Archive for the 'Conflicts of interest in commercial real estate' Category



Dear Mr. Landlord: We Both Know You’d Rather Deal Directly with the Tenant! Part One

Q&A on Tenant Representation with a Commercial Landlord
Part One of a Three Part Post

Most commercial landlords understand the role of tenant representation brokers and welcome the benefits they derive when tenant representation brokers properly educate and advise their tenant clients.  However, some landlords, mostly old-school diehards, continue to maintain very negative views of all things about the tenant representation process.   Some actually get offended by the very idea of a tenant representation broker.   Offended!?  What’s that about?

In a recent Q&A conducted via email with a prominent commercial landlord, I had the opportunity to hold a completely frank and open discussion about his views about tenant representation brokers.  And, while some of the conversation was challenging at times, both of us came away having learned from each other.

I invited the commercial landlord to provide me with his views on tenant representation, tenant representatives, and how he’d prefer to conduct the business of leasing his properties.  The conversation got so good, that it took me three posts to include it all.  Be sure to read all three posts over the next three weeks!  Following is Part One that dialogue:

1. Landlord: I would prefer to deal directly with tenants and to apply my creative deal making abilities to solve their problems, without having to work through tenant representatives.

RealStrat’s Response: In a world where transparency, disclosure, conflict-of-interest, and Sarbanes-Oxley are commonplace, for all but a few companies, it would be next to impossible for them to rely on recommendations made by transactional opponents, without having the benefit of advice and representation from third-party advisors whose job would be to protect their interests.

Additionally, professional landlords recognize the benefits of dealing with tenants who have been educated as to market conditions and properly prepared by their advisers, especially when those tenants are organized, ready, and perhaps pre-approved to make a deal.

2. Landlord: I view tenant representatives as obstacles.

RealStrat’s Response: Guess what? That’s precisely why many tenants engage tenant representatives (also known as corporate advisors).  To state the obvious, landlords benefit from higher rents, lower allowances and incentives provided to tenants, and more square feet leased for longer terms.  Tenants benefit from lower rents, higher allowances and incentives provided by landlords, the right amount of square feet and a length of term that best supports their business objectives.  Given the opposing position between landlords and tenants,  tenants see one of the many important roles of their advisors is that of a knowledgeable gatekeeper, and at times, and somewhat of an obstacle to keep the landlord from going in the wrong direction.

3. Landlord: Tenant representatives make deals more complicated.

RealStrat’s Response: Many tenants have complex business requirements that demand creative solutions. When it comes to satisfying a tenant’s operational or financial objectives, keeping it simple…the right approach in many instances…may not always be possible.

4. Landlord: I don’t like paying commissions to brokers who don’t represent me and who negotiate against me.

RealStrat’s Response: That’s interesting, because actually, tenant representatives would prefer not to be paid by their clients’ opponents.  Receiving payment from a landlord when representing a tenant makes things very complicated for tenant representative brokers.  Few industries handle compensation in a manner similar to that of commercial real estate, where the tenant’s advisor is most often paid by the landlord, the tenant’s transactional opponent.  By changing industry compensation practices, this challenge could be eliminated.  Because it remains the norm, most tenants prefer that landlords bear this responsibility.  So, until that change occurs, landlords and tenant representatives are stuck with each other as it relates to compensation.

Stop by next week to read Part Two of this three-part post.


About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat at http://www.Twitter.com/RealStrat.

LINKS:

RealStrat News
Biographies
Articles
Properties
What Our Clients Say
AndrewZezas.com

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

###

Hire a Broker to Negotiate a Relocation, But Negotiate a Renewal On Your Own…You’re Kidding, Right?

Hire a broker to negotiate a relocation, but negotiate a renewal on your own?  That’s like hiring a dentist to work on only some of your teeth!  What benefit could you derive from that?

When a commercial tenant contemplates relocation or renewal, some landlords will suggest that the tenant engage a real estate advisor, but only to negotiate transactions outside of their current building.  In these instances, the landlord will typically recommend that landlord and tenant negotiate directly on a renewal or other in-place transaction.  This approach is designed to favor the landlord and removes from the tenant the benefit of expert advice and representation it would receive from an advisor on an in-place transaction.  Such an approach also changes the role of the advisor from an objective representative of the tenant, one who has no preference or incentive to sway the tenant toward any particular property or transaction (other than the one that best meets the tenant’s objectives), to that of a salesman who would only be compensated in the event the tenant elected to relocate.

