Use an RFP to your advantage when assessing lease space
“Make me an offer.” I hear it often from landlords in the commercial real estate leasing sector. But, in the last few years, as we have experienced an obvious tenants' market, the answer is often, “No, you make me an offer.” Put more formally, tenants are now commonly issuing a Request for Proposal as opposed to submitting a written Letter of Intent. Therefore, it is worthwhile exploring the pros and cons of choosing the RFP process, and what should be included in a well-written RFP.
Submitting an RFP makes the most sense when a tenant has more than one acceptable location. I have seen as many as five or six RFPs issued on behalf of one tenant. More often, however, it is two or three similar spaces. By comparing the return proposals, a tenant can accurately determine the best financial fit. In addition to lease rate, it is a good idea to request breakdowns of operating expenses, real estate taxes, insurance and estimated utility expenses. The RFP is also a good opportunity to ask for any free rent or additional tenant monetary breaks and incentives. Upon receipt of the proposals, it is helpful to input the terms of each deal on a spreadsheet to clearly calculate all-in costs.
Beyond asking for financial terms, a well-written RFP should include basic tenant information. If you are a credit-worthy or well established business, it is best to outline and promote that as much as you can on your RFP. Additionally, the RFP should outline your preferred time of possession, length of lease, required build-out, parking requirements, renewal option expectations, suggested security deposit, etc. Interestingly, these are all things that are included in a Letter of Intent as well. The only major blank is the lease rate. You are effectively telling the landlord “This is who I am and what we do, this is how long we'll be here, this is what I want you to do for work… what's it going to cost?”
The primary negative to submitting an RFP is that landlords, for the most part, dislike them. Some, typically larger, institutional landlords, are more receptive, if only because they are so used to seeing them. But any landlord would prefer to receive an offer rather than be asked to submit a proposal. Therefore, it can get negotiations off to a rocky start.
Furthermore, the old saying, “time kills deals,” can certainly affect an RFP process. You are effectively engaging more than one landlord when submitting RFPs, and the possibility of another tenant coming along and bidding on one of your identified spaces is always there. Many landlords are happy to take a bird-in-hand rather than wait things out. RFPs, it should be noted, are non-binding, so even if a proposal is submitted, until a lease is signed, landlords are free to rent to other parties.
I recently represented a national industrial retailer. After an exhaustive search of the entire greater Portland market, we identified several excellent locations at similar price-points. There was some disagreement at a local level as to which would be the best location, so we chose to submit RFPs for the top three spaces. One landlord chose not to respond. The other two came back at similar pricing. However, one offered a significant tenant improvement allowance as well as free rent. Comparing each proposal made the decision easy, and we were able to negotiate and execute a very attractive long-term lease.
Negotiating a commercial lease is almost always challenging, and not every deal or situation is the same. Consider carefully and consult with a trusted adviser or commercial real estate broker to help determine if using the RFP process is right for you and your business. Under the right circumstances, it can lead to a smoother negotiation and, ultimately, a more attractive lease for your business.
Justin Lamontagne, a commercial broker with NAI The Dunham Group, can be reached at justin@dunham-group.com
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