The Leasing Process Step 2: Business Needs

by: Peter D. Morris CRX, SCLS, SCSM, SCMD
Greenstead Consulting Group
Specialists in Commercial Real Estate Training and Consulting

In the first step we looked at how your real estate needs must fit into the business and marketing plan. Unfortunately, this first step is typically missed by most entrepreneurs and that is a mistake.

However, once you have aligned the real estate with the overall business and marketing plan you can now go to Step 2.

Step 2: The Business Needs

A detailed plan of the business needs concerning real estate should be conducted stemming from the overall business plan. This is a more granular assessment of the needs of the business arising from the real estate. For example, a warehouse operation will want to assess the transportation systems requirements and location of their customers, competitors and suppliers.

An office space occupier may need to assess the ability of business to obtain larger or smaller space efficiently by projecting workloads and future staffing. This should be done over a timeline of a proposed lease. For example, the lease may be in 5 or 10 year lease terms. Can the business get a first right of refusal on adjacent space in the future? Is continuously leasing the preferred way to grow, or should the business seek to acquire a space or a building at some point? These are the types of questions that need to be asked and answered.

You also need to assess the amount of risk your business can assume. A lot of the property lease is about risk. In the standard lease the landlord provides you, you will probably assume most of the business risk. That is their ideal position. Little risk for the landlord and a LOT of risk for you. After the business terms, almost all the lease negotiations will be about moving that risk back to the landlord and, in an ideal world, having them assume some of your risk. But what is meant by risk?

Ask yourself these questions, as examples of risk. What happens if a catastrophe occurs, such as a flood or fire? Can I get out of the lease if I can’t operate? If I can’t terminate the lease, will the rent go down? What happens if the nature of the property changes? Will it affect my business and what can I do about it?

How much risk are you willing to assume? How will you protect yourself in these events? What will be your bottom line? You might not get all you want in the negotiation, so you have to think carefully about how much risk you want to take on and in what areas of the lease. These must be considered as part of your business needs.

Think of this step as the bridge from the overall business plan in Step 1 to the next step in which we will look at the most granular planning aspect.