Why going it alone is a great idea

January 27, 2014 By in Archives Tags: , , , , Leave a comment

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

January 17, 2014 By in Archives Tags: , , , , 1 Comment

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?

November 25, 2013 By in Archives Tags: , , , , , , Leave a comment

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

November 11, 2013 By in Archives Tags: , , ,

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.

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

October 31, 2013 By in Archives Tags: , , 23 Comments
Monty Hall - Lets Make A Deal

Monty Hall – Lets Make A Deal

As a consumer of real estate services, it’s in your best interest to understand what motivates your broker. If commercial real estate is a game played by brokers and developers, then it is important to know how they decide who is winning and who is losing.

While many brokers might tell you they have a fiduciary responsibility to you, incentives in the industry often work against your best interests. And it can be hard for brokers to resist the lure of larger fees, even if it hurts their client.

Brokers, for example, earn bigger commissions when you pay more in rent. This can translate into you signing on for more space than you need or paying a higher rate because your broker didn’t “go to the mat” against the landlord on your behalf. Why would she if it was not in her financial best interest?

People often choose their broker using the classic mix of commerce and camaraderie: They pick the guy they know from the country club because they see the broker service as a commodity and figure they’ll chose someone they know. But by doing so, they could be hurting their bottom line because brokers, by their very nature, respond strongly to incentives. And there are a lot of incentives at play when a commercial real estate deal is being transacted.

Consider this example, where a broker snagged a $21-million commission when Macy’s renewed their lease earlier this year:

The department store renewed 647,000 square-feet at 11 Penn Plaza in New York city in the first half of 2013. Their arrangement called for an effective rent in the high $40s and a lease term of 20 years. To figure out what commission might have been (and potential conflicts of interest), let’s calculate an example fee structure that is representative of one commonly in tenant representation assignments:

  • Assume fees paid by the landlord are as follows:

    • 4% for Years 1-10

    • 2% for years thereafter

  • Part I: 647,000 (square feet) x $49 (rent/sq. ft) x 10 years (term @ 4% commission) x 4% (commission)

  • Part II: 647,000 (square feet) x $49 (rent/sq. ft) x  10 years (term @ 2% commission) x (2%)

  • Sum up the two numbers from Part I and Part II

    • $12,681,200 + $6,340,600 = $19,021,800

It is important to note that commission structures range wildly from market to market. Regardless, that’s an incredibly large commission, almost enough to buy an entire office building!

If in the 12th hour Macy’s decided it wanted to secure a 10-year deal with options to renew instead of a 20-year deal, it would have cut the commission by nearly 30 percent–or $6.3 million.

Consider the following:

  • Negotiation Fatigue Syndrome: There have been many studies that show how fatigue, or simply wearing someone down, can weaken a broker’s resolve to fight for his client’s best interests. In the example above, how tenacious would the broker be, especially if the “victory” resulted in $6.3 million in his pocket?

  • Negotiations with strangers: You may feel that hiring a broker that performs only tenant representation is a good idea, but does he have a better relationship with the landlord that he has knows from deals in the past, or with you? There have been studies that demonstrate that common negotiation adversaries lead to faster deals – but they are far less creative.

How hard do you think the broker would have fought for those terms over the more lucrative ones?

As you can see, understanding how the broker is compensated can help you spot potential conflicts.

The good news is you don’t have to blindly accept what is offered as a “standard” commission arrangement–often 4 percent to 5 percent of the lease. With some understanding of the real estate process, you can structure your broker’s compensation based on your goals.

In our next blog, we’ll explain how you can move away from traditional agreements, and we’ll share examples of alternative fee structures that can better serve your needs and help boost your bottom line.

Space. The final frontier (trends in alternative workspace management)

September 16, 2013 By in Archives Tags: , , , ,
DM-Squirrelcagecubicles

Click to see Steven M. Johnson’s awesome workplace images!

Everyone in the development community is watching what large business is doing with their hoteling efforts. There has been discussion about this for 20 years, but the impact is not being felt.

