Are you leaving money on the table?

Photo Courtesy: Mark Matcho

Photo Courtesy: Mark Matcho

How much money are your leaving on the table in your real estate transaction? Commercial real estate industry information indicates that a savings of 10-20% of total facility expense can be achieved through better lease management and process orientation. That percentage adds up to a serious amount, and could have a direct effect on your bottom line. As commercial real estate becomes increasingly complex, those with little experience should not try to solve their real estate solutions without considering the help of a real estate professional that can provide you with the proper tools and processes. Having the right tools and processes is a Win-Win; saving the company money and taking stress out of the transaction.

Having the right systems in place is so important that 57% of executives said that they may be leaving money on the table by having inadequate real estate processes and controls. This statistic came from a survey performed on non-commercial real estate executives about the areas of real estate that are the most confusing, problem inducing, and mismanaged (p. 22, Survey performed by Cardinal Real Estate Partners; link to survey). The purpose was to uncover the issues executives were facing and to identify what tools were readily available to aid in providing clarity to complex real estate situations. Given this high percentage of executives that agree that there are ways to improve the processes by which they handle their real estate it is clear to see that you as well could benefit from being well prepared.

Preparing for your real estate needs does not require a degree from an ivy league school, but it does require that you seek out the right team as well as resources leading up to your transaction. Interestingly enough, according to the survey mentioned above, 55% of all respondents do not go to brokers to receive most of their commercial real estate advice (p. 21). So why is it that those in the C-Suite have such distrust for commercial real estate brokers? The survey states that the majority believe that the broker offers support but not as much as the company leader desired or expected.

The best way to get your broker to offer support continually throughout the entire transaction is to set up the agreement that aligns your interest with yours. One that aligns their fee with your opinion on the outcome of your transaction. This “fees-at-risk” method is generally reserved for larger clients (i.e. Bank of America), but remember no commission percentages are set in stone, as per the rules set forth by the real estate commission.

Lease Negotiations: Leave the Gloves off and Come together

Leave the Gloves off

Leave the Gloves off

When preparing for lease negotiations, leave the gloves at home, roll up your sleeves, and take the positive offense approach. Consider the following steps to keep lease negotiations on an even playing field that produces the best results for both sides.

1. Write down what you want to achieve from the negotiation, including the financial and non-financial objectives. Know the few points that you are going to have to go to the mat for, and be open with the other side if they are giving you something that has little value to you.

For example, if you are considering a lease decide if getting a lot of free rent is more important than an increase in tenant improvement dollars. Tenant representative brokers have models that can give an objective analysis.

2. List your strong and vulnerable points so that you can be prepared to leverage or hone these to your advantage during the lease negotiation process. Taking stock of your strong points will help to keep them front and center when it comes time to step into the arena of negotiations. Keeping track of your vulnerable points will also help you to maintain your balance so that any conversation coming from the other side that attempts to highlight those point will be met with a well prepared strategy.

For example, if you are not considering to move for the right deal, you have little leverage with your landlord at the time of lease renewal. Take inventory of other tenants in the building and learn about what terms the new tenants are paying.

3. Conduct research to gauge competing properties. Being well prepared for any negotiation is to have a solid second (or third) alternative – then make a list of what would have to happen to make them your top choice. It is that type of confidence that will result in a “win”.

As an example, think about any purchase that you make online, whether it be something as small as a book, collecting data from different online vendors can aid in saving you money when it comes to making the final purchase.

4. Rely on a strong team to support you during the negotiation process. Having agents to speak on your behalf allows you to proceed knowing you have a team with specific knowledge in your corner. When choosing an agent, ask how their representation process yields results. Also, ask the agent what tactics do they have up their sleeve to effectively advocating on your behalf.

Download Prepared to Win/Win Worksheet and find out how other blog subscribers are effectively using this simple form to get what they want.

Some other great articles to read:

How standard commission agreements work for the broker but not always for the client – Part I

The allowance that disappeared – where did it go?

