Chapter 7: Proposals and Projections

Different Lease Types Video

Triple Net, Modified Gross, and more! We have you all covered.


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Lease Renewal vs Relocation Video

Should You Stay or Should You Go? Find out here!

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Rent Escalation Video

Common practices for when the rent gets raised!

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Free Rent Video

More than what meets the eye!

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Once you find a building that works for you, you can craft your lease proposal. This precedes the lease contract negotiation. It contains the major business points that need to be agreed upon before the deal goes to a full contract. Sometimes companies will hurriedly forget to include some nuanced items within their proposals, to their detriment. Other companies will negotiate the lease proposal as if it were the lease contract itself and cover extraneous topics that aggravate rather than elevate the conversation. Experienced brokers understand this delicate balance. The two foundational elements of a winning lease proposal are:

  1. Thoughtful consideration of how the property matches the company’s needs operationally and financially
  2. An understanding that the lease needs to work for both parties

In this chapter, we will talk about what goes into a lease proposal. Then we will think through how to analyze the economics.


Let us start with the lease proposal itself. If the proposal is accepted, it will be used by the landlord’s attorney to prepare the lease contract. Here is an overview of the universal lease proposal sections:


The parties are the trade names, or official legal entities, for both the landlord and the tenant. It is essential to communicate who will be on the lease so there is no ambiguity: will it be a principal of the company, a newly set up corporation, a subsidiary, or a corporate parent? Landlords want to make sure your financials match the entity, as well as verify the corporate officers in charge of signing the lease.


This one is self-explanatory. On the odd occasion, we have had to change the property address number, letter, or suite based on client preference. This is surprisingly possible and less difficult than one would expect, provided the United States Postal Service and local fire authority are on board.


This is the approximate size of the building in question. Some people will get caught up in the exact measurements of the building, but building square footage is always an approximation. If you hired five different architects to measure the building using industry standards, you would likely get five different numbers. You must rely on the fact that the space is adequate for your business operations and that the total amount of square footage is approximate and reasonable. When in doubt, the Building Owners and Managers Association (BOMA) is the primary authority on measuring square footage. Their most current standard of measurement guidelines can be purchased through BOMA and SIOR. When in doubt, ask your architect.


This is the crucial date when you will formally take possession of the property and start paying rent. This date is equally important for the landlord, as they have to guarantee completion of any tenant improvements or construction by this date, or they incur penalties. This date is different from early occupancy or free rent.


This is the length of time you want to be able to utilize the property. It is customary to have full-year lease terms. While it is customary to lease for full years at a time, do not worry about asking for a specific lease expiration month if it works better for your business and makes for a less disruptive time to move. For example, one of my clients finds it ideal to have all their leases expire on December 31. We have negotiated every single one of their leases to have the same expiration date so we do not interfere with their busiest times of the year. Landlords are usually empathic and accommodating when it comes to this type of request.


The lease rate is quoted per square foot, per month in Southern California, Houston, and a handful of other markets, and per square foot, per year everywhere else. In certain markets, such as Seattle, they quote lease rates differently for the office portion and the warehouse portion of the space. You will always want to know if your lease includes any of the property operating expenses in it. We will cover this in the subsequent section on Lease Type.


This section describes how much rent will increase each year. The general idea is that the base rate should adjust each year to keep up with inflation. In practice, this is subject to supply

and demand market dynamics at the time of the negotiation. When I started in this business in 2004, there were still instances where we would negotiate annual rent increases based on the Consumer Price Index, which at the time averaged 2.1 percent. Over the next decade, the industry standard transformed to a uniform 3 percent.

As the market tightened in 2018, we started to see 3 to 4.5 percent annual increases, which had less to do with inflation and more to do with market rent demand. If you were not paying attention and accepted a 4.5 percent increase rather than a 3 percent increase, you would have paid an extra two months of rent over five years that you could have invested in your company instead. In Southern California, the industrial market averaged 7.5 percent market growth in lease rates from 2014 to 2019. Those who signed a five-year lease in 2014 with 3 percent increases received an unpleasant surprise during their subsequent lease negotiation.


The purpose of lease types is to set expectations and give a broad brushstroke as to what to expect, but the specific language buried deep in the lease dictates the real terms. As a result, you can find two leases with identical language but called different types of leases. Therefore, it is essential to come to each lease with a fresh perspective, ready to identify who is responsible for what.

