From LOI to Signed Lease:
The Value of Closing Leases Faster
TABLE OF
CONTENTS
Introduction .................................... 3
Speed Matters .................................. 4
Rent Commencement ...................................... 5
Transaction Risk ........................................... 6
Inated Costs ............................................. 7
Closing Leases Faster = Major Value .......................... 9
A Process Not Designed for Speed ................. 10
Excessive Communication .................................. 11
Outated Tools ............................................ 13
Tenant Delays & the Unknown ...............................14
Increase Speed & Decrease Costs .................. 15
Right People in the Right Roles ............................. 16
Leverage Technology ....................................... 17
Call Center Model ......................................... 18
RealCo Overview ............................... 19
Did you know that a
construction rm in China
built an entire 57-story
building in 19 days?
Think about that for a second. That building could
have been built almost 5 times in the same 90 day
time period that it takes to close a lease. It’s simply
unacceptable. And intuitively, the commercial real
estate industry knows it’s unacceptable. There is
intense pressure to start getting leases closed faster.
But why? And how? Unlocking the answers to those
questions, and ultimately implementing systematic
changes to speed up the process and reduce costs
can transform an entire company and industry.
The focus of this eBook is on three
fundamental questions:
1. Why should real estate companies
care about closing leases faster?
2. Why is the current legal process to
go from LOI to signed lease so slow?
3. What are some strategic approaches that real
estate companies can implement to increase
speed and reduce costs?
Throughout this E-Book, we will be referring to
a hypothetical retail real estate company called
RealCo. RealCo has 25 million square feet spread
across 125 shopping/lifestyle centers. For more
of RealCo’s characteristics see the overview.
The average amount of time it takes
to go from LOI to fully signed lease
The amount of time it took
to build a 57-story building
90
19
DAYS
DAYS
Introduction
3
The rst section of this E-Book
will focus on some of the ways
to think about and quantify
the impact of speeding up
the lease closing process.
Intuitively, the industry knows
that faster is better when it
comes to getting leases signed.
But why? There are three
main areas where reducing
the amount of time to go from
LOI to signed lease can have
a signicant impact on a real
estate company:
(i) rent commencement,
(ii) transaction risk, and
(iii) wasted time.
As you’ll see through the
RealCo example, all three
can have a signicant impact
on revenue and costs.
SPEED
MATTERS
For retail leases, every day truly matters. The
majority of the time, the sooner a lease gets
signed, the sooner that tenant can move in and
start paying rent. For oce/industrial leases,
this is less common. Instead, the issue is more
about the occasional need to push back a rent
commencement date to accommodate a legal
leasing process that is taking longer than was
anticipated when the LOI was signed. When
this occurs, rent commencement dates are
typically delayed by at least 30 days, which
results in lost revenue.
The rent implications discussed above are
most commonly experienced when dealing
with new leases as opposed to amendments.
The reason being, that with amendments, the
tenant is already in the space paying rent so
the opportunity for a real estate company to
accelerate rent by increasing speed is limited.
By simply reducing the time it takes to close
leases by 2 weeks, each year RealCo recognizes
additional revenue of:
$
425K
To walk through the math quickly: we deter-
mine RealCo’s per diem rent by multiplying
the average premises size by the average rent
psf and then dividing by 365. We then multiply
that number by 14 (the 2 weeks sooner that
the lease is signed). That gives us RealCo’s per
lease additional revenue and then we multiply
that number by the total number of leases per
year to get the total portfolio revenue impact.
Rent
Commencement
Increasing the speed from
LOI to a signed lease can
impact the commencement
of rent, and the type of asset
will often determine how this
manifests itself.
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While dead deals may be relatively rare in
practice, the risk is always present and the
downside is signicant. Each time a deal is lost,
a real estate company needs to spend time and
money re-marketing and re-leasing the space.
In addition, it can often take 6 months to nd a
new tenant and that is 6 months of lost rent that
comes out of a real estate company’s pocket. The
risk of losing a deal can be quantied by adding
the cost of wasted time to the cost of vacancy.
