Signing a CRE lease agreement? Flexibility, feasibility questions to ask

The focus of this two in-a-series-of-three articles is to empower industry outsiders with understanding. To add pragmatism around parking ratios, to deal with the unromantics around timings, to flag and explain the need for flexibility, and to highlight renewal options for a tenant.

Commercial property is an incredibly complicated industry. This article is second in a series of three aimed at industry outsiders. It hopes to simplify and demystify the process around signing a CRE lease agreement. It deals specifically with flexibility and feasibility questions to ask.

Getting this knowledge out into the open is good for the industry’s reputation, good for the talented professionals in it, and good for potential customers of the industry – such as tenants.

As the wise Benjamin Franklin said:

“By failing to prepare, you are preparing to fail”.

To avoid either egg on face or frustration, here is a list of relevant CRE lease agreement items to consider when evaluating new premises for your factory or warehouse, your office, or your shop.

We hope, in asking yourself, up front, questions that only take a couple minutes to answer, you are arming yourself with valuable information, and potentially saving yourself discomfort and frustration down the line.

GLA and space densities

The term GLA, thrown around in commercial real estate (CRE™), stands for gross lettable area. This refers to the square meters that your premises will occupy, and determines your rental payable.

However, you are a business person, not a property person. So how, without thumb-sucking, do you work out what your GLA is?

This is most applicable to office space, and you generally want to do this with a property broker or space planner.

The logic is that different roles require different square meters per role. For example, execs who need quiet to think and make confidential phone calls/have important meetings, need larger space, that can be enclosed. Call center operators however can operate with a low square meterage.

Add on storage, meeting or board rooms, kitchenettes or canteens, receptions, and you get to another number.

Again on a % for common areas like corridors, and you come to your total GLA required.

Certain property configuration are space efficient, while others are less so. So 500 sqm in one building can work the same as 650 sqm in another.

Bottom line, get to this number early, because this, along with your property category type, is what drives your space requirements.

And don’t forget about business expansion, or contraction (which triggers some thinking around the suitability of the space for sub-leasing) – more below.

Parking bay ratios / property coverages

You can largely ignore the first part below in two cases:

  • If your property use is primarily industrial or retail. Or,
  • If the bulk of your colleagues are active users of public transport, car poolers, or use disruptive transport solutions such as Uber or Taxify.

For the rest, pay heed…

You have found premises you love. Your business comprises 35 people (of which 25 use cars), and you work out you only need 450 sqms of space. But. There sadly is a but. The parking ratio is 4 bays per 100 sqm (This means that for every 25 sqm of space, there is one parking bay. 50 sqm of space gives you 2 parking bays. 100 sqm of space gives you 4 parking bays). But you need 25 bays. This means, for 25 humans with cars, at 25 sqms per car you neeed: 625 sqm, not 450 sqm. You are 175 sqm or 28% short.

Explaining this another way, if you go ahead with your 450 sqm on a parking ratio of 4 bays per 100 sqm, then there will only be 18 parking bays for your 25 colleagues.

So, to avoid disaster, a) find out who needs cars and b) apply this to your property search. And get this information up front so you can start filtering out: 3 bays / 100 sqm means your 25 staff will need 833 sqm, while 5 bays / 100 sqm reduces your requirement to only 500 sqm.

Unlike office, industrial space requires consideration of access and egress, turning circles, and yards. Again, as with above, many properties may look like perfect sites, but be a non-starter.

A good property professional will have this information for you, so you can immediately start filtering options from your list.

CRE lease agreement timings

Everything in life takes longer than you anticipate, and unanticipated complexity in any process is a given. This is how the timings look, and because no transaction is the same, it varies from lease to lease.

Good professionals should be able to take your requirements, filter across all stock, and turn all your options around to you in under an hour. Great professionals even less.

Then you have to budget for property inspections.

After that you need to budget for preparation of offer to lease documents.

Next you need to budget time for negotiations and signature of your final lease agreement.

In parallel with this you want to have a fitout team appointed and running (from designers to contractors). Because once a deal is looking firm, these engines need to start. Fitouts, funded by a landlord’s tenant installation allowance, are a mini-building project, requiring dry-walling, flooring or carpeting, painting, cabling, internet, phones, ceilings to final furnishings and equipment/furniture.

A skilled property professional will provide you with specific guidance around the timing needs for your specific transaction. This means you can get started at the right time, take your time to evaluate options, and avoid having to firefight or be forced into lease commitments because of timing pressures.

Expansion / contraction considerations

What happens if your business grows? Can your current premises support it – what is the current “flex”? Can you expand next door? Can you separate front and back offices? Can you relocate within the park, or within the landlord’s stable? How flexible and innovative is your landlord?

And if your business contracts? What then… Can your current premises support sub-leasing? Will there be demand for your premises from tenants? Will your landlord permit it?

What is the probability of expansion and contraction, and what are the associated timelines? How much visibility will you have on a change in space requirements?

Redevelopment clauses

This is an interesting one… According to your lease agreement, you as tenant are on the hook to the landlord until the termination of your lease. No ifs, no buts.

But with a redev clause, the obligation is not reciprocal. The landlord has the option to invoke this clause, redevelop the property, and terminate your lease.

In certain organisations this is a standard, non-negotiable clause, and the landlord can re-accommodate you and assist with the inconvenience. But it is something worth noting and talking to the property professional about.

Renewal options

Let us say your business is flying, your team members have relocated and settled close by, and you don’t have capacity for a relocation. This clause gives you, as tenant, the right to request an extension of lease. There is invariably a due date this clause must be invoked by, and each landlord may have different terms regarding the renegotiation of a new rental.

If you feel it is important you can renew, it is worthwhile understanding each landlord’s stance on this.

Why this article

A more educated and informed customer raises the performance bar for industry professionals. A raised service bar rewards the great professionals, and creates incentives for the good professionals to further up their game. More strong property professionals improves the prestige and professionalism of the industry across the board.

This means that the cream rises to the top, and the good guys win – tenant, landlord, and broker/consultant/advisor.

If interested, the other articles in this series are 1 of 3 (soft considerations) and 2 of 3 (financial considerations)

We hope this article has been helpful to you, and welcome any comments or questions.

Good luck!

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