Team Work Makes the (Real Estate) Dream Work: Tips on Building Your Commercial Real Estate Team
Investing in commercial real estate can be a risky proposition, but having the right team of experts, knowing what roles they should play, how to utilize them, and how they should assist each other, can help mitigate the risks significantly.
Selecting the right team and understanding their roles ensures that efforts are not duplicated, that transactions run smoothly, and that you, as the investor, get the best deal possible given the market.
The below is a guide to assembling a real estate team that can help you navigate the stages of a commercial real estate transaction, whether you’re leasing or buying or selling commercial property, and whether it is your first transaction or your 500th.
The Role of the Broker
When leasing space, whether office, industrial, warehouse, or retail space, your broker should have enough experience that he or she understands the market and market trends. This includes having a firm grasp on what similarly situated properties are renting for (and whether and what concessions, such as rent abatements and tenant allowances, are being given), and the relative bargaining power of the parties – for instance, in markets where the vacancy rates for some types of properties are high, such as the current post-COVID market, a tenant may have more bargaining power, whereas in market where there are fewer vacancies, landlords will be able to demand higher rent and offer fewer concessions.
Your broker should also have a good understanding of the needs of your business. Do you need an open floor plan or a number of small offices? Do you want Class A showcase space? Or, do you want to do your own build-out? Your broker can help direct you to space that is right for your needs and budget.
Once you’ve found the right space, your broker should help you figure out what concessions to request. What’s the right rental rate for the space? Should you ask for a few months of rent abatement? Should you ask for a tenant allowance if you are doing a build-out?
Thereafter, your broker will also help you put together a letter of intent (LOI) to submit to the landlord, and should work with your attorney to finalize it.
The Role of the Lawyer
Once you’ve engaged your lawyer, you should make sure he or she reviews the LOI before it is signed. If you are a tenant that leases a lot of space in different buildings or malls, your LOI might already have more detailed terms, such as under what circumstances and to whom you are and are not allowed to assign the lease or sublet the premises, whether you’ll have the option to renew and how the rent for renewal terms will be calculated, or whether you’ll have any early termination rights, an exclusive use, or rights to contract or expand. If not, your lawyer should discuss with you the possibilities for LOI provisions and add any that are applicable. A well-defined LOI, with details important to the transaction, can greatly lessen the time of negotiation between attorneys and attendant legal fees.
Once the LOI is negotiated and signed, you should look to your lawyer to ascertain whether your team should put forth the first draft of the lease. If you are a landlord, developing a standard lease form will help you maintain uniformity and simplify property management. In general, though, if you are a tenant, unless you are one that leases space nationwide, or even regionally (in which case you should talk to your lawyer about creating a form of lease that is tailored to your needs), your landlord will provide the first draft of the lease, and your lawyer will provide comments to it on your behalf. Here, your broker and your lawyer should communicate regarding your relative bargaining power with the landlord. This information from you and your broker can guide your legal team with respect to how many revisions to make (e.g., if you have a lot of bargaining power, you can negotiate more favorable provisions, whereas if you are a small tenant, you may not be able to change much in the lease and your attorney should focus only on major issues). In the course of this negotiation, your lawyer should walk through the lease provisions with you and discuss with you the pitfalls and dangers (both long-term and short-term) of agreeing to various lease terms without revision. Your broker can be a conduit to the landlord’s team to address major business issues, but, at this juncture in the transaction, you should primarily look to your lawyer for guidance on your lease revisions and how best to get to the finish line.
The Role of the Broker
If you are buying or selling commercial real estate, your broker’s role will be similar to that of a leasing broker – he or she will need to track the market, understand market and business trends, and assist you in locating the right space to fit your business needs. If you are buying property, your broker will also help you put together a term sheet that your lawyer should review.
The Role of the Lawyer
Once your lawyer has reviewed the term sheet and it has been negotiated and signed, your lawyer will help you negotiate the purchase and sale agreement. The seller typically provides the first draft of the purchase agreement, but if the market is particularly buyer-friendly or the buyer is particularly acquisitive, the buyer may be able to put forth its form of purchase agreement for use in the transaction. As your lawyer negotiates the purchase agreement, in addition to providing legal comments, he or she should walk you through the risks of agreeing to various provisions and what risks are reasonable to take given your business and its goals. Again, your broker will be a conduit to the purchaser or seller, as applicable, with respect to the resolution of major business issues, but you should be looking to your attorney for primary guidance on negotiation of the agreement.
Once the purchase agreement is negotiated and signed, you should talk with your attorney to determine whether you or your lawyer and his or her team will track important dates in the contract (for instance, when the earnest money is due to the title company, and when your title and survey objection period and your due diligence period end will need to be carefully tracked).
You should also discuss with your lawyer whether you will be ordering third party reports that should be ordered in connection with due diligence (i.e., zoning reports, property condition reports, environmental reports, and a title commitment and survey) or whether you’d like your lawyer to do this, and whether you have particular providers you’d like to use. If not, your lawyer should be able to offer suggestions. These should be ordered as soon as the purchase agreement is signed to avoid missing any deadlines for diligence review set forth in the purchase agreement.
The Role of the Lender
If you are financing your acquisition or if, in connection with a disposition, you’ll need a payoff letter, it is important to make sure your lender is involved early in the process. If you are obtaining a loan to purchase property, the loan documents will need to be reviewed by your lawyer and negotiated, entity searches and certified organizational documents will need to be ordered, and, if the property is not in the state where your attorney is licensed, you may need to engage local counsel in the state where the property is located to issue an opinion letter.
Regardless of the role a team member plays, it is crucial that everyone stays informed and works together with the shared goal of getting the transaction done in a way that is as beneficial as possible to you.
Penelope Campbell, Marcia Owens, and Angela Williams are real estate partners in the Chicago office of Honigman LLP.