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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The Leasing Tool Kit - Part One

To be most effective in its leasing transactions, a high growth company should develop a leasing “tool kit” that includes a checklist of lease provisions to be pursued as a matter of company policy for every one of its occupancy leases. By including these strategic clauses in its leases, the company will be armed with the legal rights necessary to address its changing real estate needs,
particularly as the company continues to grow. In my next few blog posts, I will share my top 10 suggested key lease provisions to include in a high growth company’s leasing tool kit. Here are the first 5 clauses:

1. Customized Lease Terms. The company should seek maximum lease terms that best suit its anticipated expansion plans, as reflected in its strategic real estate plan. For example, the company should pursue shorter lease terms that include renewal options for leases in jurisdictions where the company may merge with or acquire another company. This will best position the company to eliminate redundant lease holdings. Conversely, longer lease terms (that usually result in a more favorable rental rates because landlords prefer them) can be accepted in locations where the company has a clear sense it will be operating for the foreseeable future.

2. Early Termination Rights. Early termination rights in leases permit the company to terminate the lease prior to the expiration of the stated lease term. Typically these rights require the payment to the landlord of an early termination fee (as compensation for the premature termination of the rental income to the landlord) plus the reimbursement of the landlord for any unamortized amounts of the tenant improvement allowance and brokerage commissions associated with the lease.

3. Expansion Rights and Rights of First Opportunity to Negotiate. Expansion rights and rights of first opportunity to negotiate enable the company to increase the size of its premises in a given building as space becomes available. An expansion right gives the company the option to lease specific (and often adjacent) space by a certain date. A right of first opportunity to negotiate permits the company to lease other space in the building, regardless of its location, as it becomes available. Both of these options enable the company to expand while keeping transaction costs down, since expansion space can be leased on the same terms as the initial premises and is often simply added as “additional premises” through a lease amendment. However, the rental rates and other economic terms for space resulting from the company’s exercise of rights of first opportunity to negotiate will likely be based on the terms prevailing in the market at the time such space is leased by the company. If the landlord and the company cannot agree on the prevailing market terms, then they should resort to a “three broker” method process for the determination of these key lease provisions.

4. Contraction Rights. Contraction rights permit the company to reduce the size of its premises and the associated rental obligations under the lease. As with the early termination right described above, these rights may be conditioned upon a payment to the landlord of some type of compensation for the loss of the future rental stream on the space that the company gives back, plus any unamortized tenant improvement allowance and brokerage commissions associated with that space.

5. Renewal Rights. Renewal rights give the company the right to extend an existing lease term for a stated period. The company can negotiate in advance for the rental rates and other economic terms for the renewal term that would give the company some predictability in its budget (i.e., rent for each year of the renewal term could increase at the same 3% per year escalation rate that the company would pay each year during its initial lease term). Depending on the tenant-friendliness of the market, the company might have enough leverage to renegotiate for even more favorable rental rates prior to exercising its renewal options. If the renewal rental rates are not specified in the lease, the company should at a minimum have the lease specify that the “three broker” method will be used to determine the economic terms for the renewal term.

Permalink: http://fastrealestategrowth.blogspot.com/2012/03/leasing-tool-kit-part-one.html

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.

Permalink: http://fastrealestategrowth.blogspot.com/2012/03/checklist-for-selecting-right-broker_08.html

Checklist for Selecting the Right Broker – Part One

A very good broker is someone who not only facilitates a high growth company’s lease or real estate acquisition, but who also remains actively engaged in all aspects of a company’s real estate needs. A dedicated broker will act as a “watchdog” to ensure that your landlord is fulfilling its obligations under your lease. He or she will continually monitor market conditions and alert you about any factors that could impact or provide opportunities for your company’s real estate needs or plans. As promised in my last post, I am sharing, in a 2 part series, a checklist of 9 things to consider as you select a new broker or even evaluate your existing broker. Here are the first 4 items on my checklist:

1. Connection with your Company’s Objectives: It is important that your broker understand your company’s business drivers/motivators and maintain a focus on these motivators throughout the process of a real estate transaction. You should try to gain a clear understanding of how the broker generally views transactions and how he or she would typically approach your company’s proposed transaction. Does the broker have a clear “end-user” perspective and an organized thought process? Will he or she process the numerous issues that will be associated with your company’s transaction in a manner that works in conjunction with the overall goals and objectives of the company? To help evaluate these issues, ask the broker these questions:
--What transactions have you completed that are similar to the transaction we intend to pursue?
--Can you provide a detailed account of the process that you engaged in with these other clients to successfully accomplish their leasing or purchase transactions?
--What obstacles/tough issues did you face and how did you prevail?
--Given the basic plans for our transaction, how would you recommend that we move forward?

