"Value creation" is the magic phrase that every building owner wants to hear. Developing a leasing program that creates and maximizes value for an owner can significantly enhance your building's opportunity for success in the marketplace. Three key factors contribute to overall property value for owners today: effectively positioning the property in the marketplace, understanding goals and objectives, and successfully negotiating for value.
Positioning Your Property
You're armed with your property's pro forma, the budget is in hand, and you're ready to set rents for your building. Where do you go from here? The first step is to determine your building's position in the marketplace. What are its attributes? Are there any negative features? Being realistic about both sides of the coin is important in terms of setting and maintaining market rents for your building, and is essential in driving value.
Preparing a market survey, which is a subjective comparison of your building's pros and cons vs. the pros and cons of competitors in the marketplace, is the next step. The focus here is to be able to set your building's rents and to determine which values or features a tenant would pay more or less for at your building vs. your competition. Woodinville, WA-based Consultant Richard Muhlebach notes that "buildings lease at market rents, not pro-forma rents. Only by conducting a market survey can a building's position in the market, and its market rents, be determined."
How do you find the information you'll need to prepare or review a market survey? Ask. Developing a network of industry professionals who will answer your questions or point you to the best resources can prove invaluable. You may be surprised at the information you can glean from chatting with leasing agents, brokers, property managers, and appraisers.
According to John Combs, principal at Walnut Creek, CA-based RiverRock Real Estate Group Inc., a capable leasing team with a variety of skills can greatly help an owner accurately determine the position that his/her property occupies in the marketplace. He explains: "Today's listing broker or leasing agent is typically a team comprised of various skill sets, including marketing, graphics, analytical, and consultancy skills, in addition to negotiation abilities," he says. Muhlebach adds, "A market survey will provide indisputable data for the building owner. One of the critical components of an effective leasing program is educating the owner on the building's position in the market and its market rents."
Once you've prepared your market survey and arrived at rents, you're ready to roll. "Great brokers and leasing people know how to match tenants to buildings, navigating around each building's obstacles," Combs says.
To assist with this preparation, sample market survey forms are available through the Chicago-based Institute of Real Estate Management (IREM).
Understanding the Owner's Goals
As the old saying goes, "If you don't know where you're going, any road will take you there." It's vital for the leasing team to understand the building owner's strategy in order to develop the most effective leasing plan.
After the market survey has been prepared, the next step is to discuss the owner's plan for the property. To plan your discussion, consider asking the following questions:
- Is the property a short- or long-term hold? Is the property being sold or refinanced? The owner will likely want to ensure that occupancy levels are as high as possible prior to sale or refinance, and may be willing to change his/her rent levels, concessions, or other demands.
- What is the property's financial condition? If a building is in strong financial condition, the owner will be able to be more selective about which prospective tenants are chosen. Conversely, if the building's financial status is less promising, the owner may be more lenient regarding the tenants who are selected and which lease terms are negotiable.
- What is the property's occupancy level? While a building with a very high occupancy level is generally a good thing, it may also mean that rents should be re-evaluated and perhaps raised, depending on market conditions.
- What else is on the owner's agenda? Perhaps the owner is trying to gain a foothold in a certain marketplace, or with a certain property type or class. These factors can change the owner's willingness to accommodate tenant demands.
Combs notes: "Owners today face increasing financial pressures, and it takes a range of skills to drive the results needed. Owners have various constraints with each property: a shortage of cash for tenant improvements; holding out for higher face rates, but giving concessions; or the owner who needs cash flow and is willing to compromise on a tenant's creditworthiness."
The Art of Negotiating
It's easy to overlook the impact of strong negotiating skills in today's global business climate, especially in the leasing world. Weak or poor commercial lease negotiations can cost your company money. Successful negotiations take work.
Negotiating is all about relationships. Since it's often easier to reach a deal with someone you know, take time to build a relationship if at all possible. Other leasing managers, property managers, brokers, and professional groups, such as the Washington, D.C.-based Building Owners and Managers Association Intl. (BOMA) or IREM, can be great resources for networking and relationship building.
Experienced lease negotiators know that absolutely everything is negotiable. Good preparation enhances the likelihood of a successful outcome. Muhlebach notes that the best negotiators are well rounded, considering both monetary and non-monetary negotiations. "Poorly negotiated non-monetary lease provisions can rob cash flow and value from a building," he says.
Something else to remember: communicate, communicate, communicate. In our hyper-connected world, it's easy to overlook the fact that, sometimes, just a simple phone call or in-person meeting may do the trick. People are bombarded with such a barrage of information today, via e-mail and regular mail, that a simple conversation can be a welcome relief.
