Tenant Representation
In the context of real estate, corporate services are defined as the formulating and implementing of real estate strategies for end users so that they can maximise the returns from investments in human, business procedures and technology . A natural part of corporate services is tenant representation, which is the consultation of tenants in the acquisition of leased real estate.
Why is Tenant Representation Needed ?
Acquiring real estate in Moscow is complicated, difficult, and fraught with risk. Companies trying to do it without the benefit of professional advice often fail and sometimes suffer the consequences of wrong decisions for many years. It is for this reason that it is now largely market practice for a company looking to acquire a new office to appoint and remunerate a consultant to advise them: a tenant representative. Tenant representatives are professionals in the acquisition of leasehold real estate on behalf of occupiers and aim to secure their clients the most suitable space on the most competitive terms.
How Does it Work ?
Theoretically tenant representation is a process which is almost scientific in its process and outcome. The desired result is to select the most suitable building for a particular tenant and then to push the owner of that building through negotiations to “the point of indifference.” This is a point where the terms obtained on behalf of the tenant are such that the landlord signing the lease agreement is almost indifferent to whether he signs the lease agreement or not. The generic process involves the following broad steps which usually need to be tailored to reflect the realities of today’s Moscow office market.
In most markets, the tenant representation process will involve a reasonable choice of buildings and a selection of landlords who are keen to compete for the potential tenant. The tenant has choice and leverage. In Moscow the situation is somewhat different. There is a sometimes very limited selection of buildings and the landlords are often in the fortunate position of being able to choose their tenants from a number of potentially interested parties. In this context the tenant representative has to balance the ideal selection process against the need to secure space for their client in a highly competitive market.
Stage 1: Search Criteria Formulation
It is important to determine what it is that the tenant needs. This is a combination of criteria involving such factors as timing, cost, location, quality, and car parking ratios. An important part of this stage is management of client expectations. While the tenant representative’s job is to protect the interests of their client, the tenant needs to realize that the perfect solution may not exist.
Stage 2: Request For Proposal
Inviting commercial proposals from all potentially suitable options. In Moscow not all opportunities that are suitable for a tenant are openly marketed. Tenant representatives often have knowledge of such off-market opportunities and are able to bring them to the attention of their clients.
Stage 3: Options Formulation
The analysis of all options against the search criteria.
Stage 4: Shortlisting
Selection of a shortlist of up to three options. Because a tenant representative is remunerated irrespective of the building chosen, they can advise the client impartially. This is not the case for a tenant who is conducting their own search and who receives no objective advice on the merits of one option compared to another.
Stage 5: Negotiations
The tenant representative will conduct parallel negotiations with the shortlisted options in pursuit of the point of indifference. A curiosity of Moscow’s Tenant Representation at the present time is that the right advice to the client can be to offer a building owner more than the quoting rent. In a competitive situation this may be the only way of securing the space. Expensive space can often be preferable to no space.
Stage 6: Selection of One Option
The selection is made based on which option best meets the search criteria.
Stage 7: Letter of Intent
Signature of a non-binding document formalizing the agreed terms with the chosen option. In Moscow the key here is the tenant representative and the client’s ability to condense stages 1 – 7 of the process into the shortest possible time period. The tenant representative is required to provide information and recommendations to clients quickly and to implement the decisions taken by the client rapidly. In Moscow, more real estate deals are lost through indecision and slow decision-making than through any other factor.
Stage 8: Agreement Negotiations
This is the negotiation of a legally binding agreement reflecting the terms of the letter of intent. An often critical part of the Moscow tenant representative’s services is to act as a facilitator between the local entity and the head office of the client. Moscow is one of the more expensive real estate markets in the world. The tenant representative often needs to act as an independent voice of reason explaining to the head office why it is necessary to approve the agreement in the next three days, why there were only two buildings to choose from, and why the option chosen is costing more to rent than the company’s head office.
Stage 9: Agreement Signature
This is the stage at which the deal becomes binding upon the parties. The tenant representative, all things being equal, should have both helped the tenant to secure new office space and achieved better terms, both commercial and contractual, than if the tenant had carried out the process on his own.
Stage 10: Ongoing Advice
The tenant representative will work with the client after the agreement is signed, providing ongoing advice and updating the client on changes in the market, ready to start again when the client’s next real estate needs arise.