The lease type denotes the inclusion or exclusion of property operating expenses within the lease rate being quoted. Lease types can include industrial gross, gross, modified gross, modified net, single net, double net, triple net, and absolute net. The main leases you will encounter in the market are:

  • Gross: This lease rental payment includes payment for rent, property tax, insurance, and common area maintenance expenses. This is typically found with older, privately held landlords.
  • Modified gross: This rental payment includes payment for rent, property tax, and insurance, but not common area maintenance.
  • Triple net: This lease rental payment only includes rent. Property tax, insurance, and common area maintenance are paid separately. Each “net” within the term “triple net lease” represents an operating expense, namely, property tax, insurance, and common area maintenance. This type of lease is commonly found with institutional landlords and landlords who have purchased property within the last ten years.

Any deviation from this represents a shift of the property tax, insurance, or common area maintenance into the rent or into the operation expenses to be paid separately. This is where your broker and attorney can help you make sure you are very clear on what your responsibilities and expenses are for each type of lease.

At first, understanding lease types can be confusing to non industry-insiders and lessexperienced executives. At the bare minimum for all types of leases, you should be prepared to take care of all interior property maintenance on your own, including HVAC maintenance, doors, windows, ceiling tiles, lights, bathroom fixtures, roll-up doors, and dock bumpers. It pays to have your broker and attorney explain it and look out for you until you firmly grasp this concept.

In today’s modern industrial real estate arena, the onus is on the tenant to take care of the property as if they own it, whether that maintenance is done with internal facility management staff or with external vendors. Sometimes, the landlord will take care of the exterior property and bill the tenant; other times it is a mix. For instance, the tenant might take care of everything except for the roof. Most institutional landlords service the HVAC units themselves and bill the tenants for quarterly service. This is because the landlord may want to control any maintenance they think preserves the property’s value.

In other instances, the landlord turns the HVAC units and roof over to you, expecting you to get them back into working condition at the end of the lease. Some tenants have a facility manager who already takes care of everything in the warehouse, so adding exterior building responsibilities to their duties is a minimal burden.

In industrial leases, electricity and janitorial services are always separately paid for by the tenant. The main reason for this is that each industrial tenant has their unique uses and needs, making it impractical for a landlord to predict and manage them on their own.

Eighty percent of the time, the type of lease you need is determined by the building you choose. For example, if a large institution owns your building, it is likely they already have a specific way of operating it. Multi-tenant industrial landlords usually take care of maintenance in business parks because it is essential to pool expenses to maintain the business park’s image. In single-tenant buildings, there can be some flexibility.

The moral of the story is, you want to be very clear about what will become your responsibility during the lease negotiation.


Operating expenses are often referred to as “OpEx,” “triple net expenses,” or “net expenses.” They are specific property tax, insurance, and common area maintenance expenses associated with the property. Sophisticated tenants and brokers ask for a breakdown of the operating expenses on an annual basis to ensure they are reasonable. When appropriate, ask for three years of historical operating expenses to see how they have trended over time. If you find that one of the operating expense sections is greater than it should be or has increased substantially over time, it warrants further investigation into how the landlord operates the property and what future pass-through expenses you can anticipate.

Prologis now incorporates all maintenance, repair, and replacement operating expenses within their new Clear Lease and places a cap on how much they can increase annually. This results in predictable monthly operating expenses. Due to Prologis’s scale, they can forecast and control their expenses to the advantage of customers by taking a variable cost and transforming it into a fixed cost. This allows executives to refocus the time and attention of general managers and facility managers away from daily facility-related maintenance and toward business growth and operations.


Early occupancy is the time you can use to move in to the property, set up furniture, and install IT cabling, equipment, and racking before you start paying rent. The key differentiator between early occupancy and free rent is that in early occupancy, you are granted nonexclusive possession of the space.

This means the landlord retains partial possession, which is usually for the purpose of completing tenant improvements. As a result, landlords do not want tenants to be fully operational yet at this point.

Some landlords will want you to pay the operating expenses during this time, while others will not. We will cover this in more detail below, in the Rent Abatement section.

Early occupancy can also be a practical concession to start the lease on the first of the month, as opposed to starting the lease date mid-month.