Image Credits: Gorilla & Kangaroo Boxer

7 Questions to ask your future landlord

There are 7 questions that a tenant can ask to get a feel for the success of their next real estate deal, yet rarely are any of them asked! The tenant and landlord’s dance through the proposal process is one that is contained to RFP (Request for Proposal) responses and the agents negotiating terms on behalf of the principals. Often, once the lease is signed, it is the first time that a tenant actually meets his landlord. That is one hell of an arranged marriage!

During the great recession, the world for landlords was turned upside down. As a result, form leases that had not been rewritten in 20 years had now been completely overhauled. Leases are much longer now than they used to be and the time and cost to negotiate and approve the documents has increased considerably. In”25 Years of Commercial Leasing: What a Long Strange, Cyclical Trip it has been,” a group of commercial lease transaction lawyers in California point out this new complication.

Page 12 of the article states, “The 10 years preceding the birth of the Real Property Law Section, the State Bar of California saw commercial leases expand from a typical six-page office lease, manually typed with carbon paper, to a 30-page lease with a dramatically increased focus on detail and an attempt to alleviate the unknowns and “what ifs.”  After further review, the article goes on to detail how landlords have shifted to having an attorney on retainer draft leases that are more and more complex as a form of protection from certain issues that may arise with the tenant long after the lease has been signed.

After examining the above text, it would appear that the best landlord tenant relationship is one where the lease is negotiated, then put away, and never pulled-out again. But to have such a relationship with your landlord, you must have a great amount of trust. In Dr. Stephen Covey’s book, Speed of Trust, he addresses this type of trust:

“When trust goes up, speed will also go up and cost will go down.”

The inverse is also true.

“When trust goes down, speed will go down and costs will go up.”

In an industry that is primarily concerned about being faster, bigger, and cheaper, trust is a critical component to any landlord/tenant relationship. But when decisions are made based upon responses to RFPs, how does a tenant know if they are entering into a relationship with a good guy? We suggest that you preface all of your RFPs to your future landlord with the following statement and ask these 7 questions.

First, clarify your expectations by making this statement. “Smoots, Tannerbottom and Felderhosen PLLC envisions a “collaborative/partnership” during the negotiation, upfit, and occupancy of its new office. Please provide the following information with that in mind.

1. Assume that it is three years from now, the tenant chose your building, negotiated a lease, performed tenant improvements and has been a tenant for over two years, and you are looking back over the last three years, what would have to happen for the landlord to feel good about your progress? This is the greatest of all open-ended questions. You will know if the respondent is serious about having you as a tenant as well as their plan for you as their tenant.

2. Please describe the ownership structure of “respondent” and the key personnel who would be involved in the negotiation of agreements and the completion of the project. This question addresses the issue of how they will deliver results and keep commitments.

3. Provide examples of comparable projects completed by “respondent”. This question will give you insight into not only their capability, but also their humility.

4. Confirm that “respondent” be willing to work on an “open book” basis with agreed return criteria at the outset. This gets right to the issue of landlord transparency.

5. Please indicate how respondent expects to access and utilize capital to complete the project (including expansion). Anyone in the debt market knows the value of understanding a landlord’s access to capital.

6. Demonstrate financial capability to complete this project. All landlords had a tough time during the great recession, therefore the respondent should have a very clear idea of how they are going to answer this question.

7. Please share your vision for the neighborhood in which your site is located. I like this question because a landlord who knows and cares about the neighborhood in which it is located, is socially conscious and cares about the relationships with its tenants. Also, this is a great question to raise awareness on soft issues such as transportation, proposed access improvements, crime statistics, and the availability of nearby workforce housing.

 

Why going it alone is a great idea

Atlas Statue at Rockefeller CenterIf the alternative is to have someone with little to no commercial real estate experience manage a transaction, going at it alone is a great idea. Just as many of us would never dream of diagnosing and attempting to treat a medical condition on our own without consulting a doctor, buying or leasing commercial property without the insight of an expert in the field can prove to be equally disastrous.