Why? What qualifies as a job that is good to be “hoteled”. Wells Fargo and other companies have created a questionnaire that helps employees and managers determine if theirs is a job that may be better done from home. The questions asked are similar to the following:

  • Are you in a supportive role?
  • Determine if part of your value is as a mentor and organizational leader that is needed for office morale and client meetings.
  • What percentage of your time is away from the office?
  • Are you using equipment that is located in the office?
  • Is the work that you are doing secure and confidential?
  • How much paper shuffling is required to get your job done?
  • Are you consulting clients in the field?

When you think about it, much of the work that can be taken out of the office is pretty intuitive. But it is interesting to me that a questionnaire is created as a way to help decide if an employee who wants to work from home is allowed to do so. It is management 101 to establish guidelines that are practical for all to follow, but I can see the conversation now: “I am sorry Mr. Janitor Assistant Manager, you job is too secure, encrypted and paper process critical to have you clean the office from your south Charlotte home.

However, we will reconsider the issue with you again at next year’s review.” I can see why others want to work from home. Here is what Bank of America has discovered with their “mobility program”:

  • It is saving a ton of space. The current ratio of B of A employees who are working remotely is 1:19. Assuming that the bank has nearly 90,000 employees, that is 18,000 B of A employees who are working in their pajamas.
  • It is green! Really, it saves LOTS of cash to lend to small businesses. The initiative has sustainability written all over it. With the time saved commuting, and being flexible to work around other priorities, the Bank estimates that it has, “given 9 million hours back to its employees.” And you know what that means, a lot more time for Facebook!
  • I want to work from home for Bank of America!

This initiative has to result in happier employees, higher job retention and overall increased efficiency and production. Does anyone know how the office real estate development industry is responding to this? I got one developer on his cell phone (he was working from his home). He loves the idea.

How the little guy gets duped in commercial real estate deals

September 8, 2013 By in Archives

2010-04-26 19.25.44There is a very specific kind of client who gets duped in commercial real estate deals. And it’s not Bank of America or any other large corporation.  Any company that’s big enough to have its own in-house real estate department is generally savvy enough and commands enough business to dictate its own terms to the brokers.

It’s the mature, small and mid-sized company with very specific real estate needs, where a single CFO or COO is tasked with figuring out the space problem (often in addition to staying on top of the books or coming up with an operational efficiency strategy). It’s a family office or family-owned business. It’s the growth-stage business that thinks it might needs to increase office space by 10x over the next three years, but with some flexibility to ramp up or down, depending on what the company’s growth looks like.

These are companies with complicated needs and executives who want a real estate solution but don’t have time to become experts in the field.  Facility costs often are the largest or second largest asset on the books, but (perhaps because it is everywhere) real estate is easy to take for granted. And managing a real estate transaction can be a nightmare, with a multitude of stakeholders, including employees, customers, investors, regulators and neighbors.

These companies — probably your company, if you’ve read this far — need brokers who will:

  • Clearly define expectations: The best of the new breed of brokers work with their clients at the outset of a process to define goals, then adjust as the objectives inevitably shift.
  • Agree to be “partners”: The client has to agree to share key information about facilities, business strategy and functions, and IT. The agent-advocate’s focus must be not just on fees, but also on long-term goals like facility flexibility, cost reductions and employee satisfaction.
  • Structure a tailored process: Like you, I hate checklists. They run entirely against my intuitive DNA. However, the reality is that a good checklist keeps you from making common, stupid mistakes. They free you from the worry that you might be forgetting something, allowing you to think creatively and make decisions with confidence.
  • Define key criteria and analytics: These become the basis for making a final decision in a transaction.
  • Manage the transaction: A well-run process will hit all key transactional benchmarks on the way to a streamlined, efficient close.
  • Behave like an agent-advocate: The solution to the traditional agency problem lies in linking the agent’s fee to the long-term success of the transaction. Long-term is the key word here: Do you want to hire a broker who is looking for short-term gains? Or do you want to find the agent-advocate who is focused on long-term relationships?

Today’s best brokers thrive on working with people to provide clarity to complex real estate transactions. These brokers put money where our mouth is and use innovative consulting tools to provide an experience to our clients that they say they actually enjoy. You will be comfortable having them report to someone in the company’s C suite. These men and women are trusted advisors and the transactions they thrive in are almost always complex and involve some element of consulting. Rarely is there demand for the broker for an off-the-shelf, “just get it closed in a hurry” deal.

Is there too much sharing online?

