The specialization of tenant representation evolved from a need for tenants to have professional assistance in a market dominated by well organized and knowledgeable landlords. The tenant representative is employed to guide the tenant through the leasing process, a maze of business and legal considerations and negotiations that will ultimately result in a lease commitment, normally the second largest overhead expenditure a company incurs behind personnel costs. The professional expertise of the tenant representative and the methodical and analytical procedure that he follows should simplify the process, it clarifies how the tenant’s requirements relate to the marketplace and identify the specific alternatives that are available. There is no direct cost to the tenant for the tenant representatives services as we participate in the landlord's representatives fee which are traditionally paid by the owner or agent of the building.
Defining the requirements
The process begins with the tenant and his real estate representative reviewing the tenants basic requirements. This initiates a learning process that helps both parties understand and clarify the objectives that need to be accomplished for the transaction to have meaningful value to the tenant.
These Requirements can be broken down into two specific areas: First, the tenant and the representative review specifics of the space as they relate to the employees and the needs of the business. These considerations include, among others, geographical parameters, size of the initial space and future expansion needs, length of term, firm image, interior design details, security needs, and a general view of how to the company operates.
The second area deals with the economics, terms and conditions of the tenancy. In a marketplace the size of Houston, the variety of available space and economic considerations can sometimes confuse the relevant issues. The ultimate objective is to obtain the highest value at the lowest cost based upon the tenant's specific requirements.
The representative typically works under an exclusive arrangement and is required by all landlords in the marketplace. This is a commitment from the tenant to his representative that the tenant recognizes the representative as its sole and exclusive agent in soliciting and evaluating proposals responding to the tenants requirements. This does not obligate the tenant to any payment for these services and clearly states that any compensation due the representative will be paid by the building owner or landlord's agent.
This commits the representative to use all of his resources and efforts to ensure a successful completion of the transaction according to the goals and objectives of the tenant. The representative will reference this letter of authorization when requesting information and soliciting proposals from the building owners.
Investigating the marketplace
Once the requirements have been documented and agreed upon by the tenant and the representative, the representative will venture into the marketplace and select those buildings that closely conform to the tenant's requirements or desires. A survey of candidate buildings is prepared providing building information including available space, typical floor plans or as-built, base rental, operating expense provisions, interior improvements, parking information and any other relevant data. This survey will contain as few or as many buildings as are called for by the tenants requirement. It is typically used as a road map that will lead the representative and the tenant through the process of evaluating the alternatives and eliminating those that are not consistent with the requirements. This exercise is also a distilling process in that the tenant becomes more aware of his particular needs as they relate to the alternatives available, allowing him or her to focus clearly on pertinent issues.
Once the candidate buildings have been selected, the representative prepares for the tenants approval a request for proposal that documents the tenant's specific requirements. This document is then presented to the selected buildings requesting their response to a proposal.
analyzing the transaction
After proposal have been received, they are summarized in a spread sheet analysis form that allows the tenant to measure the buildings on a comparable basis, details as to the space, improvements, economics and options are outlined for easy reference and evaluation. By analyzing the economics of the proposals on a present value basis, the numbers can be compared apples to apples. The full proposals are available for specific detail and review of information not contained on the summary sheet. This analysis provides both a qualitative and quantitative overview of the proposals submitted. This information becomes the basis for the initial negotiations.
Tenant representatives have specific expertise in the structuring of lease transactions along with the experience of spending ever day in a changing marketplace. This environment can change the attractiveness and viability of a deal overnight. Building ownership often takes the form of a multi-level entity that can include the developer, equity partners, lending institution, and an agent that is employed on the behalf of the project.
A clear understanding of what motivates these various personalities in a given transaction is necessary to comprehend the alternatives available for negotiation. The representative, with his understanding of the marketplace and the need sof both parties, can help development of alternatives that would meet the goals and needs of both landlord and tenant. Generating alternatives in this manner creates depth to the negotiations allowing for the discussion of issues on a broader spectrum and increases the chance that negotiations will result in a successfully completed transaction.
negotiations
The initial negotiation that begins the process of matching a specific space to the tenant's specific requirements. Negotiations may focus simply on economics, multi-level space planning to learn the relative efficiencies of the various buildings, in-depth discussions of the terms of occupancy, or a combination of all these items. As negotiations proceed forward, pertinent issues are agreed upon and a final selection is made as the general terms and conditions of the transaction are defined. These details are documented in a letter of intent sent by the representative to the landlord to ensure that all participants are in full agreement with the details of the transaction.
By this point in the process, other members of the tenant's team are likely in place. These include the tenant's interior designer, attorney, construction specialists, and other consultants that will help in the carrying out of the actual move. The representative helps in coordinating the effects of this group in accomplishing final documentation, construction and move in. For example, the architect may be involved in defining the efficiencies of the various candidate buildings, an exercise that could have significant economic impact. The tenant's attorney will be deeply involved in evaluating the legal ramifications of the leasehold estate. He will ensure that the tenant understands the obligations of both parties to the transaction and that any unclear matters are clarified in the lease document. The representative will help in the interpretation and documentation of any necessary modifications or changes. This team also becomes involved in the negotiation of the work letter agreement, which defines the obligations of the landlord and the tenant during construction. This document can have a great deal of impact on transaction as it relates to capital expenditures, occupancy and lease commencement.
The original intent of the transaction will be incorporated into these documents, so that all parties to the transaction understand the issues and are in agreement. The role that the tenant representative takes in the actual negotiations depends on that assigned to him by the tenant. Typically, the representative acts as a buffer between the landlord and tenant so negotiations will proceed on a both timely and orderly basis.
Concluding the transaction
The task of obtaining new office space is not a simple process. It is time consuming, costly, and potentially disruptive to a company's business. The tenant representative strives to maintain continuity and order in a process, which results in the tenant being able to act on the marketplace rather than merely react to it. The procedure is a prudent and effective manner in which to approach a situation that most tenants normally deal with once every five or ten years. In summary, the tenant benefits because he has made an informed, calculated decision based on the most current market information and the representatives expertise.