Let’s assume RealCo was deep in negotiations
with a potential retail tenant looking to
establish a 20,000 square foot agship store.
The consequences are steep. Losing this one
deal costs RealCo $125,000 in lost rent. On top
of that, the company also has lost the time that
the business people and lawyers spent putting
the deal together and all other costs (such as
marketing) that went into getting this deal to
the point where it ultimately fell apart.
Transaction Risk
The longer a lease or
amendment remains
unsigned, the more risk there
is of something happening to
change or kill the deal. It’s the
old adage—“time kills deals.”
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The impact of wasted time is felt by both
business people and lawyers and manifests
itself in two ways: inated cost and
opportunity cost.
Business people are hired and compensated
to sell space, not spend time herding cats
to get leases signed. The longer it takes to
close leases means the more time people are
spending involved in a deal and the less time
they are spending nding new tenants to ll
other vacancies.
Over the course of a year, business people spend
up to 3 weeks on the post-LOI lease closing
process. Completely removing business people
from this process is unrealistic, but if they only
had to spend 1/3 of this time closing deals, that
would free up an additional 2 weeks to spend
selling space and reducing vacancy.
For lawyers, the more time they spend on each
deal, the less time they have to get to other
higher value work and time sensitive matters.
This creates bottlenecks that lead to a longer
lease closing process.
Inated costs
There is a lot of wasted time
built into the roughly 90 days
that it takes to go from LOI
to signed lease.
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If they were able to use these additional 20
weeks to increase occupancy by just .1% (from
91.2% to 91.3%—only an additional 20,000 sf
of space), the result would amount to almost
$400,000 of additional revenue each year.
0.1%
$400K
On each lease, up to 50% of a lawyer’s time is
spent manually entering lease terms, searching
for correct language, adjusting templates to
accommodate dierent deal terms, doing
calculations and formatting.
If RealCo’s business people each had 2 more
weeks of time to sell space, this would amount
to a total of 20 additional weeks for their entire
leasing department.
If RealCo’s leasing attorneys had 50% more
time, they would be able to bring their overow
leasing work in-house leading to an additional
$325,000 of savings (assuming $5K average
fee per outsourced deal). In addition, they
would be able to free up almost 1,300 hours of
time (assuming 10 hours per lease). The value
of that time saved is over $125,000.
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Speeding up the lease closing process has a real material impact on revenue and costs. For
RealCo, simply shaving o two weeks of the lease closing process and capturing rent sooner,
reducing transaction risk and reducing wasted time results in about $1.5m of combined
increased revenue and reduced costs annually. And that’s not even factoring in the intangible
benets of speed such as customer happiness. In this day and age where tenants are often
seen as customers and not adversaries many real estate companies are trying to add value
to tenants. Speeding up the lease closing process is one way to provide that value.
$
1.5M
=
Increase Revenue
Reduce Costs
425K
125K
400K
125K 325K
Closing Leases Faster = Major Value
Annually
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Despite the need for speed,
why does it take so long to go
from LOI to signed lease?
Who or what is to blame? We
constantly hear “it’s not us, it’s
them” from both landlords and
tenants. Both can’t be right.
In fact, there are plenty of
reasons that both landlords
and tenants contribute to
a slow lease process. In this
E-Book, we’re going to focus
primarily on the three most
signicant factors.
A PROCESS
NOT DESIGNED
FOR SPEED
There are two primary
types of communication that
really slows down the lease
closing process. First, are
the internal communications
within a real estate company.
Second, are the multi-party
communications between
all of the players on both
sides of the table.
Excessive
Communication
Internal Communications
Business people negotiate the business terms
of a lease and know the ins and outs of specic
deals better than anyone else. However, leases
are complex documents, and if not done
correctly, can expose real estate companies
to signicant risk.
This means that even though business people
know the deal best, lawyers are tasked with the
ultimate preparation and negotiation of the lease
document. The result is lots of communication
eort for business people to share with lawyers
what the deal is, and then for business people
to review what the lawyers produce to conrm
it tracks the intended deal structure.
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Multi-Party Communications
There are simply too many cooks in the kitchen.
