Five things every leader should know about property lease

Pre-letting usually provides developers with easier and cheaper finance to complete the construction of the project while the occupier might benefit of financial incentives, such as free-rent periods, cash incentives, discounted rents etc, according to Maria Florea (photo) senior broker at Colliers International.

An occupier might take leases prior to development also to cut fit-out costs and have some degree of influence over the partitioning of the building. Occupiers may also choose a pre-let to create a bespoke building, tailor-made to their requirements, instead of totally changing the existent design in another building.

“In 2006-2007, pre-lets have been in the limelight, because there wasn’t sufficient space available in the existent buildings, and taking a lease prior to the completion was the only solution. But now, 2009 hasn’t brought any pre-let, both because of the low take-up rate, and the low visibility of the economy, that would have been very helpful for companies when making decisions about their future”, Maria Florea told Wall-Street.

The flagging take-up rate, the completion of large-scale developments, steep drop in rents that forces landlords to constantly tack on incentives to fill vacant space, coupled with the poor economic conditions and companies’ uncertainty about their future such as whether or not to expand operations, have been the main reasons why large companies couldn’t afford taking a pre-let, said Lori Collin, senior consultant at Jones Lang LaSalle.

Among the advantages of a pre-let, as listed by Jones Lang LaSalle consultant, are: discounted rent, a tailor-made construction of the office space to meet occupier requirements, better contract terms, such as preemption clause and exclusivity clause.

“The disadvantage is also obvious: the risk the occupier takes, risk incurred not only by the tenant’s long-term plans, but also by the developer’s execution terms and the uncertainty on the development timescale, or on the actual completion of the construction. As we have already seen, there have been projects announced that never began construction let alone completed, due to a lack of pre-lets”, Lori Collin added.

The risk of delay in the delivery of the building is as high in case of office space as it is for shopping centers. Even if to retailers, pre-letting a space in a shopping center can bring about better financial terms and the option to choose the best location, they will not have the certainty that all the other tenants will open on time, said Georgiana Andrei, Head of Retail Colliers International.