In a 2009 article by the Harvard Business Review, “What every leader should know about real estate” the author, Mahlon Apgar IV, points out that real estate is taken for granted by company managers and that the most efficient companies team with real estate service providers. The decisions that surround commercial real estate are complex and time-consuming. Often executives do not understand all that is involved, so the decision is then delegated to inexperienced managers. Apgar points out that real estate is generally taken for granted by those managers and that the wisest companies decide to team up with real estate service firms that have salaried professionals or “relationship executives”. These “relationship executives” salaries are not maximized entirely on the size on the transaction but also on the satisfaction of the client. Therefore aligning the incentive of the real estate professional with that of their clients.

Here at The Strategic Tenant Advocate, we contend that such delegation of important real estate issues should be avoided. Whether you’re just now beginning in the real estate game, or you already have a bevy of transactions under your belt, there are quite a few reasons why going it alone is a great idea, if you are prepared and experienced.

  • There’s little room for instinct or rookies in a commercial real estate deal. As many before us have proved – and many more after us surely will continue to prove – making high-dollar decisions based on nothing more than your gut is the equivalent of taking an uneducated stab in the dark. When it works out, it’s dumb luck. When it doesn’t, it’s just dumb.
  • Real estate intelligence is contingent upon information that you likely aren’t privy to, or that you might not maximize even if you were. Having great real estate IQ involves not only being on the pulse of the market, but also having the ability to plan for your needs in the future, understand your alternatives, asking the tough questions from the others involved in the transaction, and ability to come-up with creative solutions.
  • By trying to master the ins and outs of commercial real estate on your own, you run the risk of becoming the archetypal jack of all trades and the master of none. Commercial real estate is a full-time job that leaves little room for other pursuits. Pursuits such as the primary duty of running your company.

We have found that working with a capable, qualified real estate broker can save up to 15% on your facility costs and is your best bet to making the kind of sound decisions that will make you look incredibly smart.

Signing a Lease? 7 Things to Expect from Potential Landlord

Often, tenants are unsure of the items that a potential landlord may be looking for. The below list should help you get prepared.

1)   Rental Application. Every landlord will require a tenant to complete a comprehensive rental application. Landlords need to understand whom they are leasing to. Landlords will need to run a credit check to verify the tenant is in good credit standing with other credit agencies, because in reality the landlord is lending you the space for a period of time. All landlords should run a credit check in order to protect their investment.

2)   Two Years of Tax Returns, Income statements, and Balance Sheets. Many landlords want to see the past history of a tenant. This can only be done by looking at the tenant’s past income statements and balance sheets and compare those with what was given to the Internal Revenue Service – also known as their tax return.

3) Current Financial Statements. Landlords will also want to review the “most up to date” balance sheet and income statement of a client to make sure the tenant is performing in an acceptable matter.

4) Articles of Incorporation. Landlords would want to see the Articles of Incorporation should the company be incorporated. The landlord wants to make sure it is a viable entity and can enter into a lease.

5)  A visit from your landlord to your current property. Many landlords like to swing by a client current office to get an idea of how he or she might treat the property. It’s important to make sure the tenant’s “current” property is in a neat and tidy fashion in order to give the landlord the necessary comfort level that you will take care of his or her property as well.

6) Potential references. Some landlords will require references should the company financial not be as strong as they would like them to be. If you are unable to provide references, this might be considered a potential red flag to the new landlord.

7)  Conversation with your current landlord. Many landlords will contact your current landlord to verify your payment history. This can be a tricky situation because if your current landlord would prefer you out of “his” property, he or she may provide inaccurate information. Most landlords complete their due diligence before entering into a lease. Landlords would prefer to have a tenant that they feel comfortable with, than to sign a lease with a tenant who could be a potential nightmare for years to come. As a tenant, it is important to live up to your obligations when you say you will live up to them.

