review it and you look at these things and it’s like five red lines.
NANCY: Yeah.
BILL: I’ve had that happen too many times. Not just any, any business person. Everybody’s got relationships and I respect those, but sometimes I tell them upfront I said you know I can give you some referrals but just don’t use somebody that is inexperienced with leasing. And even just saying commercial real estate attorney is in my mind not enough. Like I said earlier I’ve got an attorney that is my go to attorney if it’s a retail lease and a completely different one if it’s an office. And they know there’s a big enough difference in office versus retail that they don’t pretend to be the expert, you know with that particular document because I mean you can. Landlord agents for an office they don’t ever use the word “cam,” whereas retail that’s just part of the deal. So you, the documents are different. Sometimes the interest you know, are different again just in retail kind of thinking out loud. The whole idea of exclusive use. That’s going to be in every retail lease but it’s rarely going to be in any office lease and it can be very important to an OP who’s doing a business center and a retail center let’s say or puts their market center in a retail center. Do you want ReMax opening up across the parking lot? If you don’t know to negotiate that, that can happen.
BRYON: So it’s definitely important to have a great commercial tenant rep, and if you don’t have one, your commercial agent will know of several that you can use. Bill, I want to go back to you. We talked about the timeline and the process in starting early. Is there a difference when we’re talking about renewing, renegotiating or a new lease?
BILL: You know, not really because again if you want to go into a renewal feeling like you’ve got some options, which just gives you a better feel for having some leverage, you need to start early enough to have those options. So again I tell everybody at least nine months and if it’s a 5000 feet or more I’d say 12 to 18 months. And that’s in advance of really not just your lease expiration but if you’ve got a renewal option, that’s really where your decision point is as to whether you stay or not. You may have to, you may be starting 12 months before your renewal notice is due. But to just kind of highlight or just kind of bullet point what the process of tenant representation is, I always explain it as probably 30 days of market research and some tours. 30 days of getting both some preliminary construction estimates and space plans done on a shortlist of properties you’ve looked at and like. Probably another 30 days of back and forth negotiation of you know a letter of intent. And then when you get to finally say hey I want a lease, that is a 30-day process. I always say, every attorney, every time they touch it, it takes a week and it’s just kind of a back and forth. So if you’re going to go to back and forth just a couple of rounds. That’s another 30 days and then you’ve got 30 days for an architect to do their construction drawings. That’s after the lease is signed. Probably 30 days on getting permits. In a city like Atlanta that’s actually fast. And then your construction’s going to take 60 days even if it’s a small deal. So just right there you’re seven to nine months and that’s if everything is falling into place. So that’s really the timeline why again it’s just so important to get started well in advance of a renewal decision certainly a relocation.
NANCY: Very few tenants actually realize that. They just think weeks from now they’ll be up and running but they don’t realize what Bill just laid out. It’s an extensive process and depending on what city you’re trying to do a lease, you’re trying to do getting building permits, it could be a long longer than that.
PAUL: This is Paul. One of the common things that really extends out the search is when the tenant or the OP has not clearly defined in their mind what they want and we’re halfway through the process to say oh wait a minute, I forgot the training room, I forgot the kitchen, I forgot the extra conference rooms. That starts the whole process over again in many cases. So it’s very important upfront with an experienced rep to do a needs assessment to make sure the OP knows exactly what they want, but even then you’ll have surprises along the way. They’ll do anything.
BRYON: That’s a great point. So Ron, let’s say we’re going through this process and we’ve seen some buildings. How am I going to winnow that down to a list of suitable buildings or semi-suitable buildings from a long list to a short list and get those landlords to compete?
