Suite Deal Read online

  Copyright © 2019 Alice Devine

  All rights reserved.

  No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written permission of the publisher.

  Published by Learn Associates Publishing

  Belmont, California

  www.suitedealbook.com

  Design: Paul Barrett

  Editorial: Alexander Rigby, Valerie Paquin, Kari Somerton

  Image credits: Halkin Mason Photography

  ISBN (paperback): 978-1-7335307-0-5

  ISBN (ebook): 978-1-7335307-1-2

  Dedicated to William Wilson & Associates for its visionary leadership and quality real estate developments

  Contents

  Part I: Preparing to Lease Space

  Chapter 1: Understand the Local Market

  Chapter 2: Position the Property

  Chapter 3: Develop Marketing Materials

  Chapter 4: Work with Brokers

  Part II: Structuring the Lease Deal

  Chapter 5: Tour Prospective Tenants

  Chapter 6: Create a Space Plan

  Chapter 7: Analyze Financials

  Part III: Closing the Lease Deal

  Chapter 8: Craft a Proposal

  Chapter 9: Negotiate a Deal

  Chapter 10: Understand Lease Clauses

  Resources

  Glossary

  Appendix A: Market Research

  Appendix B: Space Planning Indemnification Letter

  Appendix C: Lease Proposal for a New Tenant

  Appendix D: Proposal for an Existing Tenant

  About the Author

  Acknowledgments

  Notes

  Selected Bibliography

  Preface

  Commercial real estate is a go-go business that thrives on hip architecture, charismatic people, and the thrill of a deal. The process of learning how to acquire and retain quality tenants, however, resembles a glacier moving ever . . . so . . . slowly. Why? Perhaps because real estate’s standard field training remains somewhat haphazard. Perhaps because its traditional culture limits access. Perhaps because leasing is part science, part art—precise business terms and intuitive skills. Perhaps—probably—because of all of the above.

  As I started my career in real estate, I discovered that my contemporaries who had been hired in other industries benefited from robust training programs designed to expose them to the many facets of their chosen businesses. In contrast, my training was informal and largely dependent on the quality of my mentors, whom, as I came to understand, I was lucky to have had at all. A further complication was commercial real estate’s notoriously “old-boy” atmosphere, which was entirely new territory for me. And acquiring the skills I needed to succeed as a property manager and leasing professional—both the analytical and people skills—took time. The beginning of my career was a baptism of fire that sometimes ended in a spectacular flameout of defaulting tenants and muddied lease terms.

  Over the years, the companies for which I worked managed, bought, built, and renovated commercial properties. As landlords, we leased millions of square feet of office space and established close working relationships with quality tenants who became famously reluctant to leave our buildings. Through it all, I found I had a well-developed sense for leasing—an instinct, honed by experience, that told me a deal was ours to close, even in the early tour stages.

  Why care about upping your leasing skills? Because effective leases add value to properties. Let’s do some simple math. Suppose, for example, that you negotiate a mere 5 cents per square foot per month more in rent because you’ve read this book. That’s 60 cents per square foot per year. In a 100,000 square foot building, the increased rental rate translates to $60,000 more in annual revenue. Capped at 6% (more about this in chapter 7), that additional rent has added $1,000,000 to the building’s value! So leasing matters for a property’s value . . . and it translates to one’s professional worth.

  This book is intended primarily for those in commercial real estate whose responsibilities include leasing (or some aspect of it), and will benefit property managers, asset managers, landlords, leasing agents, and brokers. Having said that, much of this leasing discussion will benefit those who work with multifamily properties as well. The book is divided into three main sections: preparing to lease space, structuring the lease deal, and closing the lease deal. The chapters mirror the extensive training program I have designed and taught to commercial property managers. My intent is to be practical and sequential, and to speak to the realities of leasing.

  Of course, in real estate, daily life rarely follows the neat sequence of a book, so take a deep breath and appreciate this crazy business for its infinite variety. You might be thrust into a tour of vacant space your first day on the job. A tenant might ask you about renewing a lease as you stand waiting for coffee. You might—lucky you—inherit a property, and although there may be a leasing team in place, you’ll want to understand how the market works. Your only certainty is that each day will be different from the last.

  My grandfather once suggested, “Begin where the other person left off.” Failing to listen to his advice, I undoubtedly retraced steps taken by others. This book gives you the opportunity to forge your own path with the benefit of others’ experiences and knowledge. I have tried to write in such a way that regardless of what leasing challenge you may encounter, you will be able to turn to a chapter and obtain help toward a solution. If my experience is any guide, the more problems you are able to solve, the better you will become at what you do. Inside, you will find practical leasing advice and real-life stories (in italics) gathered over hundreds of transactions. (As a note, the words landlord and owner are used interchangeably in this book, as are the words broker, agent, and salesperson.)

