The Leasing Tool Kit - Part Two

Here are the remaining 5 leasing provisions that a high growth company should include in its leasing “tool kit:”

1. Relocation Rights. Relocation rights in a lease enable the company to relocate its premises to another location in the building that may be adjacent to unoccupied space, thereby positioning the company to more efficiently consolidate its operations in the building as the company grows.

2. Sublease Rights. Sublease rights provide the company with the flexibility to sublease all or a portion its premises for less than the remaining term under the lease. While the landlord will likely retain consent rights over proposed subleases, the landlord should be prohibited from unreasonably withholding its consent to a sublease. In addition, the company should have the unqualified right to permit its affiliates, subsidiaries and successors by merger to occupy the space without triggering any consent or other rights on the part of the landlord.

3. Assignment Rights. Assignment rights enable the company to assign all of its rights and obligations under the lease for the entire remaining term. As in the case with subleases, the landlord should be prohibited from unreasonably withholding its consent to a proposed assignment. Further, the definition of “assignment” in the lease should be scaled back so that merger and acquisition transactions engaged in by the company do not trigger landlord consent rights. If a landlord refuses to consent to a successor tenant, the company may be forced to breach its lease in order to consummate the merger or acquisition transaction, which could have a significant adverse impact on the company’s balance sheet, particularly if the lease is for a substantial amount of space.

4. Telecommunications. The company’s leases should include telecommunications rights that are broad enough to enable the company to increase the broadband bandwidth serving the premises as needed to accommodate company growth, including expanding needs for videoconferencing and similar collaboration capabilities as new offices and locations are added to the company’s real estate holdings.

5. Audit Rights. The company should have the right in each of its leases to perform an audit of the landlord's calculations of operating expenses that may be passed through to the company, with clear remedies in favor of the company if it finds an error through this audit process (including reimbursement of associated audit expenses). Audit rights can position the company to strictly scrutinize its operating cost pass-throughs, in particular where the company has redundant space in certain locations.

A high growth company that incorporates these provisions into its occupancy leases will be better positioned to manage its changing real estate needs, including as it grows organically or through merger and acquisition activity or as it may change its area of geographic focus.

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Checklist for Selecting the Right Broker – Part Two

Here are the remaining items I include on my checklist to help clients evaluate whether their broker is serving them well.

5. Financial Analysis Skills: Try to evaluate whether the broker is capable of helping the company view the transaction from a financial perspective. The broker should have some basic knowledge about accounting and financial principles. The broker should be able to demonstrate an understanding of how the transaction will affect the company’s books and its bottom line. Here are some specifics to focus on:
--The broker should be knowledgeable about the financial and legal implications of a proposed transaction. The financial implications extend far beyond the rental rate and tenant improvement dollars. A good broker should understand how lease clauses can ultimately impact your company’s bottom line.
--It is also helpful if a broker understands how a tenant’s transaction will affect the landlord’s portfolio and how the deal works from the landlord’s perspective. The broker will need to be able to marry your goals with those of the landlord, and different approaches are required for different types of landlords (i.e., private landlords may have different objectives from publicly traded REITs). It is critical that the broker has a proven track record of negotiating transactions from commencement to completion.

6. Knows Your Company: From your interview with the broker, it should be clear that the broker has researched your company and has an understanding not only the type of business in which your company is engaged, but also your company’s primary customers, as this would demonstrate
that the broker has the company’s best interests in mind. Before you engage a broker, you would need to feel that the broker is looking out for your company’s best interests, and not just focused on executing a transaction and collecting a commission. Here are some specifics to focus on:
-- The broker should serve as your guide throughout the entire process and continue to consult with you following the documentation of the transaction.
--The broker’s role is to anticipate problems and navigate accordingly and to fully research all available options and provide prospective client with recommendations as to how to proceed.
--The broker should be assisting you at every point in the deal. For example, in a lease transaction, the broker should be evaluating the operating expenses to be passed-through to your company; analyzing your parking needs; understanding jurisdictional incentives and assessing other specific leasing risks. The broker should demonstrate a “full service” approach to the transaction and your company and should ensure that the real estate deal will coincide with your company’s business plan from all perspectives, including costs, leases terms, demographics, liabilities, location and access.
--The broker should evaluate how the construction and/or renovation of space to be occupied by your company will impact your company’s business operations and compare those challenges to the ones that would be presented by a complete relocation of your company’s operations through a move to entirely new space.
--The broker should be someone who is active in your company’s specific marketplace and has “real time” knowledge about that market – in other words, you are looking for a broker that is positioned to be thinking about his/her clients in the context of actual market conditions and watching out for opportunities best suited to his/her clients.

7. Broker Materials. The broker should provide a prospective client with case studies of comparable transactions. These would provide insights into how the broker will approach your company’s proposed transaction. A broker should provide a “sanitized” version of sample financial analyses. This will provide an indication of the level of understanding the broker has with the financial implications of a transaction.

8. Engagement with the Process. As is the case with any interview process, has the broker asked good questions (to see if he/she has given your meeting and future relationship some critical thought) and whether you feel there was any chemistry between you? Did you click with the broker? Do you feel you could work with the broker and his/her team for the duration of the transaction, which could literally go on for years?

9. Is the Broker a Relator? Consider asking targeted questions designed to underscore whether the broker has strong relationship-building skills. The length of the broker’s client relationships speaks to the true quality of the broker. How long the broker has worked with his/her signature clients. One of the most important things and possibly even one of the determinative factors for some company’s is whether the broker is a relator and how the broker feels about relationships – without a strong interest and focus on building long term relationships, the broker will not likely be a match for some companies who value relationships as one of their fundamental considerations.

A very good broker can have a vital and compelling impact on the stress level you will face in a company move. Take the needed time to carefully and thoughtfully select a broker who can best serve your company’s real estate needs.

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Engage the Right Broker

It is absolutely essential that a high growth company engage a reputable broker with a dominant presence in the markets in which the company owns or leases real estate. An attentive broker can play an integral role with the company’s efforts to address its real estate goals and provide important insights for the company’s strategic real estate plan. The broker should have the qualifications necessary to keep the company informed about market trends in each submarket in which the company operates or may need space. The broker should be engaged to help the company anticipate favorable market conditions to exploit the opportunities for locking in occupancy costs at the best points in the market. If the company faces redundancy in its real estate holdings in a particular jurisdiction, the broker should be tasked with proposing a plan to expeditiously eliminate duplicative leases and centralize the company’s operations in that location. The right broker can contribute meaningfully to the company’s strategic real estate plan. Next, I will give you a checklist about how to choose the “right” broker. Stay tuned.

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