Understanding the difference between early occupancy and rent abatement can help you identify what you want and when you should ask for it.


This is more commonly called free rent. While the concept is simple, its application is nuanced. Free rent is a concession the landlord provides only if it is needed to attract the tenant to sign the lease. It is usually given at the start of the lease because that is when it can offset the tenant’s substantial cash outlays and capital investments in construction, equipment, furniture, as well as double rent, if the tenant is paying for both buildings while they transition.

Landlords lose cash flow when they grant free rent, so they are sometimes more willing to give it when it is spread throughout the lease term. For instance, one month free each year.

Landlords routinely add a month of lease term to the total lease length for every free month given. We reference this approach by saying the landlord is giving free rent “inside the lease term” or “outside the lease term.” For example, think of a five-year lease with two months of free rent. When free rent occurs inside the lease term, a sixty-month term results in two months free, and fifty-eight months paid after that. When free rent occurs outside the lease term, a sixty-month lease becomes a sixty two-month lease, whereby the first two months are free and sixty months are paid after that.

As we discussed earlier, free rent is a concession landlords give to tenants to attract them to leasing the landlord’s space. The market supply and demand dynamics will dictate when landlords offer free rent and in what quantities. You can rely on your broker to know which concessions are reasonable at your specific point in the market cycle.

In the sixteen years I have been helping clients negotiate industrial leases, I have found there is always room for some free rent. In the softest of markets, free rent can be plentiful, and back in the recession of 2008, we would regularly negotiate one to two months of free rent per year of lease. I remember our office negotiated a year of free rent on a six-year sublease during this time. That created an extra 6 percent boost to our bottom line in the first year.

There is usually one string attached to rent abatement to keep all parties’ interests aligned: if you default on your obligations, you pay back the free rent in full, immediately. The reason for this is that you should not be able to negotiate concessions out of your landlord and then take the money and run. You have to fulfill your part of the bargain.


If you can negotiate free rent, does that mean you will pay nothing to the landlord during that time? Or will you still need to pay the operating expenses? There have been countless misunderstandings and mismanaged expectations over this nuance. It is assumed by the real estate community that you will pay the operating expenses during any free-rent period unless explicitly stated otherwise, but often the uninitiated assume otherwise. If you include your request for operating expense abatement early within the negotiation, you have the best chance for success. This can be used as a bargaining chip, trading for another concession in many instances.

For example, if you pay $80,000 per month in rent for your 100,000-square-foot industrial building, and the operating expenses are $20,000 per month, do you not think it is essential to be crystal clear on whether or not you are obligated to pay this $20,000 per month bill for the three months of free rent your broker negotiated? Most tenants do not negotiate these often enough to know better, nor will junior brokers. Savvy senior brokers, on the other hand, will be all over this. Make sure to include language that states abatement of all base rent and operating expenses during any free-rent period. I make sure my clients are never surprised that the $60,000 credit they thought was coming to them was a misunderstanding.


Tenant improvements (TIs) are modifications to the property that need to be done to make the property accommodate your business needs. This lease section defines who will design, perform, and pay for said modifications. Tenant improvements are costly and time-consuming, and as such, they can have such a disproportionate effect on the success of your negotiations.Therefore, we will devote an entire chapter to the topic, Chapter 9, so you can reference in depth as needed.


Many leases will have a section called Condition, which states the building will be delivered to the tenant with all building operating systems in proper working order. In practice, I have found it is helpful to call out all specific building systems that are deficient. You do not want to tell the landlord their building is in terrible shape, because it shames them and does not provide them an opportunity to save face. You likely would not negotiate on it in the first place if it were in bad shape, so it is best to handle the issue delicately. Remember to do the following:

  1. Mention the building’s condition, honestly and early in the process, so the landlord knows they must fix these neglected maintenance items.
  2. Make sure the landlord does not confuse the repair of deficient building systems with your tenant build-out needs.

Sometimes landlords mention their property renovation plans and then try to use their renovation cash contribution against you when negotiating tenant improvement allowances. For example, some smaller private landlords will say, “We are already spending $200,000 to renovate the property, and as a result, we should not have to give you as much tenant improvement allowance.” It is helpful to differentiate deferred maintenance from tenant improvements, because the former is for the landlord’s benefit and part of regular capital reinvestment. The latter is in the tenant’s interest and specific to your use.