Landlords will suggest that to preserve the relationship, landlord and tenant should negotiate directly.  That’s exactly why a tenant needs an advisor, so the tenant advisor can secure the terms to which the tenant is entitled and, at the same time,  preserve the tenant’s relationship…that is, if a relationship with the landlord is important. 

Other landlords will suggest that by negotiating directly, the landlord won’t have to compensate a tenant advisor, so the tenant’s occupancy costs will be reduced.    Not quite!  In fact, an advisor’s role is to drive down the tenant’s occupancy costs, despite the fact that a commission would be paid.

If the tenant agreed to deal with its existing landlord directly, such action would telegraph to the landlord that the tenant really planed on staying in the landlord’s building.  It would stack the odds in favor of the current landlord and eliminate most, if not all, of the constraints and pressure placed on the landlord through a competitive bidding process.  Moreover, the tenant would lose the objectivity it would otherwise derive by engaging an advisor to provide counsel and to protect its interests across all transactions.

In fact, the presence of a tenant advisor actually benefits the landlord while serving the tenant’s needs.  A knowledgeable advisor, objectively evaluating the implications to the tenant of all alternative transactions, including those  proposed by an existing landlord, could more appropriately guide the landlord as to how to make a deal with the tenant.

Do most tenants engage real estate advisors only to negotiate  relocation transactions, while negotiating on their own with their current landlords?  Not really.  Frankly, if a commercial tenant has the know-how, time, resources, and inclination to negotiate a transaction without an advisor, then it should do that for all transactions, whether relocation or renewal.  Otherwise, if the tenant elects to engage an advisor at all, it should give serious consideration to engaging that advisor across all transactions it may consider, to ensure continuity and objectivity, and to secure the optimal terms, wherever the tenant elects to land.

About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit

Acquire new ideas about commercial real estate at RealStrat’s blog at http://www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

Passive Real Estate Brokers…Striving for Mediocrity

Considering the current challenges in the global economy and the commercial real estate marketplace, it is amazing that a few brokers continue to take a laid-back and nonchalant attitude toward their business, their clients, and their potential customers.  

While this type of attitude may exist across all segments of the commercial real estate industry, and other industries for that matter, I have most recently experienced this confusing approach with a handful of landlord representatives.  Even more disturbing is the adversarial used car salesman-like tactics I continue to see proffered by some low-rent brokers.

These brokers even use terms that support their largess on their path to mediocrity.  They “show” their landlords’ properties.  Showing anything to another person basically says: “Here it is, see for yourself.”  Showing something only permits a view of what’s on the surface. That’s exactly the problem.  Showing property won’t accomplish anyone’s objective in an over-supplied commercial real estate market!  The most successful brokers I’ve met, those who represent either landlords or tenants, understand that not merely showing a property but, presenting it in its best light, and providing insight as to both its attributes and its short-comings is the optimal approach to inspiring a potential tenant to consider it as a possible future corporate home.

Interestingly, I have found more passive brokers representing buildings, than on the buyer or tenant side.  But, these brokers do not represent the majority of the landlord representation segment of the commercial real estate brokerage industry.  Passive brokers can sometimes afford to be more sedate, as they wait for the phone to ring and  look like heroes.  Don’t get me wrong, I’m not knocking landlord and property brokers…not at all!  I’m just fed up with the lazy ones and those who simply don’t do their job!  Some of the most impressive professionals in commercial real estate today are property brokers who understand that their success is directly related to their ability to support the objectives of their clients (landlords), while serving the needs of their customers (tenants and their brokers).

Passive brokers don’t return your calls right away, they take their time opening the emails you send them, let alone responding.  And, when they do respond to your emails, it is often in only a few words, poorly written without punctuation or proper grammar, leaving you to figure out what the heck they mean.  Passive brokers can usually be identified by sloppy and incomplete proposals and offers, and by missed deadlines attached to a long list of excuses and promises never to do it again. 

As competitors, I like passive brokers for one reason; it is pretty darned easy to win against them.  And, most often, they don’t even see successful brokers coming!  So, why do I care?  Because I must deal with them when they represent transactional opponents, and they get in the way.  Moreover, these kind of devil-may-care brokers, most of whom will put in less than an 8 hour day (even in this economy!) perpetuate too many of the negative stereotypes that many of us in the commercial real estate services industry work so hard to quash!

