In order for a lease negotiation to be successful, both landlord and tenant must reach their goals. Some people call this win-win.
I advise my clients that in order to negotiate any business transaction effectively you must be prepared to take your marbles and go home, or at lease create the illusion that you are, if you believe you are not being treated fairly. Many tenant brokers recommend having a viable backup space that you can leverage as a safety choice in the event that negotiations with the landlord do not seem to be going well. It is essential that the landlord compete for your business.
While landlords have been vilified throughout history, let me suggest something novel: The landlord is not the villain. The landlord is a businessman. He is not an adversary, although at times he may seem so. If you can understand the things that motivate the landlord, you may be far more successful in arriving at an effective business transaction for both you and the landlord.
Let’s look at things from the landlord’s perspective for a minute. The landlord looks at each prospective tenant as a source of potential profit or loss. He examines tenants in terms of their credit risk in much the same way a banker would when approving a business loan. The landlord may be providing you a business loan in the form of a construction allowance. A landlord has other costs as well, some of which we have discussed already, such as building operating expenses and real estate taxes. The landlord must also pay the mortgage. He also may pay real estate brokerage commissions to real estate brokers.
Let’s look at costs the way a landlord might. If you are paying a $20.00 per square foot rental, the landlord’s cost might breakdown as follows:
Operating expenses 5.00
Real estate taxes 2.50
Real estate commissions 1.00
Work letter 4.00
Profit $ 2.50
That $2.50 per square foot profit sounds pretty good until you look at the risk. The landlord invests his cash in you, the tenant, up front. On a five-year lease, it may be more than 18 months before he starts to make a profit at all. What if the tenant defaults on the rent before this time? Has this ever happened? Landlords are still reeling from the real estate recession of the 1980s and they do not want to repeat it. Many were also burned more recently when many early e-commerce companies a/k/a dot-coms crashed. That’s why many landlords today look at the financial statement of the tenant so carefully. Tenants today are like a bond coupon. The lower the risk, the more the value to the investor – in this case, the landlord.
You may have heard a lot about REITs (Real Estate Investment Trusts) that now own substantial portfolios of office buildings across America. REITs operate with Wall Street money. Their investors want a return for their investment, and REITs are under tremendous pressure to produce these returns. REITs hate risk.
Today’s landlords in general are more and more risk averse. The landlords’ primary goal is to maximize their return on investment, while avoiding losses. After the landlord examines your financial statement, he may determine whether he wants a typical two or three months rent, as security. If the financial statement shows risk, the landlord may look for a personal guarantee or a letter of credit to cover the likelihood of a default.
Now, let’s turn the tables and look at you, the tenant. What are your business objectives? While tenant’s objectives vary from business to business, there are some common themes. Tenants are looking to have space completed on a timely basis with as little out-of-pocket cash as possible at a reasonable rental rate. Tenants want an appropriate, safe business environment in which to conduct business profitably, grow the business, satisfy the needs of their employees, and satisfy the needs and corporate image of the business.
You will be successful in achieving your goals based upon your company’s financial leverage. While a strong financial statement is very attractive to the landlord in today’s market, you may still be able to achieve your objectives even if your company does not have a perfect financial record. This is the area where a skilled negotiator may be of real value in helping to structure the transaction.
When negotiating business terms, make a list of those business terms you must have before sitting down with the landlord. Where are you prepared to compromise? What issues would be a deal breaker? For example, if the landlord is willing to wait 90 days for your tenancy, are you then willing to pay the landlord’s proposed rental rate in return? Be prepared to be flexible. Examine the rent and other business terms carefully to insure that you are comfortable with them. Zero in on the key points that you would like to discuss with the landlord, making certain that you are being realistic in your expectations. Negotiation is the art of give and take. If you do your homework and know what terms you need to achieve, it will be easier to arrive at solutions that work for both you and the landlord.
To help you through the negotiation process, you may desire to have the assistance of a real estate advisor experienced in the give and take of leasing transactions to represent your interests. A real estate advisor can assist you in developing strategies to achieve your goals. Sometimes real estate negotiations can be a very emotional experience. A real estate advisor asking the right questions can get to the heart of the matter and provide you with the professional distance required for proper decision-making. In Chapter 13, we will outline the role of real estate advisors and how they can assist the tenant with lease negotiations to achieve success.
Categorised in: Negotiations