Parking is a big deal in office leasing because you pay for each reserved and unreserved parking stall, and in parking structures, you pay for visitor validations. When leasing a warehouse, you do not need to deal with paid parking, as warehouses do not have parking structures. However, you still need to make sure you are clear on the amount of parking you can use when you are in a business park environment with other tenants.

Ask the landlord:

  1. Are the parking spaces exclusive?
  2. Can there be reserved parking?
  3. Can work trucks be parked overnight?
  4. Can tractor-trailers be stored in the yard?
  1. Can the yard be fenced?
  2. Is street parking allowed?

Some people see there is street parking available and then plan on using that for extra employee parking, but then later learn that the city will not count that toward their allotment. Or parking is not allowed, or their neighbor utilizes all of those spaces.


We all know what a security deposit is. But how much security deposit is reasonable in the industrial market? The main factors to consider are:

  1. The length of time the company has been in business
  2. The company’s income statement, balance sheet, and/or tax
  3. The size of the landlord’s tenant improvement contribution
  4. The length of the lease

There are also different methods of payment and forgiveness of the security deposit when a more substantial one is required. When an extra security deposit is required, it is always helpful to inquire as to the specific reason for the landlord’s demand so you can address it. On occasion, it is possible to pay the extra security deposit over time. Quite regularly, though, an additional security deposit can be given back to the tenant in the form of a rent credit on anniversary dates of the lease, provided you are in good standing throughout the duration of the lease.

No conversation on security deposits would be complete without mentioning the illusionary letter-of-credit concept, which is an idea that sounds good but is not practical. Tenants sometimes prefer to give their landlord a letter of credit from their bank. This letter states that the bank will restrict a specific portion of funds from the tenant’s bank account, with express instruction that if the tenant defaults on their lease, the bank will wire those funds to the landlord. What could go wrong here? Well, plenty.

What if there is a dispute as to whether or not the tenant is actually in default? What if the tenant sues the bank for unnecessarily sending the funds to the landlord? Banks are risk-averse to these types of arrangements, and landlords are too. When it comes to security deposits, cash is king.


Unfortunately, sometimes overly eager or aggressive people will try to move the lease proposal negotiation into the lease contract negotiation before all of the lease proposal terms have been agreed upon by both parties. When people try to move to the contract too quickly, it is usually because they think they can hammer out the rest of the details later in the contract. This approach is fraught with misunderstanding and a waste of time, as you should not be rehashing basic business terms during the legal term discussion.

Remember, the purpose of the lease proposal is to size up your landlord’s ability to accommodate your needs, without forcing them to negotiate unnecessarily. The contents of your lease proposal should focus purely on that purpose. It is also practical to make sure everyone is in full agreement with deal terms before both parties start incurring costly legal fees in contract negotiation.


Everyone has their own opinion as to what a good deal means to them. They go about using that lens to select properties and negotiate accordingly. The first and most obvious criterion for what constitutes a good deal is that it fulfills all of your minimum requirements operationally, financially, and from a timing perspective. You should compare multiple viable opportunities to inform your decision-making and to refine your analysis. The focus of your deal analysis can then show the impact of any proposed piece of real estate on your ability to operate profitably and grow the business.

Most people do not analyze their proposals or compare them in great detail. Some people will only compare the very last proposal in a negotiation. The first mindset shift I have found to be helpful is to track economics starting with the first proposal. Negotiating lease proposals can take a few—up to a dozen—rounds of negotiation, depending on the extent of the construction necessary. When you begin the process knowing the value of each prospective lease as it relates to another, you can make more refined value judgments.

Deal analysis is pretty straightforward on the landlord side of the table, as landlords make a capital investment in the acquisition of the property and then look for a return on that investment. Ultimately, there is a time when they sell the property, maximize its value, and maximize the overall yield of their investment. As I learned from one of my favorite UCLA professors, Karen Davidson, in the Argus discounted flow analysis class, when you can model each lease, you can understand how it affects the value of the property. This is helpful, as landlords are hyper focused on this point.


The most common predicament executives find themselves in when their business needs to move to a new building is figuring out the best place to move it. As such, we will focus on how companies should compare multiple locations.

First, we start by comparing all of the proposals side by side. This analysis allows us to have internal discussions with our clients and to make value judgments based on real-time data.

