An office lease is one of the longest commitments a building makes. It sets the rent a space will earn for years, the capital the owner will invest to prepare it, the obligations each party takes on and the flexibility the building will have when the term ends. A single lease can shape a property’s results long after the people who negotiated it have moved on.
Cotra Plaza invests in and operates Class A office buildings, and leasing is where much of that value is either protected or given away. We approach it with the same discipline Cotra applies to acquisitions: a clear view of what we are trying to achieve, careful review of the risks and a willingness to walk away from terms that do not serve the building.
Disciplined leasing is not the same as rigid leasing. Tenants have real needs, markets move and every negotiation involves give and take. The discipline lies in understanding the tradeoffs before agreeing to them.
This article walks through the main parts of that work: understanding the tenant, reviewing credit, structuring the lease, investing in tenant improvements and managing renewals.
Starting with the tenant’s needs
Good leasing begins with listening. Before we discuss terms, we want to understand how a prospective tenant works: how many people will use the space, how often they come in, how much of the floor needs to be private offices versus open areas or meeting rooms, what their clients expect to see and how they expect their needs to change over the term.
These conversations help both sides. They tell the tenant whether the building and the specific space are a good fit, and they tell us what the space will need and whether we can deliver it well. A tenant who chooses the wrong space, or takes far more or less than it needs, is unlikely to be a satisfied tenant for long.
We also consider how a tenant fits the building as a whole. A new lease affects the building’s tenant mix, its use of shared amenities, its parking and loading demands and its rollover schedule. A tenant that is a good company may still be a poor fit for a particular building, and it is better to recognize that early.
Reviewing credit with care
A lease is only as good as the tenant’s ability to honor it. Before committing to terms, especially terms that involve significant improvement capital, we review a prospective tenant’s financial condition. The depth of that review depends on the size of the commitment and the information available, but the purpose is always the same: to understand the risk we are taking.
We look at the tenant’s financial statements where available, its history and stability, the nature of its business and how dependent it is on conditions that could change. For larger commitments, we may ask for additional security, such as a larger deposit, a letter of credit or a guaranty. These are not signs of distrust. They are a way to balance the capital the building puts at risk.
Credit review also informs structure. A strong credit may justify a longer term and a larger improvement allowance. A newer or smaller company may be a good tenant on a shorter term with a more modest investment. Matching the structure to the credit is often what allows a deal to work for both sides.
Credit is not reviewed only once. Over the life of a lease, we pay attention to signs that a tenant’s circumstances are changing, such as late payments, reduced use of the space or requests to sublease. Early conversations about those signals give both sides more options than a problem discovered at the last minute.
“A lease is only as good as the tenant’s ability to honor it.”
Structuring the lease
Lease structure covers far more than rent. It includes the length of the term, how rent changes over time, how operating expenses and taxes are shared, what rights the tenant has to expand, contract, renew or terminate, and how the space must be returned at the end. Each of these terms carries value and risk, and they interact with one another.
We think about structure in terms of the building’s long-term plan. Expansion rights that would block a larger tenant on an adjacent floor, termination options that leave capital unrecovered or renewal rights at fixed rents that may fall behind the market all deserve careful thought. That does not mean we refuse them. It means we price them and decide knowingly.
Rollover is part of this picture. When too many leases expire around the same time, a building faces concentrated vacancy risk. Where we can, we stagger expirations so that leasing activity is spread over time. That consideration sometimes leads us to propose a slightly different term than a tenant first requests, along with an explanation of why.
Operating expense provisions deserve the same care. How costs are passed through, what is included, how increases are measured and how tenants can review the numbers all affect both the building’s economics and the tenant’s trust. We favor clear language and plain reporting, because disputes over expense reconciliations can damage an otherwise good relationship.
Tenant improvements as an investment
Most office leases involve preparing the space for the tenant, whether through a full build-out or more modest improvements. Tenant improvement allowances are capital, and we treat them that way. Each dollar invested should be justified by the value the lease creates over its term and, ideally, by the value the improvements retain for future tenants.
That is why we pay attention to what is being built. Durable, flexible layouts and finishes are more likely to serve a second tenant than highly specialized ones. Where a tenant needs something unusual, we discuss how it will be paid for and what happens to it at the end of the lease.
We also manage the construction process carefully. Clear scopes, realistic schedules, good contractors and regular communication help a tenant move in on time and keep improvement costs within budget. A delayed or poorly executed build-out can sour a relationship before the tenant has spent a single day in the space.
Renewals begin long before expiration
For an existing tenant, the renewal conversation begins long before the lease expires. In a sense, it begins on move-in day. Every service request handled well, every planned shutdown communicated clearly and every reasonable accommodation made during the term builds the case for staying.
We start formal renewal discussions early, giving both sides time to consider options without pressure. We want to understand whether the tenant’s needs have changed, whether the space still works, and what improvements or adjustments might make a renewal attractive. A renewal that reflects the tenant’s current needs is more durable than one signed simply to avoid a move.
We treat renewals as part of an ongoing relationship rather than a single negotiation. That does not mean every renewal is easy, and it does not mean we accept any terms to avoid vacancy. It means we approach the conversation with a shared interest in finding terms that work.
When a tenant decides to leave, we try to make the transition orderly and respectful. A tenant that departs on good terms may return, refer others or speak well of the building. An early understanding of a tenant’s plans also gives the leasing team more time to market the space and plan any work needed for the next occupant.
“A renewal that reflects the tenant’s current needs is more durable than one signed simply to avoid a move.”
Knowing when not to sign
Disciplined leasing includes the willingness to say no. A lease that fills space today but limits the building’s flexibility, commits capital the property cannot support or brings in a tenant whose credit does not match the commitment may not serve the asset or its other tenants. We would rather wait for the right fit than accept terms we will regret later.
Every lease is evaluated against the property’s written business plan, and leasing results appear in the same monthly reporting used across the Cotra family, alongside occupancy, rent growth, operating margin, capital spend against budget and tenant satisfaction. When leasing activity departs from the plan, we want to understand why and whether the plan itself should change.
Leasing as stewardship
Leasing is sometimes treated as a transaction to be closed. We see it as stewardship of the building’s future: each lease should leave the property in a stronger position, with a tenant who is well served and terms that support the business plan.
Careful leases make for durable buildings.
This article is for general information only. It is not investment, legal or tax advice, and it is not an offer to sell or a solicitation of an offer to buy any security. See Important information.