The ideal lease: helping to make it happen.

As a commercial tenant, how did you gauge the success of your last transaction? Chances are that you measured it by the difference between the current market rental rate and your negotiated lease rental rate. Even a $2 per s/f differential from the market rental rate can add up quickly. On a 50,000 s/f, ten-year lease term, the savings would translate into a significant savings of $1 million. However, by focusing solely on the base rental rate, a tenant could ultimately stand to lose multiples of these negotiated savings.

A standard New York City lease document consists of hundreds of pages. Within these leases are at least 100 negotiable items that can offer significant savings for tenants. These range from smaller items like monthly surcharges for overtime air conditioning, freight elevator usage and water charges to more substantial matters such as sublease, assignment rights and flexibility options. In order to negotiate effectively, one must ask the following questions which are crucial to the success of any transaction:

Is the assessment of your space needs accurate? For instance, are you sure that you need 30,000 s/f over a ten-year term or could your space be programmed more efficiently to utilize only 28,000 or even 25,000 s/f? What about the potential for expansion or contraction during your lease term?

How consistent is the comparison of base building conditions from property to property? Have you identified all of the deficiencies of base building conditions when comparing each alternative? If the landlord is not held responsible, what is the tenant's cost to upgrade mechanical, electrical or safety systems? A seemingly equal comparison of two properties with identical quoted base rents is not truly appropriate if one property requires additional expenses to upgrade and equalize the base building conditions.

Do you really know how much of a tenant improvement allowance you will need? Have you accounted for all construction and non-construction costs? The budgeting process is essential to negotiating an appropriate tenant improvement allowance. Additionally, if you are employing a project manager, landlord oversight fees become unnecessary.

When can you realistically take occupancy? This estimate must account for all factors, including scheduling and approval of design, permitting and expediting, all construction phases, furniture ordering, delivery and installation, technology installation, the physical move-in and any other miscellaneous work.

Typically, when a company conducts a real estate transaction, project management is not considered until the ink is dry on the lease document. To accurately address the considerations above, you need to enlist the appropriate expertise up front. Increasingly, corporate tenants are realizing the value of bringing project managers in early.

An integrated team that includes a project manager and a real estate adviser facilitates more aggressive negotiation and avoidance of costly mistakes by helping to accurately identify both short- and long-term space and infrastructure needs; assess building deficiencies; establish a project budget inclusive of technology, furniture and relocation costs; and determine a realistic occupancy date.

Consider this scenario: A company has signed the "perfect" lease in midtown Manhattan. The space is in an ideal location for the combination of client visibility, work force recruitment/retention and employee commutation. The 50,000 s/f lease consists of a competitive rental rate that is $3 per s/f below market rental rates over a ten-year term, plus six months of free rent. At first glance, this equates to approximately $2.5 million savings.

However, problems arise when the company is unable to meet the scheduled occupancy date. In fact, scheduling delays that have pushed occupancy back by at least three months, result in the loss of free rent and a costly holdover penalty on the current lease.

The company's situation only gets worse when it comes to light that it actually needed only 42,000 s/f, not the 50,000 s/f committed to in the new lease. And, upon closer review, the tenant improvement allowance negotiated at $40 per s/f really needed to be closer to $55.

In this example, the inaccuracies and improper planning tally up to major expenses. The 8,000 s/f of surplus space at $40 per s/f over a ten-year lease equals $3.2 million. At $15 per s/f, the tenant improvement allowance shortfall comes to $750,000. Additionally, the lost three months of free rent is another $500,000, not to mention the holdover penalty of $1 million. That's a total loss of over $5.45 million.

Bringing project management into the fold before negotiating the lease could have avoided much of this expense as well as the surprise and accountability issues associated with the unraveling of the "perfect" lease.

Having an experienced corporate real estate adviser representing the tenant's interests, in conjunction with bringing project management into the due diligence and negotiating phases of the project, not only assists the tenant in all of the decision-making stages, but also ensures that previously unforeseen costs will be minimized. It is the early integration of project management and transaction services that generates maximum benefits. Combining the preplanning expertise and management skills of project managers with the market knowledge and negotiating savvy of corporate real estate advisers generates efficiency, continuity and accountability.

JACK PETRIE, SVP, CRESA PARTNERS AND LEN EAGLE, PRINCIPAL/PROJECT MANAGEMENT, CRESA PARTNERS