RON: Yeah. I think the way to do it would be to try to create a competitive bid process so obviously you’re starting early. You have plenty of time and you’re not up against the gun of six months before your lease expires. And so you notified your landlord that you’re out there looking for property and you’re interested in maybe renewing with them. And you said you’d go on tour as Bill had suggested and some of the other colleagues. You’re going on tour. You narrow down. Maybe you look at ten properties. You narrow it down to let’s just say between three and five properties. And so you send out RFPs to all the perspective landlords and you get responses back and you start to develop a competitive lease analysis which is kind of like a lease comparison report where you can put them side by side and look at you know property one, two, three, four and five. And let’s face it, they’re not all on the dollar. They’re not all the same size. There’s different financial indicators as well as space, size and TI fit up. Maybe there’s some rate abatement going on and so what you want to do is develop this comparison report so that the OP can look at it and make a better educated decision. So one space might be 5000 square foot. The next space might be 6000 square foot. So obviously the 6000 square foot is going to be a higher cost total base rent so you want to look at the total base rent over the whole life of the lease that you’re looking to do. And you want to look at the average annual base rent and you want to look at also the average monthly rent. And you can look over it over seven or eight different financial indicators to give you a better educated understanding of what’s going to be the expense here. You know sometimes the best choice is not the lowest cost. And if you have five to choose from, you can really nail down your financial decision and what’s best for the market center by doing this competitive lease analysis and compare them side by side and then talk to your broker and ask their opinion and have maybe a second or third person in with you to try to get other points of view. But I think the competitive bid process with the RFPs is a start and you start and you can develop your lease comparative analysis and I think that’s going to give you a lot of information so you can narrow down and choose the right property.
BILL: Nancy had mentioned a comment earlier about a landlord that went bankrupt and I think all too often you know, you think well the landlords are going to investigate the credits of the market center. But it needs to be on your list too and sometimes that’s just market knowledge. If a landlord may have credit issues, again in the state of Georgia if that building’s foreclosed on, no obligation to honor the leases that are in place. So that’s another one to be a deciding factor is to how well-capitalized is the landlord you want to do business with.
NANCY: I always ask about the landlord. Are they long term holders, what kind of debt do they have on the building and are they flippers? Did they buy this to fix it up and turn around and sell it for years? Tells me what kind of landlord they have. I always check the bathrooms. It tells me what they’ve done as far as maintenance and what do they actually spend money on their buildings as well. Bathrooms are not inside.
BRYON: That’s a great point. Paul I’m coming back to you. We talked a little bit about subleasing and things like that. What other items are crucial to include in all these, that’s going to provide flexibility to negotiate later?
PAUL: That’s a good question. We’ve covered a lot of these but now sort of summarize them. You want to put on the lease an option to expand or and or an option to contract your space back. You can ask for the first right of refusal. We’ve talked about that. If another tenant’s offering any space, we can match it and take that over but there’s drawbacks to that. Some landlords will resist that and ask for a first right of offer. Space becomes available. We have the first right to come in and negotiate to lease that space. Also option terminates great in that it gives you a lot of leverage on the landlord. If you can’t meet me needs then will just terminate and relocate. We mentioned the right to sublease. Renewal options are very important. All of these add flexibility to in a lease but it’s all subject to the market. Three years ago you might have gotten most of these in a lease. Today all the office markets are tight and so an OP’s got to decide which of these are most important to them that might be most applicable in the future for them and then try to get those from the landlords. A lot of landlords now are pretty much drawing a line and saying they’re not do much if anything in this area. So it all depends on the market. So flexibility’s great to have in a lease. There’s an appropriate time where you can negotiate more of these options in the lease than when you run into a strong market and landlords are very resistant. So OPs need a good tenant rep in a strong landlord market to first find all available space and then to know what flexibility landlords are willing to give at that moment in time in the leasing market.
NANCY: There’s one more landlord clause I haven’t heard anyone mention that’s important to take note of and that is where the landlord has the right to relocate you in a building. That could be very detrimental to a tenant that has to be relocated at a later date. So things that appear in a lease that you’re not even aware of. And I always say to people if anyone says to you it’s a standard lease I say run. There’s no such thing as a standard lease. Take it, chop it up.
BRYON: Great point.
RON: That’s a great point, Nancy. You know, I had something like that pop up after the tenant had signed that lease and basically we went back in and convinced the landlord as to why it was in their best interest not to do that. But boy oh boy, that’s a good one, Nancy.
BILL: And I actually just had one end of last year with my OP. I got invited in to look at a deal and they were in the process of getting relocated. And the way the lease had been written, even though we were a 20,000 foot tenant already, we had had a separate part of that market center ended up in a separate part of actually a building across the parking lot. Same owner, same development. And they, they were going down. It’s funny. Once I got invited in the landlord’s like oh yeah, we’re exercising this right to relocate and I was able to show them where they actually didn’t have it. They were trying to say because a lot of times about 5000 feet’s kind of that benchmark as to whether it was going to be applicable or not. Well the piece of the market center they wanted to relocate was only about 3000 feet of our 20,000 feet so it’s noncontiguous. And again it hadn’t really been addressed in the original lease. We were able to create some leverage and actually at the same time we were needing to expand so it did become a win win. But yeah that’s another clause that I try to address in the LOI stage because if you wait until you get the lease, it’s a little bigger of a fight. Yeah that’s another one Nancy that’s going to be in almost every lease when it shows up and you’ve got to know, negotiate it or get rid of it.
