The commercial classroom: Helping tenants today

Our role may be to find tenants new space because their lease is up or they are a new business seeking space or an established business seeking additional locations. We may also be called upon to assist a tenant who needs more space due to growth but is currently leasing space and has significant time remaining on the lease term. Or be asked to help a tenant who's business is in trouble and they need to either reduce their space requirements, or close their business and deal with an outstanding leasehold obligation. We could be negotiating new leases, re-negotiating current leases, sub-leasing space or negotiating lease buy-outs. One of our first considerations should be who is going to pay us. Since we will be representing the tenant, a Tenant Representation Agreement (Exclusive Right to Search) should be executed; including the amount of our commission, how and when it will be paid. Finding new space: in most markets vacancy rates are up and absorption is down meaning there is a lot of space available and landlords are being aggressive in making deals. Generally we deal with two types of customers desiring to lease new space: tenants who tell us exactly what they require and tenants who need to be guided. Some customers rarely move, perhaps only every five or ten years as their leases expire. Here the real estate professional can help guide the customer to determine their current space requirements and suggest favorable lease terms they should seek. Often these customers want to see everything that is available in the marketplace. National tenants may sign a Tenant Representation Agreement (Exclusive Right to Search) with a real estate brokerage firm. Or, they make the brokerage community in general aware of their requirements through electronic marketing or postings in trade papers. In these cases the customer will indicate a specific area where they wish to locate and criteria of the site. For example a company may be looking for high traffic corner locations on Long Island with a minimum land size of 30,000 s/f, to build a 4,000 s/f building to be used as a bank. Zoning must permit a drive through window. To submit a site there may be additional information required and often a questionnaire that must be completed. These customers are only interested in looking at sites that meet their criteria. Hint: many national retail firms have web sites, typically www.companyname.com. The site may have an icon for the real estate or site selection department and detailed criteria posted. If not, one can probably find the phone number of the corporate headquarters and make an inquiry to the real estate department. Subleasing space in a down market can be a real challenge. A 10 year lease was signed three years ago with current annual rent at $70,000. Presently rents are down 20%, competitive space today is being rented for $56,000 a year. The tenant may be able to find a sub-tenant but may have to subsidize the rent by $14,000 a year to meet their leasehold obligation. The tenant no longer wants the space, so what is the possibility of buying out of the lease obligation? Just to keep it simple, with no escalations, the overall obligation to the landlord for the next seven years is $490,000 (7years X $70,000 annual rent). In many cases such buy-outs are discounted considering the present value of money. In this case if a discount rate of 8% were applied the present value of the obligation would be reduced to $364,445. Several major questions: can the tenant afford to do this? Perhaps for major corporations, but I don't see our Main Street tenants being able to do so. Why should the landlord discount the obligation? Granted it is a lot of money and most likely the landlord can rent the space in a reasonable period of time, but at a lower rent? Or should the landlord make the tenant fulfill their obligation by sub-leasing and having to subsidize the rent? (Can the tenant even afford that?) But what if the landlord does not work with the tenant and the tenant goes bankrupt? Serious considerations all around, these clients need our services to help them understand the issues, discuss alternatives and help them negotiate solutions. Edward Smith, CREI, ITI, CIC, GREEN, RECS, is the regional director of Coldwell Banker Commercial NRT, Eastport, N.Y.