When renewing a lease, getting a quality tenant rep involved early can pay huge dividends, according to Piers Pritchard, senior associate, and Jay Holland, senior vice president and principal, both of Colliers Turley Martin Tucker.
“Your landlord is in the real estate business; brokers level the playing field,” Pritchard says. “Brokers provide expertise so you can concentrate on your core business.”
Smart Business spoke with Pritchard and Holland about what services tenant reps provide, the importance of making contact early and what types of savings can be realized.
What benefit does a quality tenant rep bring to the table?
A quality tenant rep provides a broad spectrum of services. It’s not as simple as just showing buildings there is a wide array of knowledge that is necessary for every aspect of a transaction. This includes accurate and up-to-date market information, construction expertise and a detailed knowledge of lease documents. In addition to identifying properties and providing expertise in the negotiation process, a good tenant rep will provide a comprehensive financial analysis that allows their clients to compare alternatives on an ‘apples to apples’ basis. By utilizing the services of a quality tenant rep, a company can reduce occupancy costs, increase profitability, mitigate lease risks and minimize time invested. A quality tenant rep will also interview architects on behalf of tenants. If a tenant is going to move or renovate its existing space, it will need an architect to design the space. A good tenant rep interviews architects and negotiates architectural contracts at no charge.
How can a tenant rep help a company gain leverage during the negotiation process?
When negotiating, it’s critical to have as much leverage as possible. When conducting real estate negotiations you gain leverage through a number of factors. Some of those include using market comparables knowing what other deals the landlord has done, what the market dictates, what the landlord acquired the building for, upcoming lease expirations and if the owner has any intentions on selling the building. All of these factors affect a lease renewal and good brokers will use this information to gain leverage with a landlord, whether it’s an existing landlord or potential relocation.
At what point should a company contact a tenant rep?
The lead time necessary is dependent on the size of the tenant. The largest tenants need to engage a tenant rep several years prior to lease expiration so new construction can be considered. For smaller tenants, it’s important to contact a tenant rep at least 12 to 18 months prior to a lease renewal for several reasons. One, the lease renewal/relocation process, when done properly, simply takes that much time. Secondly, and more importantly, in order to properly assess all of a client’s options it’s imperative to review, explore and negotiate any relocation options before a tenant hits renewal option dates.
Typically, tenants will have the option to renew their lease with an option time between 6 and 12 months before the lease expires. It’s important that market research is completed before that option date, because if it’s not, you’re exposed to your existing landlord. Tenants that pass through renewal options are often treated differently than those with options as their ‘parachute.’ Landlords can stick tenants with above market deals simply because the tenant does not have enough time to move. Being ahead of the curve is critical.
What types of cost savings can be realized by utilizing a tenant rep?
There are two types of savings, quantitative and qualitative. Quantitative savings include how much you lowered the rent, how much the construction allowance was increased, and how much free rent a tenant received.
Perhaps even more significant and where a good broker can drive value are the qualitative items, which are more difficult to measure. That’s where you really see the benefit of having a strong tenant rep. Items in leases like renewal option language, operating expense caps and exclusions, termination and expansion options, white-box definitions, subletting rights and code compliance are hard to quantify upfront because you can’t associate a dollar value to them. But over a three-, five- or 10-year period whatever your lease might be you are certainly going to have to reference the lease for certain items. Qualitative items are hard to identify upfront, but often provide the biggest benefit in the long run.
What questions should be asked when meeting with a prospective tenant rep?
First, make sure the rep has adequate experience with similar types of tenants and transactions in the market. Secondly, ask a prospective tenant rep to answer the most important questions upfront, including: Specifically how are you going to save me money? How are you going to reduce my occupancy costs and increase my company’s profitability? What do you know about my building and landlord? Every good broker should think from the landlords’ perspective. What keeps them up at night? What specific issues are they having in the building? Are there other tenants with leases expiring in the near future? Are there tenants moving out? If there is a tenant moving out, the landlord will be more sensitive to your lease they’re already losing one tenant and certainly don’t want to lose another.
PIERS PRITCHARD, senior associate, and JAY HOLLAND, senior vice president and principal, are both of Colliers Turley Martin Tucker. Reach Pritchard at (314) 236-5477 or firstname.lastname@example.org. Reach Holland at (314) 236-5446 or email@example.com.