These value judgments then enable us to prioritize our pursuits and understand how we can leverage our next round of negotiations.

Some companies do very little lease analysis. Others have a series of complicated internal calculations based upon Financial Accounting Standards Board (FASB) guidelines, costs of capital, internal rates of return, and disclosure requirements. These calculations make you aware of how you can use fundamental

financial analysis to improve decision-making.

Key inputs for proposal analysis on an industrial lease transaction are:

  • Square footage
  • Start Date
  • Term
  • Starting Rent
  • Annual escalations 
  • Free rent
  • Type of lease
  • Base year
  • Operating expenses
  • Tenant improvement cost
  • Tenant improvement allowance
  • Net tenant improvement expense • Tenant improvement amortization

The outputs then become:

  • Year one annual cash flow
  • Year one monthly cash flow
  • Total value of concessions
  • Net effective rent per square foot (this is the average rent per square foot after subtracting leasing concessions)
  • Average cash flow per year
  • Total consideration

If all you do is compare and contrast each of these inputs and outputs side by side within a spreadsheet, you will still be ahead of most people who operate based on gut feel.


To delve deeper into analysis and draw further insights, take the inputs and outputs and relate them back to your company’s internal key performance metrics.

Here are some factors to take into account as you analyze your lease deal.


It is helpful to compare how your profit and loss (P&L) statement will be impacted by each building. Perhaps you can hold more inventory in one of the warehouses, ship faster with a greater amount of loading docks in the second, and package goods faster in the third. It is helpful to create categories for each part of your business if you think they will be impacted significantly by one building over another. In doing this, you can then make value judgments and incorporate those value judgments into your negotiation. This shifts the tone of the conversation with the landlord from “market” deal negotiation to negotiation based on the property’s value to you.


Time can be factored in many different ways: term lengths, construction timelines, lease commencement dates, and expiration dates, for starters.

  • Term length: Double-check to see if all of the lease terms you are considering are the same length of time. Sometimes, concessions will lead to adding terms onto the leases. You will want to assess if the added term works better or worse for you.
  • Construction time: Project when each building will be deliverable based on the completion of tenant improvements. Check how confident you are in each landlord’s ability to perform on time.
  • Lease commencement time: Figure out the ideal month to start your lease. You might find two buildings that fit your company, but one landlord will push your start date out by only thirty days due to competing offers, whereas the other landlord can wait ninety days because of an existing tenant. Determine how flexible each landlord is to accommodate your timing.
  • Expiration date: You may not want to end your lease during your busy season. Verify that the landlord can accommodate your desired lease expiration date.


For a review of the total cost to occupy the property, go back to Chapter 4 and review the three components of budgeting. For each lease, make sure you document:

  1. The cost to build out the new building
  2. The cost of the actual relocation
  3. The cost to surrender and decommission the old building

You can then total these and understand the total cost to occupy each building in relation to the others, and determine how that affects a property’s attractiveness to you.


The cost to find a new building and relocate to it is almost always higher than the cost of extending your current lease. Moving within the same geographic area purely to get a better rent structure for the same size building almost never happens. If we are talking about moving out of state, then there is another set of considerations.

It is valuable to compare lease renewal versus relocating, because it is an opportunity to reframe your conversation with your landlord. When you tell your landlord you cannot renew with them because the value of the property to you is only X and they are asking Y, and you have studied the opportunity to relocate to a different building, you change the nature of the negotiation. Most people ask themselves,

“Am I getting a good deal compared to all the other deals in the market?” With our approach, you shift the question to “What is this particular deal worth to me?” When the landlord understands this, it usually prompts them to become more creative in their deal making so they can better accommodate your unique needs.

The main difference between renewing your existing lease and relocating to a new building, other than forgoing the time and expense of finding, negotiating, building out, and relocating to the new building, is the cost and disruption of renovating your existing space if you choose to stay.

When companies make lease renewal decisions in five to ten year increments, they realize they will likely need to improve their space with every lease as well. This can be as minor as new paint and carpet, but usually there is a reorienting of office space to modernize the layout, accommodate new furniture, or make the space more efficient.

