What kind of landlord do you have?

give to getI was just asked by an associate to help understand a little bit about a landlord that I’ve had some experience negotiating against. When considering how to approach lease negotiations, it’s important to know the type of landlord you have and their underlying motivation. We’ll go through a few common types of landlords that you’ll find in the market.

REIT/Institutional: These are defined by their ownership structure and desire to provide consistent cash flow to their shareholders, whether they are a pension fund, REIT stock holders, or other investors. That means there is tremendous focus on stable cash flow. Concessions such as free rent and construction allowances for the most part will be modest but rental rates will be competitive with other similar asset-class buildings. (Institutional owners such as insurance companies, pension funds, etc fit in this category.)

Merchant Builders: These landlords typically evolved from construction companies and almost became landlords by accident. They are interested in building projects either to suit a requirement or on a speculative basis. The advantage of working with them is that they know the construction and can complete projects quickly and cheaply. Just understand that they will sell the building shortly after the tenant occupies with little focus on how the building will be managed for the long term.

Private Equity/Value-Add: Private Equity or other investment groups that rely on aggressive debt structures purchase buildings with a lot of leverage and try to rapidly increase the value before selling. This is accomplished by taking vacant or under-occupied buildings and making improvements to the building, offering tenants tremendous up-front concessions in the form of free rent and fit-up allowances in exchange for rents that climb through the term of the lease.

Family Money: Properties have typically been owned by one family or group for generations fall into this category. There is little debt on the buildings and they primarily exist as assets to be passed down as part of an estate. Depending on the organizational philosophy, they may be aggressive deal makers or they may want to wait for the right tenant and terms.

Each landlord will structure a competitive deal in their own way, but understanding both your needs and the landlord’s motivations will help you negotiate an attractive lease.  While there are endless other ownership structures and landlords, this provides a pretty good picture of the general types of owners you will encounter as you explore the market. Your adviser should be able to provide some insight about each building under consideration as part of his services.

Don’t press “snooze” on your lease

ararmBy far, the most frequent objection I hear is, “We have plenty of time and don’t need your services.” With two years remaining on your lease and the perfect amount of available space for expansion, you probably don’t need my services.

But thinking that a real estate deal can get slapped together in three months is a mistake. Consider the following “musts” when negotiating a new lease.

1. Understanding the market. You can ignore this if you don’t care about getting a market sensitive rental rate and just plan on activating your lease’s renewal clause. But in reality, it’s going to take weeks to digest all of the available space and various options available to you.

2. Negotiating business terms. There are a whole host of items that should be negotiated and understood before the lease is drafted. There are the obvious items like rental rate and lease term, but also more esoteric items like expense pass-throughs, sublease rights, termination options, etc. Figure this will take at least a month when you consider internal discussions, committees, and waiting for landlord responses.

3. Lease review. Now is when the lawyers get involved. If you get lucky and hire effective counsel, he will work quickly on your behalf. But that’s only one part of the equation. The landlord’s attorney might not be so expeditious. I’ve seen overworked landlord attorneys take weeks to generate one round of comments. I would add another month.

4. Space planning and construction. If there is significant construction involved, an architect will have to draw up construction documents. This will take a few weeks. Then they have to be submitted to the building department for approval, another month to six weeks. Then the construction has to actually occur, another two to six weeks.

Even conservatively, I’ve just outlined a process that’s almost six months long. That assumes everyone works together, there are no crises in the middle, and nobody takes a vacation. In reality, it can take a lot longer. It doesn’t cost anything to start a little early. Starting late on the other hand can cost you quite a bit.

CRE vs Brokerage

CRE is “process”
Brokerage is “deals”

CRE is “corporate”
Brokerage is “street”

CRE is “global”
Brokerage is “local”

CRE is “methodical”
Brokerage is “speed”

CRE is “planning”
Brokerage is “execution”

CRE is “analytics”
Brokerage is “instincts”

 

While they get lumped together, I see corporate real estate services and brokerage as two different animals. I’ve done both in my career and in each time it has served the client well. It’s important for the service provider to understand their personal bias toward delivering one or the other (because it does exist) and then also understand what the client needs. 

How commute times impact productivity

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I recently finished a project for a headquarters operation and one of the major discussion points was how relocating would impact commute times and employees

As part of the site selection process, I was tasked with a completing a commuting study to determine the impact relocation would have on the employee base. We looked at where employees lived, traffic patterns, and alternative travel options. Upon final analysis, management determined that relocation was not in the best interest of the organization.

Relocating outside of the current geographic area may have promised a fresh start, but the cost to current employees would have been too great.

The management team’s instincts are backed up by research I saw a few years back.

From the HBR Daily Stat Blog“Workers with a 50 kilometer one-way commute can be expected to miss 15% more days from work, on average, than their colleagues who commute 10 kilometers[…]Commuting distance is usually assumed to affect only employees, not businesses, but the study shows that it also has a strong impact on absenteeism, the researchers say.”

From NPR “if you can cut an hour-long commute each way out of your life, it’s the [happiness] equivalent of making up an extra $40,000 a year if you’re at the $50- to $60,000 level.” 

Conducting a travel study can help understand where your employees are coming from, and what location will minimize commuting impacts across the employee base. A lease is a long-term commitment and mistakes during the site selection process can linger for years. Conversely, a site that is convenient for many employees may boost retention and loyalty, extending the tenure of star producers.

What’s your exit strategy?

???????????????????????????????Could there be a topic in the corporate real estate that is talked about less than an exit strategy?

As a broker that has been on the receiving end of more than a few, “We have to get out of our lease,” calls, I know that a little bit of planning will go a long way towards avoiding a major headache later. Here are three things to consider about an exit strategy when negotiating your lease.

1. Does your business plan horizon match your lease term? Don’t sign a 7 year lease if you only have a 3 year business plan! I have a client that only does 2 year subleases. His business is building up a piece of technology and selling it. He doesn’t want to get stuck with a long lease after the technology has been divested.

2. If you’re signing a long-term lease, negotiate a buyout at some point during the term. It might be expensive, but it’s better than carrying a lease to the natural maturity. I recently used a termination right to leverage an expansion option for a growing tenant.

3. Design the space to easily demise. If you’re taking a large block of space, make it easy to divide so you can sublease a portion or the whole thing. We just moved a financial services company into a full floor. We purpose-built the floor to accommodate demising just in case they didn’t meet their growth projections.