By Carrie Kreydick and John-Paul Wolfe
Working with commercial tenants can be a challenging experience, even if you have sold or leased commercial properties in the past. Transaction timelines can easily span more than a year from the initial search to the final lease signing. As a broker, your job is not limited to simply identifying a space that meets your client’s search criteria. As you will see, finding the right space is only the beginning.
Understanding your client’s preferences and requirements are as essential as knowing the territories in which they operate and the locations that they are targeting for expansion. Start-ups and first-time business owners have drastically different needs and capabilities than a corporate entity, a seasoned franchisee or an experienced entrepreneur. The same way that a first-time residential buyer has different needs and questions than someone who has owned many homes.
The initial client meeting should involve getting to know your client, and establishing that they are prepared to move forward on a Letter of Intent (LOI) when the time arrives. The client should have a strong business plan, current financials, a competent real estate attorney (with experience negotiating commercial transactions), as well as sufficient funds or financing in place in order to open the business.
The next step is to determine a target market and to thoroughly canvass the area for potential sites. This includes searching the various listing services, driving the target area and calling commercial brokers, developers, landlords, property owners and managers about possible locations that may not be listed.
Utilizing all of these techniques will ensure that the site selections presented to the tenant are complete and comprehensive. When searching for space, the broker needs to find sites that not only meet the tenant’s geographical parameters, but also the functional and logistical requirements of the client’s business. Criteria such as proper ingress/egress, loading/dock space, zoning, employee/customer parking, “Black-iron” venting, HVAC, plumbing and electrical all must be taken into consideration when examining the viability of a potential space.
Once suitable sites have been identified, the next step is to schedule site tours. Depending on the search criteria and the current market conditions, finding the right space can happen on an initial tour or take several outings. Just like in the residential world, it is important to communicate with the client about their concerns and objections, as well as what they like and what they can live with at each potential location. Narrowing down your search to a few potential sites will allow you to move forward to the next step: the LOI.
LOI’s are submitted by the tenant broker on behalf of their client to the landlord or the landlord’s broker. The LOI summarizes the business points that will eventually be incorporated by attorneys into a lease for the property. These letters should include the property address, square footage, offered lease rate, term and renewal options, type of lease (Gross, Modified Gross, Modified Net, NNN, etc.), delivery date, delivery condition and the guarantee. Tenant improvement allowances, build out time and rent abatement (if applicable) are also extremely important to tenants. The tenant broker needs to figure out which points the tenant is negotiable on and which are deal breakers. The landlord’s broker will typically counter the LOI with modifications to the proposed terms, as well as new terms that may be required by the landlord. This process can go on as long as both parties want to make the deal work, or it can die on the vine.
Once the LOI is fully executed, the deal is said to be “going to lease” and the terms are sent to both parties’ attorneys to be incorporated into a lease for the property. If you think you are home free because you believe the deal has been negotiated, think again. The Letter of Intent is just that, the intent of both parties to move forward on the agreed upon terms. The LOI is typically non-binding and can be cancelled by either party at any time. The lease negotiation process can derail more deals than any other aspect of the transaction. It is therefore extremely important that the tenant’s broker has constant contact with the tenant’s attorney. Time kills deals, and the longer lease negotiations take, or if one party is being non-responsive, the less likely that a lease will be consummated. A good tenant broker needs to help expedite the process, keep all parties well informed and get the deal done to get paid.
If the space is already built, the tenant typically is able to take possession upon lease execution. If the space requires build out, then by now, architects, space planners and contractors have all taken a look at the project and the tenant can immediately begin the permit process. Brokers should make sure that their tenants have had contact with the appropriate alderman, community boards and permitting authorities. Although it’s not the tenant broker’s responsibility to ensure a smooth construction project, the broker will get calls from both sides when issues arise, thus they should be knowledgeable about all facets of the process.
A productive partnership between a tenant and a broker makes the leasing process fulfilling for all parties involved. The same can be said in terms of a residential Realtor and his/her client. In the commercial case, it’s important that the tenant find a broker experienced with their particular use to address their specific requirements and individual needs. The broker should be able to not only find the right space, but also guide their client through the entire process. A tenant broker looks out for their client’s interests, mitigates risk, negotiates the best deal possible and keeps the deal on track with constant communication between all parties. If brokers take all these steps into consideration, the broker can count on repeat business when their clients open a successful business and begin the search for additional locations.
CARRIE KREYDICK IS THE DIRECTOR OF BUSINESS DEVELOPMENT AT NEW WEST COMMERCIAL AND JOHN-PAUL WOLFE IS THE DIRECTOR OF COMMERCIAL BROKERAGE AT NEW WEST COMMERCIAL. KREYDICK CAN BE REACHED AT CKREYDICK@NWRCHICAGO.COM AND WOLFE CAN BE REACHED AT JPWOLFE@NWRCHICAGO.COM.