2. Team Members: Ask the broker to identify the specific team members that will be involved with the company’s matters and to inform you about the qualifications of each team member relative to the company’s transaction. To help evaluate these issues, ask the broker these questions:
--What is every team member’s role in the transaction?
--Who will be my primary contact(s)?
--Who will be involved on a day-to-day basis and play an active role with my transaction.
--Does the team provide a “deep bench” with multiple skill sets and talents?

3. Geography: Geography is a very important consideration when evaluating a broker. As your company’s business environment becomes increasingly national or even global, it is imperative that your broker understand this national/global approach. To help evaluate these issues, ask these questions:
--To gain a clear understanding about the prospective broker’s primary jurisdiction, ask where the brokerage company does most of its business. Are the brokers national, regional or local players?
--If your transaction is national in scope (i.e., you are “relocating” your company from one jurisdiction to another), is the brokerage company geographically positioned to effectively service your deal and your needs?
--Does the broker have knowledge about what other companies comparable to yours are doing in other markets?
--Has the broker evaluated the potential for reduced real estate costs to your company across your real estate portfolio? For example, can the broker tell you where there are less expensive real estate markets to which you should consider relocating certain of your company’s departments?
4. Experience and Expertise: Try to determine the number and type of transactions completed by the broker and then evaluate whether they are “on point” for the deal you will be pursuing. To help evaluate these issues, ask these questions:
--What has this specific brokerage team done in the past as a team?
--Demonstrate how your team thinks creatively and has used innovative techniques to solve difficult problems.

--What types of businesses has the broker and his/her company represented that are similar to your business? Does he or she understand your industry and, in particular, how your industry looks at real estate transactions. Is there an industry group within the broker’s organization that benchmarks your industry?

I will share the remaining checklist items in my next post. I look forward to hearing about your additions to my checklist.

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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.

Permalink: http://fastrealestategrowth.blogspot.com/2012/03/engage-right-broker.html

Create a Strategic Real Estate Plan

There are many strategies that a high growth company can employ to best manage the risks and maximize the returns from its real estate holdings.

As one of its key tactics, the company should prepare a strategic real estate plan that reflects current and future real estate needs based upon its anticipated growth. This plan should be developed in coordination with the company’s enterprise-level strategic plan and encompass the views of the company’s leadership. It should include how the company’s occupancy costs currently impact its overall budget and the stated objectives the company might have to minimize those costs.

If the company determines that the reduction of occupancy costs is a strategic objective, then the plan should outline the possible approaches for achieving that goal. These could include reducing the amount of required space, relocating to less expensive neighboring jurisdictions (i.e., move from the city to the suburbs), employing innovative design tactics to use its space more effectively and efficiently and enhancing the use of technology for its core business operations (such as by transforming the company’s offices to paperless environments, resulting in a dramatic reduction in required filing space).

The plan should also contemplate the company’s ultimate exit strategy as a general matter and specifically for particular geographic areas or business divisions. Future planning about how the company plans to implement its macro or micro exit strategies should be tied to the company’s approach to its real estate. The company’s strategic real estate plan should aim to enhance the company’s existing operations, accommodate its future plans and at all times enable the company to closely manage its occupancy costs.

Has your high growth company prepared a strategic real estate plan? If so, what components does it include beyond those described in this post?

Permalink: http://fastrealestategrowth.blogspot.com/2012/02/create-strategic-real-estate-plan.html

Intro to Real Estate for Fast Growth Companies

This is the inaugural post for a new blog we are launching that will focus on real estate issues aced by high growth companies. When we refer to a high growth company, we are thinking about a company that is in upward projectile, with steadily increasing year over year revenues. We also have in mind a company that may have employee ranks that are growing annually at north of 100%. Through organic growth, merger and acquisition activity, or both, the company we are focused on is moving to the next stage of its life cycle – it is becoming a big deal.

We intend to explore the real estate implications of this company’s tremendous success. For example, if this company is growing organically, it will likely need more occupancy space before the end of its existing lease term to accommodate its expanding work force. If the company is in merger and acquisition mode, it will probably face geographic redundancy for some of its leases and possibly excess space in certain locations, in particular if it is acquiring other companies in similar industries who tend to be located in the same areas where the company already operates. The company might also find itself expanding into new and previously unchartered geographic locations where it has no meaningful sense of prevailing rental rates and other market-based
economic terms.

How should this high growth company best position itself to address these issues? How can the company maximize its increasing “real estate” clout in the marketplace? Stay tuned for some key insights on these topics and feel free to jump in with your thoughts.

Permalink: http://fastrealestategrowth.blogspot.com/2012/02/intro-to-real-estate-for-fast-growth.html