NANCY: It’s one that’s easy to overlook unless you have horror stories that you have personal experiences you just indicated. You don’t even think about it until you know the history of some of your tenants that got caught off guard on that.
BILL: And I’ve got one going on right now. It’s not a market center but it’s a client of mine. He picked this building because it’s a nice view from the ninth floor and it ended up becoming a negotiating point. And the best I was able to do for him was just keep him on floors six through ten if they wanted to relocate them in the future. But he’s a 3500 foot tenant sitting next to a 40,000 foot tenant so I knew I wasn’t going to win that one telling the landlord they couldn’t relocate them. But at least I was able to keep his views, not have him on the first floor, you know, staring at the parking garage one day.
BRYON: That’s great.
DARRELL: Hey Nancy, thanks for bringing that up about a missed clause. There are two others I want to bring up that very specific to Keller Williams real estate office and that is parking lot and off hours HVAC. Since there’s so many of these market centers have training, they have a lot of agents. There are times they have a hundred or more people coming in for training and we’ll have a parking load in a building that typically in an office is only going to have four spaces her thousand. How an OP chooses where to go is really critical that they have the rights for those certain times there’s overflow parking or an allowance for that in the lease. Same thing with the agents, particularly on the residential side having evening and weekend hours. Many of the buildings don’t want to be offering HVAC, particularly during off hours and if you do want it they charge you a fortune. I had a client once that we actually did a calculation the building. Tenant wanted I think 65 dollars an hour for the excess time that they would need it and it was an ongoing thing for the year and we calculated it to be a dollar an hour was the actual cost.
NANCY: Wow.
DARRELL: In some states it’s illegal to profit from the resale if you will of electric. And landlords will come up with every excuse in the book about how oh they got to have their engineer. We got to cover depreciation and all these things. The reality is you can compromise on that but it should never be these gigantic numbers, particularly in a real estate office that needs it fairly regularly. And I know there are offices out there that grow. There’s hot summer months, you know when it’s 90 degrees, 85, 90 degrees in the office on a weekend and they shrug their shoulders and go we can’t pay 50 or 65 dollars an hour you know, for six to eight hours of time on a weekend. But that all needs to be negotiated up front those two things.
NANCY: Well it comes back as Darrell is saying comes back to what the office hours are, their standard office hours are eight to eight or whatever they are. But I think, I just negotiated one yesterday where I just did a flat fee because I didn’t want to have to count the hours and it was a lot more beneficial to my client just to have a flat fee for the month. Doesn’t matter how many hours. They operate until midnight ever night. That could be very costly for real estate companies.
DARRELL: I’m just going to add one more quick thing about HVAC. The landlord will say, they’ve got to run their machinery and all that but the reality is the actual cost for HVAC in an office building is typically 30 to 40 percent of the bill. 50 to 60 percent is for lighting for most engineering standards that I’ve seen. And so when you start breaking it down to that point and then you know a demand charges, they’re not going to have during off hours, everything starts getting this thing down to a very, very small cost. And hopefully you can get that past through in the negotiation.
NANCY: Depending on what size your tenant is, the space that you’re doing you can always do a supplemental system which is what I do with my bigger sites. But it ends up saving them.
DARRELL: A lot of money.
BRYON: Darrell, how do we minimize the need for things like personal guarantees, security deposits, letters of credit?