When considering renovations to your existing space, there are a few key considerations:

  • The length of construction
  • The impact on the use of space during construction
  • Maintaining business continuity during construction
  • The landlord’s contribution to the renovation budget
  • Whether or not the landlord’s contribution will cover the entire budget
  • Who will hire the contractor and manage the project
  • The need for new furniture and associated costs
  • Where existing team members will relocate during con-


Renovations can work in different ways. Some tenants have the landlord’s construction crew renovate at night, so they do not disrupt the business during the day. Other companies move employees upstairs when their warehouse has a two-story office space, while the downstairs office is renovated. Sometimes, the landlord owns other property nearby where employees can be relocated temporarily. None of these options are fun, but they are worth it if they help you stay in your current property, save on the up-front costs of moving, and set your company up for growth for another five to ten years.

In the previous chapter, we talked about looking for deferred maintenance on potential new buildings to make sure landlords account for them apart from your tenant improvement budget. This will apply to your lease renewal negotiation as well.


Most companies know when they want to lease or own their building. If you are in doubt about which option you should pursue, chances are you still have detailed internal discussions to complete before entering into the market.

When it comes to large public and private companies, the decision to lease or buy usually revolves around how important the facility is to the company’s mission. Corporate headquarters, for instance, are usually owned because they are viewed as mission critical to the company’s success.

The same mission-critical idea applies to capital-intensive businesses. If you run a food production company, an automotive manufacturing plant, or any other operation where the up-front capital investment is unlikely to be paid back during the initial term of the lease, then you will likely want to own your property. The last thing you want is for your lease to expire and then your landlord deciding not to renew it or charging you excessive rent to remain in the property.

For private companies, there are a whole host of tax incentives designed to benefit property owners that you can take advantage of. These incentives range from writing off mortgage interest and property taxes to taking depreciation deductions and minimizing capital gains taxes. Oftentimes, the executive’s CPA is the one who will change the opinion of the executive from leasing to buying after discussing specific tax advantages.


No discussion of leases would be complete without touching on the fluid lease accounting standards implementation. Over the past decade, the FASB has been working with industry players to establish a new standard for lease accounting. The chief goal is to provide clarity on lease obligations within a corporation’s financial statements. The highest-profile example of wrongdoing in this area is the Enron scandal of 2001, where Enron fooled investors through fake holdings and accounting practices that were off the books. An MBA student typically studies the Enron implosion in their second year, whereby they follow the history of the company’s wrongdoings through their SEC reporting footnotes, which read like a fiction novel.

The problem FASB is looking to solve is that operating leases currently do not have to be disclosed on a company’s financial statements. Real estate leases under fifteen years of length are classified as operating leases, whereas longer leases are considered capital leases. The difference between the two has to do with how the lease obligation is reported on the company’s financial statements. This may not be a big deal for smaller, privately held companies. However, for any company that is public or relies on external capital sources, it is imperative for investors to understand all of a company’s financial obligations. This allows them to assess risk and compare against other companies with transparency.

By implementing lease management software, companies can turn an opaque and tangential financial statement reference into data that is extracted, standardized, and available to investors.


Once you have made your matrix showing the qualitative and quantitative aspects of each building side by side, you can have an educated conversation to fine-tune your negotiation action plan. You are able to discuss how each variable changes a building’s value to your company and prioritize those variables. It is through prioritization that one drives value.

Conversations usually take the tactic of:

  • If we choose this building, then we need to be concerned with X.
  • If we choose the other building, then it is only worth Y to us.
  • If we choose the third building, we effectively limit our
    growth to Z number of employees.
  • Based on feedback from the broker and an updated analysis,
    I think we should go back to landlords A, B, and C with the following terms, X, Y, and Z.

The cycle of lease proposal negotiations, analysis, and internal meetings will require iterations as many times as necessary. I have seen some clients make the decision in one meeting; others 

I have seen the cycle repeat six or seven times. Eventually, you will arrive at a point where each proposal reaches its limit, and it is time to make a final decision. Then you call the other party and utter those commercial real estate precision words:

“Let us go to lease documents.” “Please proceed.”
“We are in agreement.”
“Let us ink it.”

“I will call my attorney and give him the go-ahead to draft the lease.”

“I will have my attorney call your attorney.”

You are now one step closer to the realization of your goal. The probability of success increases exponentially at this point, and all you need to do is make sure the lease has everything written correctly. Sound simple? Not so fast. Right when everything looks hopeful, it is time to prepare yourself for lease negotiations.