It is common for there to be upwards of 8
dierent people weighing in on dierent parts
of a lease at dierent times—tenant, tenant’s
attorney, tenant’s broker, landlord’s leasing
representative, landlord’s attorney, landlord’s
construction team, landlord’s accounting team
and landlord’s property management team.
One lost email, one person away on vacation,
one misinterpreted comment can lead to weeks
that get added to the process. At times it can feel
like a game of telephone where information gets
passed from one person to another to another
only to be slightly changed in a material way
before the message gets to the person it was
intended for. Not only is it frustrating, but it adds
time as the parties try to get on the same page.
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For most real estate
companies, the only option
is to use outdated tools
such as Microsoft Word.
Outdated Tools
The vast majority of other industries have
evolved with time and the tools they’ve used
have likewise become modernized. But for
real estate companies, the process of going
from LOI to a fully signed lease has evolved
very little since MS Word overtook typewriters
in 1985. In many ways, MS Word is just an
advanced typewriter. The process of drafting
and editing leases is still extremely manual
and labor intensive—an extraordinary amount
of time spent lling in blanks, changing
singulars to plurals, correcting formatting,
searching for correct alternative provisions
and reinventing language from scratch.
All of this takes time since it is unnecessarily
manual and labor intensive. With the outdated
tools currently being used, the only way to
meaningfully reduce time is to sacrice quality,
but this is not an acceptable outcome given the
importance of lease documents.
Polaroid
Camera
Digital
Camera
Smart
Phone
Cassette
Tape
Compact
Disc
Pandora
Microsoft
Word
Microsoft
Word
Microsoft
Word
1985
2000
2017
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Tenant Delays
& the Unknown
There are without a doubt
also factors that are outside
of a landlord’s control that
contribute to the lease
closing process taking an
unnecessarily long time.
Tenants have their own internal inecient
processes and may even have reasons for
intentionally wanting leases to take a bit
longer. Uncontrollable circumstances, such
as vacations, illnesses or changes in nancial
markets come up and can also add length
to the process. But the good news is that
there are factors that real estate companies
can control. You don’t need to take a 90 day
process down to 10 days to see a meaningful
impact. Even just a few days or a few weeks
can have outsized benets. For example,
turning a second draft around in 3 days
as opposed to 7 days could be the dierence
between a tenant’s attorney getting to review
and comment before he goes on vacation or it
sitting in his inbox until he returns. That one
simple change could actually result in a deal
getting signed a couple weeks sooner since
while the tenant’s attorney is away, you could
be going through your process to turn the
next draft.
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Now that we’ve touched on
why speed matters and what
some of the causes of the slow
legal leasing process are, it’s
time to dive into what can be
done to increase speed and
decrease costs.
INCREASE
SPEED &
DECREASE
COSTS
Think about the composition of a football team.
The players are supposed to go out and execute
the plays that the coaching sta designs and
calls. Now imagine that as the game winds
down, the team decides to let the coaching
sta play the end of the game while the
players head to the locker room.
The coaching sta doesn’t have skills or the
in-game knowledge to eectively close out the
game. They also will need to play the game at
the same time as they are designing and calling
plays which is a lot to handle. This is not a
recipe for success.
But this is eectively what happens with
leasing. Once the LOI is signed, the leasing
representatives are eectively taken o the
eld and replaced by the lawyers. It is the
lawyers primary job to close out the lease, but
they have no context, except for a bare bones
LOI, about what has transpired between the
parties so far.
What if instead, lawyers designed a system
and put protections in place to give leasing
representatives, or other business units, the
tools to draft and edit high quality leases up
to a certain point themselves without needing
to involve lawyers?
This re-allocation of the workow would
accomplish numerous objectives:
1. It would actually reduce the time that leasing
representatives spend closing leases since they
wouldn’t be involved in as much back and forth
with legal about deal terms.
2. It would reduce the time that lawyers spend
closing leases since they wouldn’t be involved
in simple deals and the back and forth with
leasing representatives would be cut down.
3. It would help leases get closed faster since
it would eliminate a lot of the unnecessary
communication.
