BY CARRIE KREYDICK AND JOHN-PAUL WOLFE
In this current economic climate, finding a qualified tenant for a commercial landlord can be just as challenging as finding a qualified, contingency-free buyer for a residential owner.
The leasing process is typically time consuming and fraught with obstacles. It can take months of showings and lease negotiations before the landlord’s “ideal” tenant finally signs on the dotted line. For these, and many other reasons, you will notice that even the largest landholders and developers utilize the expertise that a commercial real estate broker can provide.
The goal of commercial brokers is to find appropriate tenants for a site and negotiate terms on the landlord’s behalf to maximize the landlord’s profit, all while mitigating the landlord’s risk and minimizing market time. Just as in a residential transaction, a broker must not only market, show and negotiate with potentially non-committal tenants, but must also facilitate the communication between the landlord, potential tenants, attorneys and the cooperating brokers.
The first step when listing a commercial property is to understand the landlord’s goals and come up with a target list of tenants. This helps to narrow down the universe of tenant types and to set a rental rate and incentive package that will satisfy the landlord. The following questions can help to establish the decision-making criteria for identifying the “ideal” tenant or tenant mix for a commercial property.
– Is the property a short or long term hold?
– What is the landlord’s risk tolerance? Is a corporate or national credit tenant important?
– Does the landlord want to deliver the space as-is, or are they willing to finish the space for the tenant?
– Are there funds available to offer a Tenant Improvement Allowance?
– Does the landlord want a restaurant, a cafe or a sandwich tenant?
– Are there any restrictions on use (either from the landlord or condominium declarations)?
– Where is the property located? What are the neighborhood amenities? Parking? Proximity to transportation?
– When can the landlord deliver the space?
– What lease rate does the landlord hope to attain or need to attain?
Depending on the property, the landlord and the landlord’s specific goals, the answers to the above questions can vary widely. It’s important to determine expectations and the probability of getting a deal done. Just like in the residential world, commercial brokers don’t like to waste their time marketing properties that are highly unlikely to sell or lease.
Once you understand the landlord’s goals and have competitively priced the property, what comes next? Can you simply list the property on the MLS and call it a day? Absolutely not; listing commercial properties is an active process.
There is still a lot of work to be done. If the space isn’t located on a major street, some retailers may be turned off. If the space is too expensive, a nonprofit probably won’t be interested. If black iron isn’t available, it may be costly for a smaller restaurant. Determining who can take the space is the first step, then the broker finds a tenant by using direct marketing techniques.
Not all tenants will have broker representation or access to the various listing services. It is the job of the broker to actively market the listing to specific tenant types that correctly fit the property. A broker should get the space in front of as many target tenants as possible by using an assortment of marketing tools including commercial listing services, custom signage, targeted mailers, cold/warm calls, broker e-mails and open houses.
Some commercial brokers choose not to actively cooperate with other brokers and are not even members of the MLS. Therefore, not all commercial properties are listed on the MLS. There are several other fee-based listing services that commercial brokers use to get their properties in front of a large, nationwide audience.
Brokers also send targeted mailers, cold call specific users and are always aware of which tenants are in the market looking for space. Also, most brokers know which other commercial brokers are representing the tenant types that the landlord is looking for. If the broker co-ops, he/she makes sure those tenant rep brokers know about the new listing. Prominent signage on the site is also important because many tenants and brokers drive their targeted areas for expansion.
Once you have found a tenant through your various marketing strategies, a Letter of Intent (LOI) is submitted for the space. LOIs for retail space are typically submitted by the tenant or their broker to the landlord’s broker. In larger office transactions, the tenant‚Äôs broker will typically submit a request for proposal and will ask the landlord to submit a LOI to the tenant. The LOI summarizes the business points that will eventually be incorporated into a lease for the property including:
– Rental rate and annual increases
– Taxes, common area maintenance and insurance charges
– Lease type (gross, modified gross, net, NNN, ground lease)
– Lease and rent commencement
– Rent abatement
– Exclusivity language for tenant’s specific use
– Tenant improvement allowance, landlord’s work and tenant’s work
– Term of lease and renewal options
– Tenant contingencies (permits, occupancy, licensing, etc.)
– Delivery conditions and timing
– Sublease or assignment provisions and approvals
– Signage requirements and approvals
– Landlord’s right to floor plan and design approval
– Security deposits and lease guarantees, based on financial information
Once the LOI is negotiated and signed, the terms are submitted to the attorneys, a lease is drafted, negotiated and eventually executed by both parties. The broker and the landlord have to keep their goals aligned or the assignment will not be successful. Brokers get paid when the lease is signed, so understanding the client’s preferences and requirements are as essential as managing their expectations to keep the deal on track and not waste crucial time.
Commercial listings require a multi-faceted marketing campaign to maximize exposure for the property. This process can take months or even years. It all depends on the uniqueness of the property, delivery timeline, current market conditions, the available pool of potential tenants and the broker’s ability to get the tenants to the property and negotiate a deal. A good broker helps the landlord choose the correct tenant and then manages the transaction from start to finish.
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.
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