I heard of a story where a tenant and landlord come to an agreement and the next step was for the landlord to cash the tenant first month rent and security deposit. The tenant kept stalling and asking the landlord to wait until some specific contingency had expired; the tenant kept moving the date where the landlord could cash the check, which inevitably frustrated the landlord enough to where he canceled the lease. The tenant was in a world of hurt after that circumstance. We believe the reason the tenant did not want the check cashed was that the company was cash poor until a specific date, however no one ever confided in the landlord to tell him the real situation and because of that lack of communication, the company lost the space which dramatically affected its future business operations.

Being prepared and knowing what to expect will greatly speed up the negotiations and everyone will win.

“Signing a Lease? 7 Things to Expect from Potential Landlord” is original content from Mr. Randy Mason, CCIM, SIOR of Commercial Realty Specialists and was posted in the Commercial Property Executive on January 15, 2014.. The Strategic Tenant Advocate has permission to use the article.

Mr. Mason is the Managing Partner for Commercial Realty Specialists. With more than twenty-six years of real estate brokerage experience, Mr. Mason specializes in leasing and selling of office and industrial properties throughout the Orange county Marketplace. He specializes in representing the tenant and buyer side of the transaction, which has allowed him to focus on his client’s needs by being their fiduciary.

Please check out Mr. Mason’s website by clicking HERE.

The allowance that disappeared – where did it go?


Say you’ve found the perfect office space and are ready to commit to a lease.

When it comes time to negotiate tenant improvements, however, you’ll need to pay close attention and have sage counsel at hand because tenant improvements–including how much and who pays for them–can be the most important part of the deal.

When a tenant moves into new space, it’s common for improvements to be done to make the space fit the new user’s unique needs. Tenant improvements can range from new paint and fresh carpet to knocking out walls to building out a shell.

But exactly how this work is done, such as who hires the contractor and how the money can be spent, can have a huge impact on how good a deal you ultimately secure with your lease.

Savvy tenants often want to do the work themselves so they can control the quality and be assured their tenant allowance is stretched as far as it can be. They also don’t want to lose sleep at night worrying about whether the landlord will pay bills for the contractor and architect when they come due.

The landlord, meanwhile, wants to keep the money and earn interest on it. They are motivated to control the build-out process and retain fees that cut into the money that goes to the contractor. Landlords also like to restrict what the money can be spent on, preferring it pay for changes that improve their property versus items such as furniture and cabling, which benefit the tenant.

Recently we were representing an advertising firm that was moving into a renovated, 1930s warehouse. The other tenants in the building were similar “creative” companies and my client was eager to make a deal. The landlord’s tenant improvement allowance offer was 25% above market, but during our due diligence our contractor found improvements needed to the sprinkler, HVAC and bathrooms to meet ADA requirements that would have used nearly 50% of our tenant improvement allowance. We were able to negotiate with the landlord to make the improvements at his cost, and the deal was made, but without the help of a good GC, the tenant would have spent the equivalent of 3 months rent on bringing the bathrooms up to ADA code!

Throughout the years, I’ve heard from tenants who became unhappy with their tenant improvement allowances after they signed their leases. They’d share with me how the number tossed out by their landlord sounded good at first but once construction bids were in they realized they didn’t get such a good deal after all.

A common horror story I heard after the economic downturn hit was how landlords refused to pay tenant improvement allowances, and even broker commissions, after a deal was cut. This can expose the tenant to expensive litigation. Some tenants also discovered that their space was missing critical systems that were promised (and should be standard) and they had to finish the job out of pocket.

Adding insult to injury, some tenants were shocked to learn that they couldn’t benefit from unspent portions of their tenant improvement allowance.

To avoid these disastrous scenarios, the tenant and landlord should agree during negotiations (before the lease is inked) on what the total cost of the project is and understand how much, if any, the tenant is expected to contribute.

The tenant should fight to make sure there are liberal and flexible provisions on what the tenant allowance can be spent on. Sometimes landlords will allow items such as cabling, depending on market conditions.