So, in a hard scrabble business like commercial real estate, in the worst economy in decades, do you really want to be one of those laid-back, wait-for-the-phone-to-ring types?  If so, then go sell something else, and get out-of-the-way!  There are some pretty hard-working brokers in commercial real estate who prefer not to have to step over you on their way to serving their clients and customers!

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit http://www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at http://www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

Let’s Put The Landlord in the Poor House, and Other Stupid Statements

How many times have I heard commercial tenants say “I don’t care about the landlord!”?  That’s pretty dumb (and, right up there with landlords who don’t care about their tenants!).  Why wouldn’t a tenant care about the business entity that is responsible for the very foundation (literally, the foundation of the building!), that supports their ability to efficiently and profitably conduct business on a daily basis? 

The role of a tenant advisor is to determine the optimal achievable transaction structure on the tenant’s behalf, advise the tenant as to how it can achieve those terms, and to execute its tenant’s preferred transactions. But, even halfway decent advisors recognize that in order to accomplish this, they must first understand the objectives, risks, and challenges of landlords. 

Understanding your opponent in any contest is the foundation of victory.  Too many unqualified or ill prepared real estate licensees (I use that term here to differentiate this subset of the industry from those who really know what they’re doing!), run their tenants headlong into real estate transactions without really knowing where to go.  These brokers are often long on salesmanship (and telemarketing skills), short on precise knowledge, and even shorter on true expertise. 

Tenants who take a ‘Let’s grab every dime we can!” attitude can shoot themselves in the foot as they either drive the landlord so far that it refuses to enter into a transaction, or jockey the landlord into position such that he / she agrees to bad terms in the hopes of making-up the difference on the next lease, only to put the building in financial jeopardy.  That’s not the best way to protect a tenant’s interests! 

Tenants rarely need every possible right and option under the sun, so that they tie the landlord’s hands and restrict its ability to lease the rest of the space in the building.  Tenants do need leases that provide favorable terms, flexibility, low and predictable costs, with no surprises.  They also require financially sound landlords who can and will provide the services to which they commit. 

Tenants don’t need to put landlords in the poor house.  These days, doing that is a lot easier to accomplish, especially if tenants and their brokers aren’t careful.  Writing as a tenant advocate, landlords need the ability to stay in business, pay their mortgages, refinance their buildings, provide services to tenants, manage risk, sustain their own companies, and “Yes”, generate profits, whether those profits come now or later. 

Mounting a well-planned, well-armed negotiation with commercial landlords requires knowledge, resources, and skill.  Never “bring a knife to a gun fight” as they say.  Commercial landlords can be some of the most well trained, well armed, and aggressive fighters on the business battlefield, and many of them have some pretty big guns.  Accordingly, tenants would be well advised to bring tanks, jet fighters, and battleships, or at least a missle or two when negotiating with certain landlords! 

The special challenge in a successful negotiation, for both tenants and their advisors, is to determine in advance those terms that the tenant really needs to achieve its objectives and to negotiate aggressively to succeed in securing the right terms, while being mindful of keeping their landlord in business.  This is a wise approach, even when dealing with one of those few remaining landlords that doesn’t have a sense of fair play, could care less about the tenant, and is too plain greedy and self-absorbed to recognize the tenant’s good efforts and the true interdependent relationship that, when respected, gives tenants and landlords what they both need…the tools to succeed and prosper.

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

 

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

Soon To Be In Foreclosure!

You’re not going to believe this story…in this economy…in this real estate market!  I almost can’t believe it myself!  This is real time stuff that  happened to me.

To set the stage, my client is a growing company that is led by a very bright CEO.  He’s young, aggressive, extremely accomplished, highly successful, hard-working, respectful, and takes no prisoners.  He’s a straight shooter who respects straight shooters.  