No successful lease deal can take place without a good understanding of how the three essential elements of information, time, and perception impact successful negotiations.
1. Information. You only have to peruse a few of the many publications available on the art of negotiating to know that information is often synonymous with power, and he/she who possesses it is often considered to have more control and to be in a better negotiating position. Arriving for a lease negotiation armed with the right information about the prospective space, market conditions and rates, and the landlord's hot buttons makes you a powerful negotiator because you can establish the expectations. At the very least, having information will allow you to begin the negotiation on a level playing field and maximize the value of your lease.
Surprises are usually not a good thing during lease negotiation; however, preparation is a great advantage. Another great advantage is understanding the perspective of the other side. Simply put, the landlord's perspective is almost directly opposite of the tenant's perspective. If you are sitting across the table from a prospective landlord, take time to find out about similar deals in the past and find out what made them successful. Make sure you understand current market conditions in your area (What kinds of base rents, increases, tenant-improvement allowances, base years, and special lease clauses are likely? Is the landlord a strong force or a relatively new one?).
Check your sources and take advantage of opportunities to gain additional information (Are you meeting with the decision-maker? What is his/her reputation?). Knowing your prospective landlord's must-haves in advance will allow you to better plan any concessions. Remember, the value of concessions to the other side is what matters.
2. Time. Remember, patience is a virtue. Even if the world is swirling around you and you think that Dorothy and Toto may actually land at your feet, take the time to assess your position and theirs before walking into the negotiation. Whose do you think is stronger, and why? Is there broker representation or a company representative?
By this point, you‘ve already planned your strategy. Now, it's time to focus on the goal. Understand your parameters and work them to your advantage.
3. Perception. Who exactly is the 800-pound gorilla? The 800-pound gorilla is whichever side has the most leverage, or the most perceived leverage. For example, you work for a strong national tenant (or landlord); the perceived leverage lies with you. Whether it's real or not doesn't always matter. Determine the following:
- A little bit about the person you'll be negotiating with, whether it's over the phone or in person.
- Who really has the authority and whether there might be a hidden agenda.
- Whether you're dealing with the decision-maker or not. When deal breakers come up, you'll know if you're dealing with someone who has the authority to say "yes."
5 Rules for Negotiating Leases
Follow these five rules and you'll enhance your ability to negotiate the best leases and maximize value.
1. Your plan says it all. Have one. Take the time and effort to plan your strategy. Understand what you need, and understand the market. Know what's competitive, and how far you can go to make the deal. Compare leases, plan concessions, and understand the financial aspects of the deal. If you don't have experience in negotiating or leasing, ask a senior member of your team to work with you through the LOI (Letter of Intent) process; try to sit in on a lease negotiation to observe and learn.
2. Do your homework. Make sure the playing field is level. Arrive prepared for your meeting or conference call. Understand the demographics, the building, and the marketplace. Your opponent at the negotiating table will have likely done his/her homework and will have the benefit of competitive market surveys. "Comp" surveys will help you understand the subjective and objective advantages of each property. If you have an ongoing relationship with a local brokerage firm, you may be able to obtain a relevant comparison survey from them. Appraisers are another good source of market information, or you can prepare your own comparison to be sure you have everything you need. Research, research, research.
3. Know your parameters. It sounds simple, but understand your lease. If you end up using your landlord's/tenant's lease, take time to read and understand theirs. Next, be sure to consider, complement, and align with your corporate goals. You must have an excellent working knowledge of your company's (or the owner's) goals and objectives to achieve the best result. Check and coordinate with various departments, especially if you're doing business internationally.
4. Be patient. This can be difficult when time is at a premium and everyone around you is pressuring you to get the deal done. Negotiating is the one time when patience is truly a virtue.
5. Know when to fold ‘em. Of course, the goal is to end up with a win-win agreement for both parties. But, like the Kenny Rogers song says, you've got to know when to walk away. Sometimes, deals just don't work out as planned. If you've planned your deal breakers, you'll be ready for this part.
Common Negotiating Mistakes
There are many reasons that leasing negotiations fail, but here are a few of the most common reasons:
Shannon Alter ([email protected]) is a real estate consultant based in Santa Ana, CA. As a member of IREM's national faculty and a certified property manager (CPM®), she teaches courses both nationally and internally for IREM and the American Management Association, and has taught "Introduction to Commercial Property Management" for California State University, Fullerton's Extended Education program.