A “Tenant Proposal Package”: How to Negotiate Superior Commercial Real Estate Lease Terms

A “Tenant Proposal Package”: How to Negotiate Superior Commercial Real Estate Lease Terms

Creating a tenant proposal package can help commercial tenants get approved by landlords in New York City. And don’t worry, even if you are not trying to lease an office or store, these tips can be used to approach a residential landlord if you’re looking to rent an upscale condo or even apply for a job where you’d benefit from standing out from the competition.

Selling Your Tenancy to a Commercial Landlord

In all cases, the main challenge is to creatively sell yourself as a tenant, as a company, or as an employee.

Now, you may think landlords would be much more willing to lower their expectations for prospective tenants because of the post-pandemic climate – to get the spaces leased. Unfortunately, this is not true, and it’s generally never true. Many landlords in New York City are well-capitalized. They can afford to have their buildings stay partially leased, and none of them would want the headache nor the expense of dealing with a subpar tenant who they may have to evict or take to court. This is especially relevant today.

I’m sure that many of you are well aware of how backed up the courts will be after the end of the moratorium on evictions on August 31st of this year. By this logic, if you were a commercial landlord – would you really want to risk leasing out your space to a low-quality tenant, who you wouldn’t be able to evict or sue for what could be years into the future?

Landlords Have No Reason to Drop Their Standards

With that in mind, I hope you can see that landlords have no reason to drop their standards or expectations for tenants regardless of the current situation with high commercial office space vacancies. The main upside of the current climate is that they are much more motivated to put together a favorable deal for a high-quality tenant.

One important point to remember is that regardless of the legal structure of the landlord, every landlord, whether individual or corporate, involves human beings as decision-makers. People are attracted to qualities that provide security and repelled by qualities that could potentially create problems or cause damage. This much should seem intuitive.

Owners Scrutinize Prospective Tenants

To better understand why landlords are known to scrutinize prospective tenants deeply – think about how much of a headache it is for you as a tenant to deal with a single landlord who may be giving you a hard time. The negative impact on your daily life would be palpable. Now, commercial leases can be 3, 5, or even 10 years in length – so try to imagine what it would be like for a landlord to deal with multiple problematic tenants.

They would be playing the “bad guys” every single day with potentially combative corporate tenants – and you can see how no person would be willing to take on that level of stress for what could turn into decades of their lives. This argument doesn’t even consider the financial losses that could potentially negate or delay significant amounts of rent payments.

I hope that I’ve convinced you why it’s important to give a lot of thought as to how you would approach a commercial landlord and why you would want to present yourself in the best possible light as a tenant – whether you are the original tenant for the space, or if you are planning to sublease a space from another tenant. Either way, you will need to get approved by the landlord.

Maximizing Your Appeal as a High-Quality Tenant

Now, let’s discuss what you can do to maximize your appeal as a “high-quality tenant.”

Most landlords are likely to start by investigating the company’s credit rating asking to lease the space and some of the key people involved representing the company in question. The landlord may also perform a litigation search on the prospective tenant to assess risks and protect their interests.

As a tenant,  it would be an excellent idea to put together your own tenant proposal package for the landlord to review. You can make their decision easier and increase the chances of acquiring a better commercial office space for your business. Not many tenants choose to do this. Simply by offering a generous amount of information without being asked, you are setting yourself apart from the others and demonstrating that you are a business-savvy tenant sympathetic to a commercial landlord’s needs and concerns.

Remember – ideally, the landlord-tenant relationship should be one of cooperation and mutual benefit. It does not need to be adversarial.

Key Items to Include in Your Tenant Proposal Package

First, you would want to draft a business bio – in other words, a document to inform the landlord who you are as a prospective tenant. Are you a major law firm or a financial brokerage? Are you a long-existing non-profit? Are you an experienced restaurant owner? Provide the landlord with a brief history about yourself and the company that you operate and bios on the principal members of the leasing entity. This will help the landlord get a picture of who they are working with. Naturally, they will do their own research as well, and it’s important to make sure that the information they find is consistent with your own. If the structure of the leasing entity or the nature of your business is somewhat ambiguous, be well-prepared to clarify any points of concern that the landlord may have.

Second, you need to demonstrate that you are a good financial bet for the landlord. All businesses carry inherent risk, and landlords understand that, but much like you do with your business – landlords try their best to pick tenants who are least likely to default or cause problems in the long run. In your tenant package, include your entity’s D&B rating, credit status, corporate tax returns for the last two years, and an audited net worth statement and/or profit and loss statement.

More Information is Always Better

More information is always better. It’s highly advisable not to be overly protective of your company’s financial details. Doing so can indicate to the landlord that you may have something to hide – and they are likely to reject your tenancy based on what their instincts tell them.