If the landlord is reimbursing the tenant for the construction, there should be periodic times (perhaps monthly) when the landlord pays the allowance. We recommend they pay early and often, ideally at least once a month. The landlord will push to pay less frequently.

Other caveats to include or watch for when the landlord is reimbursing the tenant for its construction:

– Landlords will insist on lien waivers before being paid. Make sure you protect yourself against minor contractors who could insist on not signing.

– Don’t let landlords withhold tenant improvement payment if the tenant is in default. If you default for a defensible reason, you don’t want the landlord stopping your construction.

– Decide with the landlord ahead of time on the form and substance of the requisition form that will be required.

– If the amount of work in a given month is less than the landlord feels is appropriate, don’t let them pay less. The tenant improvement reimbursement is a set amount, not one based on work progress.
Agreeing to a tenant improvement allowance is most definitely a buyer-beware situation. But with the right guidance, you can feel confident that the tenant improvement allowance that was negotiated for will be spent as promised. You’ll have confidence the landlord won’t disappear in the middle of the night with the cash and will instead escrow the funds in the event they are going to sell the building. And you’ll rest assured knowing that money will be available when the contractor is wanting to be paid.

How standard commission agreements work for the broker but not always for the client – Part II

Making sure your broker’s interests are aligned with yours

Considering the thousands of commercial real estate transactions that occur each day, you may find it surprising how much mystery remains around how broker fees are calculated.

Typically, a client leasing office space might be told by their broker that there’s a “standard” 4 percent to 5 percent commission based on the value of the lease. But it is important to note that despite what brokers say, there are no “standards” for establishing these fees – they should always be a point of discussion; however, they rarely are by commercial real estate laymen.

As we mentioned in the first part of this post, commissions often are paid in a way that is not aligned with the client’s best interest. Under the traditional model, for example, brokers earn more on larger deals (i.e. when the client pays more), which can result in the client being dissatisfied, paying extra in rent or leasing more space than they may want or need.

Real estate is ubiquitous and most people take it for granted, but there are deals happening in your market every hour. It’s hard to know how many commercial real estate transactions are done each year. But we know from their annual report that CBRE, the world’s largest brokerage firm, closed $189 billion in sales in 2012.

That’s a lot of clients who are paying fees or commissions. I would argue that often, especially in the instance of tenant representation, that the client does not entirely understand how the brokers are getting paid, and how the broker’s actions are effected by their compensation structure and the push to get revenue to the shareholders.

Think for a moment: Have you ever had a bad experience with a broker? What if that broker had only been paid if you were 100 percent satisfied, instead of earning a commission simply based on the deal’s value. Do you think the outcome would have been different?

In his book “Antifragile,” author Nassim Nicholas Taleb discusses this inherent conflict of interest (also known as “the agency problem”) from a slightly different perspective. To Taleb’s way of thinking, the problem with brokers is they don’t have “skin in the game” in the same way that their clients do. Like an unethical defense attorney who pressures clients to cut plea bargains to clear his overloaded docket, the influence exercised by a broker has a much greater impact on his client than on himself. It’s another way that misaligned interests do disservice to the client.

So, what to do?

If your are considering engaging a broker, you should inquire whether the broker is willing to consider an alternative arrangement that puts your interests in line with his or hers.

At Cardinal, for example, we tie our commission to meaningful indicators of the deal’s success. In essence, we put our fees at risk to ensure the best outcome for everyone involved. We are not the only firm that does this, the largest real estate service providers offer this paid for performance mechanism to their largest customers.

Using key performance indicators (KPI’s), we monitor how well the broker and the clients are achieving quantifiable objectives. We talk to the client, they tell us what’s important and we work toward that.

Our experience shows these customer-specific performance indicators motivate the broker and client to drive down costs and improve customer satisfaction. To learn more about this process, called the Value Creation Review Process(™), click here.

The bottom line: You are best served when you truly understand how your broker is earning their fee and whether their motivations are truly matched with yours. If you find or suspect they are not, then you should look elsewhere.