DARRELL: Yeah I mean the first thing you do is you say no. No. I’m not going to do that. No. But on the flip side of that you have to understand why the landlord is requesting it and sometimes you have to give in in some way, shape or form. The goal is to mitigate any of those things by time or money. So on the personal guarantee side, there could be a very significant landlord investment in the build out that they want to be sure that they get a return on. The business that are in in real estate, there are quite a few ups and downs and that concerns the landlord when they’re spending that kind of money. And the individual partners in a market center, what’s their personal financial statement look like? What’s their P and L look like? The landlord’s going to want to look at those things and quite frankly based on the strength of those items you may be more successful at eliminating a personal guarantee, eliminating a security deposit possibly or just minimizing it. One of the other key factors that a landlord’s going to look at in our type of business is whether the build out of that office is generic enough that they could lease it to any other company. Or is it very specific to the use? Most of the Keller Williams offices I’ve been in are fairly generic. They could be used by other companies. You go to a ReMax office and it’s all these eight by eight or ten by ten offices in a rat’s maze of always and that’s not releasable for a landlord if there’s not a default on the lease and they have to try to find another tenant to go in there. One of the factors in all this, landlords if they do come after you personally for a guarantee, I will tell clients sometimes under the list of Why’s that maybe they should give them something just to be sure that they can say to their ownership we have at least something to hang our hat on. And often that’s in the early stages of the lease. If they don’t know you as a client or what your reputation is or if you’re fairly new in the region, their biggest concern is that first or second year. And so the personal guarantee that might have to happen can be topped pretty significantly after the first year of successful performance by the OP and that market center. Sometimes the landlords will say we’ll just reduce it 20 percent a year over five years, but the reality is you want it to go away on behalf of your client the OP as fast as possible. So I’ve been fairly successful at getting it cut by 50 percent the first year and 25 percent in the second year and then after that it doesn’t exist. On the flip side of that, it could be a larger security deposit that they want in which they’re holding your cash and that’s always a concern if they go bankrupt. They might lose control of that. A letter of credit is an opportunity to be sure that it’s at least saved by a financial institution as opposed to the landlord’s office where they comingle their funds. But there’s a fee associated with the letter of credit. A security deposit I often say to landlords in my negotiations on behalf of the tenant is needed sometimes based on these Why’s that we determine. But after a while it’s not needed and then it’s considered in my book a loan to the landlord. And when I say that clause to the landlord’s reps they kind of look at me kind of cockeyed and realize that that is true. They don’t really need to hold onto this if we’ve had successful performance. And I haven’t had an events default. Doesn’t mean you’re going to get it reduced but it does lay the ground work for at least ending at some point in time or getting it back. They do like to ask for any of the guarantors to be joint and several which is a major problem for OPs if they have a series of partners. The landlord’s going to want to have their paws in every one of them and you as a negotiator for the OP or the market center really want to limit that to either a percentage of ownership, have it divvied up somehow based on the percentage of ownership of the market center. That percentage of ownership of personal guarantee. Again you want that to be disappearing quickly over time. Husband and wife issues are another one where the landlord’s going to want the guarantee to be joint and separate with the husband and the wife or the wife and the husband and you want to avoid that at all costs. You can usually just make that point, well she will not agree to it or he will not agree to that. It’s my business. I’m the only one that’s going to be liable. Here’s my personal statement, etcetera. Another consideration is many of the leases have a default clause that involves acceleration in which the landlord can make a claim of default and accelerate all of the rent that would be due in the next remaining years of the term until today. And that can be very, very damaging and very difficult to squirm out of if a market center’s in trouble. And so you want to have an attorney try to mitigate or eliminate those types of clauses from the default section of the lease. Mitigating by time and money can also be negotiated to just be a rolling guarantee. Okay well look, I understand you need this. I’ll give you a guarantee of six months of rent. That will give you enough time to find another tenant and it will just roll through the lease and at the end of three years it’s reduced down to just the security deposit that you’re holding. So there can be manners if you will of eliminating the time element and or the money element of that guarantee and all of that is negotiable.
BILL: One of the main points Darrell made was even if you have these things at the beginning, it doesn’t mean you have to have them forever. And if you don’t go ahead and set up the lease. I try to make, even if mine aren’t going down, that they go away at a renewal. You know, you want your renewal option to automatically include the personal guarantees. And just manage expectations, an OP with five or six locations that’s been in business from 20 years is going to have a lot more leverage on this issue than a new OP with their first market center that they’re starting up. One of the things we’re doing with OP now is going through her different leases. And as those leases roll we’re pulling out these personal guarantees, some of which have been sitting there for ten or 15 years and they weren’t needed. Again it’s part of cleaning up old leases that haven’t been cleaned up before at renewal time.
