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Leasing Basics and Negotiations
Courtesy of the Nonprofit Finance Fund

2. WHAT ARE THE ROLES OF OUTSIDE CONSULTANTS?

Commercial leases are complex and have a long-range impact on the financial and programmatic well being of your agency. The roles of various professionals whose assistance can be critical to the success of your agency's move are described below.

Real estate broker

Why use a broker?
Ultimately, you must reach an agreement with a landlord on a lease's base rent and an escalation package (see question 3, "What will the costs be?" and question 4, "Will the monthly costs rise over the term of the lease?"). While commonly thought of solely as folks who help you find space, brokers spend most of their time negotiating all the terms of a lease. They use their knowledge from other deals and bring their experience to bear in the negotiations. They may act as the agent for the landlord or as the tenant's representative. A broker should be able to tell you about the building's history and the owner's financial background. It is important to understand that rent is only one of the considerations that have an impact on the financial health of your organization. With commercial rentals, the owner's asking price is meant to be negotiated. The broker can identify suitable spaces and can assist you in negotiating a lease that meets your agency's needs.

Can I find space without a broker?
In some cases, you might be able to avoid using a broker (word of mouth, newspaper ads, contacts from Board members and friends, pounding the pavement and finding spaces where owners want to deal directly). But commercial leases can be complex, and generally a top-quality broker who you feel is honest, competent, knowledgeable and sensitive to your needs is an asset which can save you money. Generally, if you require very small amounts of space (below 1,500 - 2,000 square feet), you probably won't be dealing with a broker. Many brokers won't be willing to work on a very small deal because it is a time-consuming process and small deals do not cover their costs.. Free internet sites such as Loopnet.com, Cityfeet.com, Comro.com, Propertyfirst.com, and in some markets, Sublease.com, are all valuable resources for tenants searching in that smaller size range.

How do I find a good broker?
The best way to find a broker is to talk with other nonprofits that have had a good experience with a broker. You may have access to a good broker through your Board of Directors. You should interview at least three brokers to find a good fit. Always check out the broker's references and recent clients. The broker should be willing to understand your needs and work within your limitations. There are brokers who specialize in working with tenants and view themselves as the tenant's advocate. Oftentimes, contacting the broker listed on properties found on any of the internet sites listed above can be a good starting point. Pikenet.com is also a good portal site for many commercial brokerage firms.

Who does the broker represent; who pays the broker?
Brokers typically receive their commission fee from landlords. The commission is based on a decreasing percentage of each year's rent during the life of the lease, or in some markets, paid on a flat dollar per square foot and year of the lease. (Incidentally, brokers are not on salary, and their commission is usually split with their company.) In some cases, a tenant may want to retain a broker on an exclusive basis by signing an agreement that commits the tenant and broker to work together exclusively for a period of time. In any case, it is rare for a tenant to pay the broker. Feel free to ask brokers you consider working with about their fee arrangements (see "Caution!" below).

When you look for a broker, make sure that you find one who is willing to learn about your needs and constraints. Ultimately, brokers represent "the deal," as they are generally not paid until one is agreed upon. Thus, a good broker will work to come up with an acceptable arrangement for both landlord and tenant, i.e., a "win-win" deal.

However, if you are renegotiating your current lease or responding to a broker's ad for space, you may be dealing with a specific landlord's broker or "agent." In this case, the broker's primary interest is in getting the best price for that landlord.

Caution!
To understand fully the brokers' motives, you need to know their various arrangements. The word "exclusive" is used several ways. Some brokers are the "exclusive" representatives of a building or owner; in other words, they're pushing their own space. Although some may have an "exclusive" on certain properties, most know about the same available space through an "open listing."

Further, since you expect your broker to be ethical with you, you should do the same for him/her. For example, don't start dealing with a second broker on the same space. You could be legally liable for two brokers' fees!

Real estate lawyer

Is it necessary to use a lawyer?
In general, someone knowledgeable and with authority from your staff and/or board, together with your broker, should negotiate the business terms of the lease. In addition, your lawyer should carefully review your lease and be sure you understand its consequences before you sign it. He/she will often propose revisions and help you strategize on complex legal and technical issues. The lawyer, however, should generally not be involved in the business issues. It is also possible that your accountant, bookkeeper, office manager, president, board chair, executive director or others can deal with much of this.

A lawyer can also assist in the drafting and review of any agreements with an architect or contractors for the renovation of the space.

Architect/engineer

When is it necessary to use an architect or engineer?
There are several reasons to work with an architect or an engineer early in the process. If you do not know the amount and type of space you require, an architect can help analyze your space needs. During your space search, an architect can research the zoning and building code requirements of each site you identify. There may be restrictions or special permits required for certain uses at each site.

If reconstruction is necessary, you will want an architect or engineer who is independent of the building owner to help determine the feasibility of adapting the space to your agency's needs, estimate the cost of improvements, design the layout and oversee construction. They will also be able to inspect the building systems and conditions and look at whether the building meets technical, regulatory, occupancy and other code requirements. This building conditions survey can also reveal whether there are any problems that would be costly to fix.

Finally, an architect can help you understand and negotiate the workletter (a list of work that the landlord will provide) based on what you need vs. what the landlord is initially willing to provide as part of the lease. (see question 5, "What if the space needs renovation?" for more on renovation.) Normally, the landlord works with his own contractors, but not with an architect. If the landlord is renovating the space, the workletter is the tool for negotiating the work and it allows him/her to price out the work. For this reason, you need to have your own architect to review the workletter before the deal is closed and help negotiate whatever is necessary.

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