  Like most real estate documents, this one contains a disclaimer. This book is not intended to offer legal or accounting advice, but rather to serve only as a guide relevant to the daily tasks of leasing. For those subjects where legal or financial advice is required, you should seek the advice of professionals in those fields.

  I’d love to hear from you about what works, what doesn’t, and your own leasing experiences. Please visit my website, www.devinerealestateguide.com, for discussion, news, and relevant leasing topics. So hang on to your purses and wallets, and let’s go.

  Part I

  Preparing to Lease Space

  Chapter 1

  Understand the Local Market

  “I want to see everybody in their habitat.”1

  —Sam Zell, founder, Equity International and real estate magnate

  Goal: Understand the Local Real Estate Market in Order to Position a Property Competitively

  One afternoon, I received a telephone call and was hired to lease and manage a million square feet of commercial office space on the San Francisco Peninsula. Initially elated, I soon became concerned. Although a native San Franciscan, I knew little about the small towns south of the city and just north of Silicon Valley where this new portfolio was located. The area seemed an eclectic mix. One town boasted a card casino open twenty-four hours while the next town’s tree-lined roads obscured mansions that housed CEOs and heirs to fortunes. Soon, office space featuring Ping-Pong tables for hoodie-clad techies would become fashionable. In the meantime, I needed to understand this marketplace. One of the first things I did was call the broker whose number was posted on a leasing sign at a large building in the area. Over the next three years, this broker helped me understand the market and, in the process, became a trusted friend.

 
It’s said that commercial real estate professionals only care about the space within an hour’s driving distance from their pillows. That quip underscores accurately the very local nature of real estate—for many, only the buildings within their competitive market affect their daily leasing lives. It follows that by focusing on your immediate real estate market and its competing buildings, you can position your own property for leasing success.

  Learning about your local market allows you to succeed within it. Quantitatively, you must know and understand the features of the area, its inhabitants, properties, economics, culture, geography, and nuances.

  In addition to knowledge of the quantifiable aspects of the local market, successful leasing requires a good understanding of people. An expert in human behavior, former CIA operative Henry A. Crumpton writes that “the heart of intelligence . . . is human espionage.”2 While you may aim to lease office space rather than provide national security, the importance of understanding people and what motivates their decisions applies equally to both.

  How, then, do you gather the information you need in order to understand your market?

  Learn from the Brokerage Community

  Read Brokerage Reports

  Online brokerage market reports can offer an expedient overview of real estate markets. Many real estate brokerages—especially national companies that often have extensive research staff—keep their fingers on the pulse of local markets by publishing regular blogs, online statistics, and market reports.

  Market science, however, is inexact. Brokerages can report the same data differently by using their own definitions of neighborhoods, net rents, and square-footage absorption rates. While this lack of consistency can prove frustrating, when taken as a whole, the information should provide a good general overview of the marketplace. Take the reports for what they are—a broad brush of the local real estate landscape. (See appendix A for a list of firms that publish market research reports.)

  Finding King Kong

  Nearly every market has its “King Kong” of brokers, who may also write a blog or publish reports. These independent reports can have the added bonus of a more authentic voice, uncensored by a corporation’s red pen. To find your local King Kong, contact the research staff of the three largest brokerage companies in your area and ask if any individual brokers publish such, and look for broker names posted on large buildings.

  Develop and Utilize Broker Relationships

  Next, develop broker relationships to better understand a marketplace. As a starting point, choose several local brokers who represent buildings or tenants that you find similar to yours and ask how they feel your properties compare to others in the marketplace. If you get a sugarcoated response, talk to other brokers until you get more honest feedback. Remember that this is a time to listen, not to defend. When you get a broker’s advice about improvements for your properties, you will have received valuable information, because most local tenants will likely share—or at the very least be influenced by—these same perspectives. Such feedback will allow you to develop a sense of what local brokers and tenants value, and enable you to create a better marketing plan.

  Ask Your Local Broker for Feedback

  How does my property compare to others in the marketplace?

  Which of my property’s attributes are superior to those of other properties?

  Do you view any aspects of my property as detrimental?

  What, in your opinion, could be improved?

  What tends to be the most important decision factor for your clients? (See chapter 4 for more discussion about working with brokers.)