NANCY: I want to make a comment about when Darrell discussed the acceleration clause. It’s very important in that clause to see what would cause them to default to accelerate because I have seen it as something as simple as missing your payment for one month. And that can be a disaster. If they want to get rid of you, they can hang their hat on that. You just want to make sure you carve that out so it’s something more reasonable.
BILL: Good point. In fact I’ll probably say that’s one of my answers for your first question to me. One of them that’s easily preventable is again how do you negotiate the default clauses. A lot of states do not require landlords to give written notice when you’re in default for rent. In Georgia there’s no requirement for a written notice. Your written notice is a lease that you signed. So I try to go in and put you know one or two written notices in any 12 month period just to protect my tenant clients from uh ending up in a default. Not knowing it and having any intention to pay. If the landlord’s trying to accommodate a bigger tenant next door or suddenly there’s no obligation for them to accept your money after the fact.
NANCY: I think it’s imperative that they hire a tenant rep agent to assist them.
BRYON: This has been an amazing call and in terms of the information still be covered, there’s a tons of other things that we haven’t even talked about. But in terms of a parting piece of advice for an operating principal who’s looking to either renew, renegotiate or sign a new commercial lease, what’s your parting advice to them?
CHRIS: One of the biggest things that comes about whenever I’m asked to give any sort of response or opinion or whatever regarding a commercial lease is give me a full copy of the executed document with any of all addendums. Let me read the lease, then I can discuss intelligently. And so often we have Ops, certainly they’re knowledgeable in real estate but they certainly may not be knowledgeable in commercial leases and somebody that knows what they’re doing needs to read the lease and know what there is in the lease. And when I read a lease I make notes as to the various and sundry terms and dates and obligations and all that so that then I will be able to discuss intelligently with whoever is asking a question or whatever position I’m being put in from a position of knowledge and strength having read the document that we’re discussing. And so often that doesn’t happen and that’s got to be the first thing that everybody does that’s been involved in a lease transaction.
BILL: And I was going to say too, not to wait until it’s an emergency situation and you know, it’s. My regional owner came to me years ago and handed me a whole stack of leases because we had met, he was listening to what I was saying which is just like this type of conversation. I started going through these leases to be able to give him some information to be able to pass onto his OPs. And I would say best parting advice is just don’t look at the commercial lease transaction to be like any other transaction that you may typically be involved in. I tell everybody if you’re buying and selling real estate, there’s a good chance that when that transaction is over, those two parties never see each other again. A commercial lease is establishing a five year or ten year relationship with a landlord so it’s all about what’s yet to come. Not that I found a space and got a good rate and yet that’s very often that first perspective is not just OPs or market centers but just tenants in general go to the market and say oh I’ve found this great deal, can you look at it for me. And the think they’re again halfway done. But it would really be just to kind of back up, pause and think about how these transactions are different and even as you interview your KW agents, you know, I have KW Commercial agents referring me leases because they just don’t want anything to do with them and they realize it’s not the same as buying and selling real estate. It’s just a different animal and they really owe it to themselves to get someone experienced involved to help their business.
DARRELL: Good point, Bill. To tag onto what I believe Chris said about getting a copy of the lease to review it, I would also highly recommend that you get a three year history of operating expenses or CAM charges that the landlord has for, by line item, not just the totals but by line item so that you could see where the variations are and can ask questions about why did these things happen particularly. That’s really important. The other parting comment I would have is that it’s an expression I’ve heard years ago that I would share with any OP. If you read the fine print it’s an education. If you don’t read the fine print, it’s experience.
BILL: It’s education the hard way after the fact.
DARRELL: Yeah I would suggest that they develop alternatives because once nobody likes to move but they could be surprised with what they find out there.
CHRIS: Yep.
BRYON: All right. Well my last parting piece of advice is KWCommerical.com. Talk to Mark Moreno and Sam Hasty and the rest of the KW Commercial team. If you don’t know a great KW Commercial agent in your area who focuses on tenant representation, Mark and Sam and the team can help you find that person. Nancy Lemas, Chris Rosprim, Bill Langley, Ron Fredette, Paul White and Darrell Nevin, thank you so much for joining us today. We really appreciate your wisdom and your experience.
CHRIS: You bet.
BILL: Thank you. I’m glad to be a part of it.
NANCY: Thank you.
This has been the KWU Interview.