August 31, 2013 By in Archives

ImageBack at the beginning of my career, commercial real estate brokers still played a critical role as keepers and guardians of valuable market information.  The best brokers knew — whether in their head or in well-kept files — where the available space was in a given market, who controlled it and what general terms the market would bear.

The Internet and the age of Big Data have changed all that forever. The same tools that allow homebuyers to sort online residential real estate databases and see what every person on a block or in a neighborhood paid for their home and when they paid it — a reality that has fundamentally altered the role of the residential broker — are widely available in the commercial real estate world. The commoditization of market data on the Internet threatens to mercilessly disintermediate the traditional broker, who is no longer the keeper of the keys to the kingdom.

These days, any traditional broker who describes their primary role in a transaction as “knowing the market” is irrelevant. In an age of Information Overload, the broker’s primary function has shifted from being a broker/”market maker” to serving as a client’s advocate and guide through a complex transaction, with a laser focus on providing wise counsel. This new-style broker – what I describe as an “agent-advocate” – clarifies a client’s needs and advocates relentlessly on behalf of the client all the way through a transaction. When an agent advocate is compensated at the end of a transaction, they are being paid for their ability to provide clarity to a complex transaction.

This won’t win me any industry Broker of the Year awards, but the reality is that traditional commercial real estate brokers share a set of traits that are particularly unhelpful for clients in the current environment. Here is my list of the most obvious problems in the commercial real estate brokerage game:

  • The classic “agency problem”: Traditional brokers operate under a compensation structure that motivates them to operate in their own best interest — not that of their client. I refer to brokers who are willing to sacrifice their near-term self-interest to benefit their client’s best interest (with the knowledge of earning a fee, obtaining a referral, and future reciprocity) as “agent-advocates.”
  • Trusting their intuition: Traditional brokers are not analytical or data-focused. With a flood tide of data washing over them, few traditional brokers have the interest or skills to analyze the numbers and objectively interpret how they can be put to work on behalf of clients. Like the traditional baseball scouts in “Moneyball,” determined to keep making gut-level decisions based on what their eyes tell them, they’re being left behind.
  • The rugged individualist: Years of working in an “eat what you kill” environment has conditioned traditional brokers to operate as lone wolves. Such a broker struggles to assemble a team that can bring diverse skills to bear on a complex transaction, including something as simple as involving brokers in other markets where a client might need to lease space.
  • Lack of formal training: Professional development and skills training — which in most other industries would help professionals adapt to a changing environment — is almost non-existent in the industry (partly a function of the Lone Wolf Syndrome noted above). Commercial brokers do receive training from their State regulatory agencies, but most syllabus are targeted to residential brokers who work with first-time home buyers.
  • “Slamming deals”: Compensation structures and the nature of the industry motivate brokers to close deals as quickly as possible. That leaves little room for creative solutions, application of detailed problem-solving processes and proper due diligence.

To me, traditional brokering is an unrewarding profession. Clients are understandably suspicious of their brokers; many of them believe their broker is overcompensated for driving little, if any, value in the deal process.

There are ways around the agency problems and there are many modern brokers who take pride in being agent-advocates for their clients. See the posts below about how to hire a broker and the next post to the Strategic Tenant Advocate™ to gain tips on the right team to put in place to solve any real estate decision with which you are faced.

Lease Renewals: 7 Surprises to Avoid

July 8, 2013 By in Archives

Five years ago, few anticipated that the commercial real estate market would collapse. In some markets rental rates dropped by more than 25%. It is a good idea to review your lease renewal rights to make sure you have an equitable deal and to avoid surprises at renewal time.

Your landlord will be aware that the market has improved, but are you prepared to get the best deal possible? Having a specific real estate negotiation strategy for when a lease is up can provide a way to facilitate successful negotiations that will give you a lot of confidence when trying to get consensus with your team.

Here are 7 tips to avoid surprises at lease renewal time. Watch the video to learn tips and ensure that the negotiation process goes smoothly.