  Meet Brokerage Analysts

  In addition to brokers, company analysts responsible for writing and publishing market reports can be a valuable resource. Unlike brokers, analysts—with a business card titled Market Research Analyst or something similar—can work far from the milieu of the private golf course, so buying them lunch or dinner can be a thoughtful gesture that encourages conversation. You will hear opinions about various landlords, evaluations of space in the market, and quite possibly, the current best—and worst—jokes.

  Converse About Comparables

  Economics 101 tells us markets are all about supply and demand, and that the truest test of correct pricing is what the market will bear. In commercial property leasing, signed leases—known as comparables or comps—reveal the value of a space according to the rent along with lease concessions (such as tenant improvements, rights to expand, etc.). The primary use of comps is to justify the offered terms of a lease as competitive and fair for the local marketplace. A complete comp generally contains all the economic terms (rent, square footage, term length, tenant improvements, etc.) of fully executed lease deals as well as other pertinent information, such as expansion or extension rights. The brokerage (and landlord) community tends to closely protect comps, using them to bolster their positions and volunteering only the information that doesn’t weaken a negotiating stance. Effective leasing agents garner, guard, and use market information to their advantage.

  How can a less experienced real estate professional accumulate a good bank of comps? By obtaining published comparables (via subscription and the other reports discussed above) and expanding them with information gleaned from your own industry connections. Although word-of-mouth information needs to be taken with a grain of salt, personal conversations allow for a certain freedom, often off the record. These discussions, however, still need to be cross-checked because they can be a mix of speculation and fact.

  Once you have assembled all the data available on comparable deals in your area, you should have a good idea how your deal (or any deal) stacks up relative to the marketplace. The nature of these comparisons is such that while some spaces will stand out as direct competitors, others may be market indicators but will not share a one-to-one correspondence. Suppose, for example, that one space offers a view of the San Francisco Bay while another looks out over shrubs. How do you value each property’s view as it relates to rent? Even professional appraisers struggle with quantifying certain subjective aspects of space. The idea, therefore, is to compile as large a group of comparables as possible to ascertain a range of justifiable rents. After that point, the success or failure of the transaction will likely boil down to a tenant’s personal preference or, perhaps, some “softer” aspect (such as great property management service) that will tip the balance in your competitive leasing favor.

  All the World’s a Stage

  Try role-playing to improve your information gathering. It takes practice to develop an informed yet easy conversational style that allows useful give and take. Overzealous information gathering can alienate others. So find a peer and practice exchanging the details of comparable lease terms.

  Selecting the Right Tone

  When seeking market information, many leasing agents use a reciprocal style; the more detailed and open the broker is with comparables, the more information you trade. Keeping the concept of exchange front and center allows you a balanced conversation in which you don’t give away many details with scant information in return.

  Choosing What Information to Trade

  When you talk with brokers, appraisers, and other property managers, how do you know what comparable information to discuss? In terms of the information you receive, you are searching for the deal details on large tenants, or tenants who toured your property (but leased space at another building), or information on any portion of a deal. Because you keep a log of deal information, every bit of new data is valuable. Over time, the body of comparables you gather will probably become substantive, and you can ask for missing specifics to fill in the gaps.

  When it comes to providing comparables, many real estate professionals prefer to trade information that already resides (more or less) in the public domain, because they do not want to release privileged details that may hurt their own negotiations. Which deals are public? U
sually the ones that involved a broker, as the individual brokers and their employing brokerage houses certainly know the lease details. The more brokers involved—for example, a transaction that includes both a listing and a procuring broker—the more widespread the information. On the other hand, a lease renewal made directly between a landlord and an existing tenant (and without a representing broker) would be considered more private information. The best agents are conversant with all the public information and look for details or deals that have not been published. Evaluate the experience of the individual with whom you discuss deals—the information you trade will depend, to some extent, on the level or depth of that individual’s knowledge. In many instances, you may be able to trade information about deals done at other properties, or deals already publicly discussed, and only as a last resort have to share any of your own private comparables. Remember that amplifying someone else’s comps also counts as an information trade. For example, you can point out that one suite enjoys a panoramic view while another does not, which is likely reflected in the rent or another aspect of the lease. The more you understand your local marketplace, the better you become at discussing properties and lease transactions.

  I remember a conversation with a local broker who complained that our building had a higher rental rate than the competitor across the street. I explained that our property was well constructed, with concrete floors and a steel frame, while the other building had a wood frame. The broker asked, “Who cares, since the floors are carpeted anyway?” I answered, “The tenant who walks across a squeaky wood-framed floor every time he crosses the office cares.” Articulating the features of the space you lease allows you to call attention to its benefits and, ultimately, to justify the deal terms as you compete against other properties.