4. It would allow lawyers to spend more time on
the bigger picture legal strategy of leasing and
how to best manipulate and structure the legal
leasing strategy to reduce risk.
Right People in
the Right Roles
One way to speed up the
lease closing process is to
re-allocate the workow
so that people aren’t tasked
with doing jobs they aren’t
best equipped to do.
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Leverage
Technology
Another signicant
opportunity for change and
improvement is through
technology. There are three
main areas where technology
will dramatically impact the
lease closing process over time.
Lease Automation
Eectively this means using a logic-based
platform to do the same work—drafting and
editing leases—in minutes as opposed to take
hours. For instance, by simply clicking a button
to indicate that a lease has a TI Allowance,
entering the amount of the TI Allowance and
selecting how the TI Allowance gets paid,
the lease gets updated in multiple places
with the correct language updates, relevant
calculations, and formatting automatically
applied. Now, imagine this working for all of
the 100+ lease concepts and alternatives that
real estate company’s currently cycle through
both for rst drafts and subsequent drafts.
Lease automation is the only way to achieve
the optimal balance of speed and quality.
Multi-Sided Platform
This means that both landlords and tenants
access the lease through the same portal, albeit
with dierent views and dierent permissions.
This is possible with technology today given
advances in document collaboration and
security. A multi-sided platform would
dramatically reduce communications
bottlenecks. No more people saying
“oh I thought I already sent that to you”,
or “can you re-send the draft I lost it”, or
“have you heard back yet from so-and-so.”
Lease communications would be transparent.
Everyone involved in a lease would be able
to go to one centralized place for all drafting,
editing and communication needs.
Use of Data
Instead of treating leases as a collection of
letters, that make up words, that make up
paragraphs and ultimately 50+ pages of text,
leases will be created from data building blocks
which will allow all departments within a real
estate company to access lease data faster and
easier and enables real estate companies to
immediately generate automatic abstracts and
integrate with other software systems (including
property management and nancial modeling
systems) to create maximum eciency.
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Principal Financial does something similar
in the lending world. They have standard
documents and certain standard “gives”
that their business units can easily give to
borrowers. But for any other requested changes,
they need to escalate to their legal team which
can take an additional 2-4 weeks. Oftentimes,
this disincentive is enough to make the
borrowers pull back their request. This
forces borrowers to do a cost/benet analysis
on the modications they are asking for.
In the leasing world, tenants aren’t required to
do the same cost/benet analysis. It’s relatively
easy for a tenant’s attorney to mark up a
document to oblivion, and there is no resulting
cost to them. The worst thing that happens
is the landlord’s attorney rejects the edits.
The only party that this materially impacts is
the landlord because it is their legal team that
needs to wade through all of these proposed
modications to determine what is and is not
reasonable. This may not work for every lease—
it is a question of leverage, but for smaller
more cookie cutter deals where the real estate
company has signicant leverage it would be
very eective.
“Coercing” tenants into accepting more
standard terms and eliminating a lot of the back
and forth would signicantly reduce time from
LOI to close. In addition, it is a more friendly
way to reject changes than simply saying no,
which can help with customer happiness and
getting the relationship o on the right foot.
Call Center
Model
A third way to speed up
the lease closing process is
to create a system called the
“call center model” where
deviation from “standard
terms” has implications that
create a disincentive for
tenants to ask for them.
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RealCo
Overview
125
Shopping/Lifestyle Centers
130
New Leases
25m
Total Square Footage
195
Amendments
4,500
Average Lease Size (sf)
10
Internal Leasing Reps
$
18.85
Average Rent (psf)
5
Internal Leasing Lawyers
91.2%
Occupancy Rate
80%
In-House Leasing
325
Lease Deals Per Year
20%
Outsource Leasing
90 days
From LOI to signed lease
(industry average)
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LeasePilot combines document automation, word processing and user-centric
interfaces into a single web-based platform expressly designed to radically
accelerate the entire process of drafting and editing commercial leases, from
a letter of intent through lease execution.
To learn more, please visit us at leasepilot.co
