What kind of landlord do you have?

I 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.