This post originally appeared on tBL member Pam Pester's blog The Tenant Rep Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.

Commercial Lease Process

This is part 5 of my 5 part series on The Commercial Lease Process. Here are links to parts 1, 2, 3 and 4, if you missed them.

Perform a Financial Analysis of all Alternatives

Once you have toured a sufficient number of properties, your broker will prepare either a Request for Proposal (RFP) (or Letter of Intent) for submission to one or more prospective landlords. The RFP typically includes requests by the tenant for specific things such as a turn-key buildout, a specific term, right of first refusal for adjoining space etc. Rather than requesting specific terms the RFP may request the Landlord to propose terms upon which the landlord will let the space such as base rental rate, operating expenses, annual rate increases and such. If at all possible, it is best to submit at least three RFP’s so that each landlord will be incentivized to compete against the other landlords.

After all proposals have been received, it is imperative that your broker perform a financial analyses to compare the true occupancy costs of each option. Many tenants focus only on the price per square foot. This is a big mistake. Each proposal will have a number of variables that will differ in amount such as base rent, additional rent, caps or ceilings on operating expense increases, free or reduced rent, parking charges, add on factors (rentable v. useable square feet), etc. The only way to make an “apples to apples” comparison of these various proposals is to perform a detailed financial analysis.

Your broker can prepare a spreadsheet that will project the total occupancy costs over the term of the lease on an annual basis. The projected annual cash flows are subjected to discounted cash flow analysis. Discounted cash flow analysis is a method of valuing all costs associated with a lease using the concept of time value of money. All future cash flows (both incoming and outgoing) are estimated and discounted by using cost of capital to give their present values. The results are the Net Present Value which is really the bottom line price of the deal. The table below gives an example of a simple financial analyses comparing three different lease proposals.

commercial real estate lease process

In addition to preparing a financial analysis of proposals from competing properties, your broker should also compare each proposal to other leases that have recently been completed within each property. While the terms offered various tenants will depend in part on the financial strength and attractiveness of the tenant, knowing the terms of recent deals can help the tenant determine if the proposal being offered is in fact a good deal.

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