If you don’t have any other options, are
you negotiating or settling? Tenants looking for new space need to create leverage to land the deals that best achieve their
objectives. “If tenants focus on one particular alternative, they’re putting all of their
eggs in one basket,” says Jonti Bacharach,
vice president with CresaPartners in
Orange County. “If you haven’t created
leverage, you don’t know if the landlord is
taking advantage of you.”
Smart Business spoke with Bacharach
about how tenants can benefit from real
estate leverage.
How do landlords try to minimize tenant
leverage?
The most common way landlords attempt to diminish tenants’ negotiating
power is by outsmarting them in order to
dictate and ultimately control the final
terms and conditions of the agreement. If
the tenant hasn’t covered his bases and
completed his due diligence, then the landlord is much more likely to come out on
top. Having strong, experienced representation that is able to generate leverage and
produce credible alternatives levels the
playing field.
How can tenants maximize their leverage?
There are many ways. At the most basic
level, tenants create leverage by casting a
wide net. This means they consider many
alternatives in the marketplace. Rather
than only considering what they have done
in the past, companies might do well to
think about options like purchasing versus
leasing, buying land and building to suit,
buying and rehabbing, or buying and
changing the use, such as converting an industrial facility into an office building. By
exposing themselves to the entire market,
tenants create more options and better
solutions.
Why is it important to look at the big picture?
A big-picture perspective helps executives make better decisions at every level.
When running a business, most companies
facing decisions with large financial ramifications are accustomed to taking a big-picture perspective. However, when confronted with a business lease or purchase decision, sometimes businesses react rather
than plan. At this time, executives need to step back and evaluate the overall status of
their company, preferably 12 to 24 months
in advance of a buying or leasing decision.
Once companies determine their strategic business plan, they can use it to drive
real estate decisions. Real estate should
always support the company’s business
plan. In this fast-paced business economy,
businesses and the way they operate can
change over the years while their office
space and facility layout remain the same.
Using defined objectives, companies and
their real estate advisers can provide alternatives that better support the business
and operational needs at lower costs.
What benefits can tenants receive from
leverage?
Leverage most often comes from having
options. More options allows companies to
generate better terms and conditions in the
form of:
- More favorable lease rates
- Tenant improvement packages
- Free rent, moving allowances,
lease flexibility - More beneficial sublease rights
- Additional hours of operation without
after-hours charges - Risk mitigation protection
- Signage rights
- Straight-line amortization of additional
tenant improvement dollars instead of
set-percentage amortization
With the aid of leverage, tenants can
increase the probability of securing better
terms and conditions within a lease or purchase agreement. Having back-up properties also allows companies to make educated decisions based on the overall market, not just one set of factors.
How can real estate advisers create optimal
tenant leverage?
Our job as real estate advisers begins by
educating tenants throughout the real
estate process so they understand the
process and what is at risk. We assist with
the strategic planning process, provide
comprehensive analysis and then lead the
implementation process.
Real estate decisions aren’t isolated, onetime events. Effective real estate advisers
ensure the real estate supports the business needs. Ideally, this begins 12 to 24
months prior to lease expiration. The best
real estate advisers also know how to overcome tight deadlines and still achieve outstanding results. However, a shortened
lead-time forces tenants to react much
more quickly.
Once real estate advisers and tenants
have pursued multiple opportunities, advisers can use this knowledge to help tenants achieve the most favorable terms and
conditions. If one landlord refuses to offer
reasonable concessions, leveraged tenants
have the ability to move on. When tenants
can tell landlords that they’re not willing to
compromise on certain points, the probability is high that a better result will occur.
When landlords know tenants have
options, they often bend and agree to a
meaningful compromise. Without leverage,
tenants have no real negotiating power and
are forced to accept whatever the landlord
dictates.
The bottom line is this: tenants should
always have a serious backup. Real estate
advisers can help them start negotiations
with five to seven options and then negotiate the fine-print terms and conditions with
two or three alternatives before signing a
final letter of intent.
JONTI BACHARACH is vice president of CresaPartners
in Orange County. Reach him at (949) 706-6576 or
[email protected].