  1. The lease critical dates “gotchas”: Know your lease’s renewal language 18 months in advance. Often leases have to be renewed with a 12-month notice. Establish ticklers for critical dates and discuss your options with your broker and attorney.
  2. Your new neighbor negotiated a better deal than you did: Collect recent market comparables and know what the new tenants nearby are paying in rent. The past three years have been a tenant’s market and your new neighbor likely won concessions related to lease term, free rent, improvement allowances and sublet flexibility.
  3. Changing trends in office space requirements: What functional elements will you need in the space three or five years from now? Office trends have changed a lot – consider hiring a space planner to help you understand your future critical needs.
  4. You will find that it is a volatile market out there: Issue a detailed RFP to other landlords, and to your current landlord. Always get two or three other proposals from competing properties, and then perform a discounted cash flow analysis—you will be surprised at what you learn.
  5. Your landlord has a plan for your renewal that is a lot different than yours: Develop a negotiation strategy before contacting your landlord about your intent to consider other options.
  6. The renewal provision in your lease is a lot different than the deal you will ultimately negotiate: If you have a renewal option in your lease, decide if you are going to accept it or challenge it.

LUCKY YOU! Number Seven. Your team will have unrealistic expectations about the value you can claim at lease renewal time. I suggest that you first work with your team to reach conclusions on your optimum real estate negotiation strategy in terms of what you want in relation to the length of the lease, rental rates, responsibility for repairs and maintenance, and sublet options. Having this set in your mind prior to negotiation will help you maintain your position during the negotiation.

7 Good Ways to Terminate Your Lease

July 1, 2013 By in Archives

arrivederci'One of the biggest issues in all of lease negotiations are termination options. Tenants want them, landlords fear them, and brokers don’t want to have anything at all to do with them. The reasons why are based in common sense.

•                Tenants want the option to terminate their lease agreement at any time and are willing to pay a lot of money to exercise the option. Still, it’s not something that’s commonly agreed to by landlords, and commercial real estate agents resist them.

•                Landlords view a lease termination option in a wholly negative light and are frequently resistant to negotiate this into the terms, even if it results in a deal killer. Often a landlord is between a rock and a hard place. The landlord’s lender gets to approve any substantial lease, and if there is a provision that will affect the landlord’s ability to pay its mortgage, the lender will likely not approve the lease.

•                Traditional commercial real estate agents see negotiating the ability for a tenant to terminate a lease agreement as counterproductive to their personal goals of earning a living. Working a termination option into a lease can have a significant negative impact on the commission of a broker, as it can impact the fees they earn by as much as half.

So what does a tenant have to do in order to gain the option to terminate their lease agreement?

  1. The tenant can pay for their own improvements and for their broker’s fee. After all, if the tenant can terminate the lease before the landlord can break even, the landlord would be making a very bad deal.
  2. The tenant can offer to give ample notice of their intent to terminate, which will allow the landlord to find a replacement tenant. Common termination notices provisions range from 6 to 12 months. However, they can be up to 18 months. We have also seen where the option period opens and closes during a short period of time, a trick that the landlord will use to catch a sleepy lease administrator off guard.
  3. The tenant can offer to pay the landlord’s unamortized expense of doing the deal. In this instance, the landlord might send a check to the landlord at the time that they exercise their termination right in the amount of the sum of the unamortized brokerage commissions and tenant improvement allowance. Sometimes tenants will include any free rent that they may have received in the calculation of the unamortized deal costs.
  4. The tenant can pay a fee that is equal to some number of months of rent. This is typically designed to reimburse the landlord while the space is empty.
  5. A combination of some, or all of, the above. In landlord-friendly markets, getting a termination is tough. The tenant may agree to pay the landlord for its unamortized deal costs, provide 12 months advance notice (but only during the week prior to), pay six months of rent, reimburse the landlord for the free rent the tenant received and the right completely goes away if the tenant is ever in default (or more than 1 day late with its rent).
  6. If you are in dire straights, look at the tenant default, bankruptcy and mitigation sections of your lease – then talk to a good attorney. Each different, but you may find that your state will force the landlord to mitigate the lease burden if you can’t pay the rent.
  7. Short of hoping against all hope, tenants have to align themselves with a commercial real estate brokerage that pays their agents based on performance. Although finding such an organization can be on a par with finding the Holy Grail or hunting down Bigfoot, there are tenants who have been able to accomplish this task. As a result, they’ve emerged from negotiations with a renewed perspective on what the relationship between tenant, landlord, and commercial real estate broker can be about, and what they can result in: a mutually beneficial solution for everyone involved.