If you are a non-profit, you want to specify how you are funded, by government, charitable organizations, and individual contributions. You would want to break down the proportions of those contributors. You should also provide your IRS 990 forms because the landlord can get them online anyway. Of course, it helps if you are a well-known non-profit or a Non-Government Organization. Sometimes, an NGO can add a certain level of prestige to a property and potential profits – and landlords can show favor to this type of tenant.

It’s also possible that the nature of your business might be attractive to other tenants in the building, such as attorneys, accountants, insurance brokers, and others who might become your vendors and service suppliers. This means that if you take the time to research some of the other tenants in the property, it can help you put together a more convincing tenant proposal package. Landlords love it when their tenants are financially successful – at least to the degree that allows them to pay their rent on time.

You also want to show that there has never been any litigation history between you and another landlord and that you have never been a party to an eviction proceeding as a commercial tenant – even if it was eventually dismissed. A history of locations that you have previously leased and the square footage of those tenancies are excellent items to add to your tenant proposal package.

Include a Reference Letter from Your Previous Landlord

Include a reference letter from your previous landlord (or landlords) in the package if you can get one. It should say that you always paid your rent on time, never interfered with other tenants, and left your space in good condition at the end of your lease. Such a letter will carry a lot of weight with a potential new landlord.  

The more experience you have, the longer your entity’s existence, and the stronger your financials, the more likely a landlord will accept you as a tenant and the more likely you are to negotiate favorable business terms. Remember – not only does a landlord want a rental income from their space, but they also need to show a prospective lender, such as a bank, that the tenants in their buildings are solid. This would allow the landlord to maximize the amount of financing they would be able to secure for future projects or keep their existing business running well. 

Finer Points of Selling Your Tenancy to a Commercial Landlord

Typically, when you are talking about leasing a commercial office space, a landlord is not overly worried about hazardous materials coming from your office. Still, in some cases, this can be a concern.

If you are a health care practice leasing medical space, you will likely generate biohazardous materials in your various testing of bodily fluids, in the use of needles, etc. In that scenario, you would want to assure the landlord that you have proper protocols in place to safely and legally deal with hazardous waste materials and the relevant insurance coverage concerning them.

Speaking of insurance – as a tenant in any commercial lease, you are going to be required to furnish a certain amount and certain types of insurance – general liability insurance and often business interruption insurance. After you review the proposed lease requirements, it is a good idea to get your insurance broker to issue a letter stating that your entity can readily obtain the required insurance. If you already have experience with that particular insurance broker, the letter should also indicate a history of timely payments of premiums and no lapse in coverage. These small details often matter to the landlord – and you may end up having to explain any anomalies to the landlord upon review.

Even if the lease does not require that you carry business interruption insurance, it would be smart to show the landlord that you are going to get it anyway. Thereby increasing the odds of the landlord receiving timely rent payments – if something goes wrong and temporarily interferes with your company’s cash flow or profits. The act of going the extra mile for the landlord could serve you well.

Include a Pro Forma Financial Statement in Your Tenant Proposal Package

Nowadays, landlords are offering shorter lease terms in the Manhattan commercial space market, which is often a five-year term. This means that you may want to create a five-year pro forma statement – in other words, a five-year financial projection for your company’s future, demonstrating the likelihood that you will be able to make timely rent payments for the entire lease term. 

In putting together your tenant proposal package, you might require the assistance of your accountant, your insurance broker, and of course, an experienced commercial tenant broker representing you in your presentation and negotiations with the landlord. This is especially valuable if your commercial real estate broker has experience and an existing relationship with the landlord, as well as knowledge of the Manhattan commercial space market. Landlords will always perform their own research on prospective tenants, but the support of a tenant broker they’ve signed with in the past adds a few bonus points of credibility to your standing as a tenant.

Demonstrating Improvements in Your Financial Condition to a Landlord

Now, it might be the case that you’ve had a few problems as a previous commercial tenant, in which case your tenant proposal package should provide proof that what was past is past and that your present and future indicate that you are the type of tenant the landlord would want to accept. You can demonstrate an improvement in your financial condition, your present cash flow, or if you are a non-profit – new funding sources that have come on board. As always, be exceptionally well prepared to discuss any points that may be causes for concern for the landlord.

In negotiating anything in life, you need to know and understand the objectives of the other party. In negotiating for commercial office space, you need to know that your landlord wants a financially responsible tenant who will not damage the space that’s being leased and perhaps even enhance the desirability of their building to other potential tenants.

As an experienced real estate broker representing commercial tenants in New York City since 2004, I am happy to help guide you through this process. Feel free to contact me with your questions and commercial space requirements.

As always, I am happy to hear from my viewers as well. If you’d like to add any points of your own which may be relevant in your country or region, please feel free to share in the comments below.