I remember reading somewhere that John Wooden never specifically prepared to face an opponent, instead focusing on the fundamentals of his team. While I certainly can’t argue with John Wooden’s results, sometimes it’s worth considering what the competition is doing in order to ensure that you’re not falling behind.
I was speaking with a client the other day and we were comparing their lease costs as a percentage of SG&A expense versus other companies in the sector. My client’s ratio was significantly higher than his competition and I suggested exploring why that would be so. Perhaps it was just an anomaly. But perhaps they were spending more than necessary on facility costs. We both understood quickly that increasing real estate savings was a quick way to free up capital and re-invest in the company.
Identifying an opportunity for savings is the easy part. Looking for answers is where it gets a little more challenging. It requires understanding where the competition is located, what kind of buildings they occupy, and how their overall setup is configured. This is the heavy lifting of the project but can reveal how best to move forward.
One of the biggest pieces of a real estate broker’s job is helping to negotiate the business terms that will be the basis for a lease. These are items like rental rate, lease term, improvement allowance, timing, security deposit, etc. The list goes on, and my typical proposal document can stretch beyond five pages.
Prioritizing your focus is the secret to juggling all of these items and coming away with an acceptable deal. It’s easy to say “everything is equally important,” but that’s not really true. Business strategy actually dictates what’s of primary importance.
A few examples:
Changing Product Lines: I had a client that wasn’t sure about the direction of their business over the next five years. When doing their analysis, there may be a shift in product lines, services, and geography. So while securing a low rental rate was important, flexibility and a short term lease was the priority. We structured a short term lease with multiple extension options.
Status Quo: I had another client that handles mostly contracts with public/government entities. They are confident their business would remain stable for the next decade and wanted to achieve the lowest possible rate to maximize margins. We secured a below-market rate for a decade, ensuring predictable below-market lease costs.
Acquisition Target: A client that was marketing themselves for a merger negotiated generous assignment rights to ensure that if they did get acquired, the previous owners would not get left with the lease obligation.
These are just a few examples, and each situation is different. It’s easy to say “We want everything,” but the landlord has priorities as well. If you can articulate your priorities and employ some give-and-take, there is a better chance for a successful negotiation that both the tenant and landlord will be satisfied with going forward.
I was asked by a prospective client why they should hire a broker… They felt there was a compelling case for going it alone:
- They were renewing in place and had a renewal option in their lease.
- They had a good relationship with the landlord and didn’t want to rock the boat.
- The landlord would be less flexible with the rate because he had to pay a fee.
Fair enough… I understand each of these arguments. But when unpacking them, I explained why involving a broker would add value and negate each of these objections.
A broker will help with price discovery to establish a fair rate. The renewal option in your lease reads: “the greater of ‘fair market’ or the ‘then escalated rate.’” Few leases are actually at market when they get escalated through a lease term. Activating the renewal will result in a rate that is higher than market. And why should the tenant pay more than what the market will bear?
Brokers act as buffers, ensuring that the principals are both satisfied at the end of the transaction. Every tenant should have a good relationship with their landlord. But sometimes tempers flare and egos get bruised during negotiations. Everybody wants to believe that cooler heads will prevail and that everyone will be reasonable. But that’s why the lease is in place to begin with…
You’re probably missing something that will more than offset the broker’s fee. The broker understands some of the nuances that you may miss. Items like the base year, tenant improvement allowances, and free rent may be available to you. The landlord isn’t offering these up, but odds are that they will more than offset the broker’s fee.
Someone is getting paid! You might as well make them earn it! If you used a broker to find that building the first time, he’s going to get paid on the renewal even if he’s not involved. His commission agreement with the landlord says so. You have the right to hire another firm, but either way, someone is getting paid.
Feel free to go it alone with the landlord. But understand that the landlord negotiates a lot more leases than you do. And without expertise and the ability to execute price discovery, chances are the landlord is doing better than you think.