The tenant occupies office space in a suburban New Jersey building, which is owned by an out-of-state landlord.  This particular landlord promotes the stereotype of the mean and nasty commercial landlord, that dwindling minority of the industry that tries all they can to dominate every tenant and every deal.  This landlord, a cheap suit wearing an open collar, gold chain, and way too much cologne,  demonstrated himself to be arrogant, condescending, self-absorbed, not too bright, somewhat successful despite himself, probably a front man for other people with real money, and based on his antics, someone who still thinks he’s in a landlord’s market where tenants should pay homage to him and be grateful to be occupying his building.  Based on how this landlord handled himself, he is a very strong candidate for president of the local bread line.
Here’s the abridged version of what happened.  You’ll get a kick out of it!
  • Our client, the tenant, sought to renegotiate its existing lease based on current market conditions, or to relocate to another building
  • Our client had uncomfortable dealings with the landlord in the past
  • We submitted an RFP to the landlord’s agent and provided specific guidance as to our tenant’s requirements
  • The landlord’s agent called us with a precise message from the landlord, one that I have never received before:  “The landlord said if you play ball with him, he’ll pay you a commission.  If you make it tough for him, he’ll only pay you half!”  Wow!  How to win friends and influence people!  Was the landlord trying to intimidate us, create a conflict-of-interest, or just bring us over to the dark side?  We advised our client of the conversation.
  • Despite our guidance, the landlord submitted a proposal that was extremely one-sided and did not address our client’s requirements
  • The landlord attempted to circumvent us and meet with our client directly
  • Our client authorized us to arrange a meeting with the landlord, which we did
  • The landlord rescheduled the meeting twice and then swaggered-in 45 minutes late
  • During the meeting, the landlord was disrespectful to our client, speaking down to both the CEO and the President, as well as, to his own agent
  • The landlord arrogantly spoke to me, and after realizing that he was not the most important person in the room and wouldn’t get his way, waved his arms, got up and stormed out
  • Despite our email and voicemail requests for a revised landlord proposal, weeks passed without a reply
  • I finally go the landlord’s agent on the phone one evening, when he sheepishly told me he was not authorized to respond, but didn’t want me to tell that to the tenant…Huh?
  • We received an email directly from the landlord saying we were an impediment (To what…his ability to take advantage of our client?), and telling us that he instructed his agent not to deal with us ever again (Really?  So, I should not bring my next 100,000 sq ft tenant to your building?)
  • Our client said good riddance and instructed us to make a deal elsewhere
  • Our client will be moving into their new facility shortly
  • Oh, and did I mention that the landlord’s building is a 60% vacant class B building that sits way out beyond the western fringe of the central New Jersey market, where very little demand exists even in good times?

Anybody want to buy an office building…cheap?

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

 

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

Do Commissions Create Conflicts for Tenant Representative Brokers?

Traditional real estate commissions, based on a percentage of rental income or sale value of a transaction, work very well when brokers represent landlords, sublandlords, and sellers.  In those instances, their objectives and those of their brokers, are completely aligned.  The higher the price, the higher the commission.  See…that works perfectly!

But, what about the tenant representative broker and the corporate advisor, whose job is to protect the interests of the tenant or buyer?  In this case, the primary objective of the tenant representative broker is very often to reduce occupancy costs.  In most cases, tenant representative brokers are paid commissions based on the same percentage of rent standard as  brokers representing landlords and sellers…the higher the price, the higher the commission!

Does that work?  Is that right?  Don’t traditional commissions based on percentages put the tenant representative broker in a position of being in conflict with his / her own client?   Moreover, since most commissions are paid by the landlord, even those payable to the tenant representative broker, doesn’t that pose additional conflicts for the tenant and tenant representative broker relationship?  Afterall, doesn’t being the one who pays the tenant representative broker  give the landlord undue influence over the how the tenant representative broker might perform on behalf of his / her client?

In many instances, commissions paid to tenant representatives can be substantial.  Despite the ability to mitigate the potential for conflicts of interest, tenants are very often hesitant to accept the responsibility of cutting a check for large sums, especially when they haven’t done so in previous transactions.

Rent and other financial components are not the only points of commercial real estate transactions that tenant representative brokers address.  Given that fact, how can they charge for the true value they create in a manner that is both aligned with the objectives of their tenants and will result in fair compensation to them?   Any thoughts?

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

Is a Lease Renewal Really a ‘Renewal’ Any More?

Do any companies really just exercise lease renewal options any more?  Don’t most companies negotiate to modify the terms contained in their lease renewal options?  Doesn’t that mean that lease renewals aren’t really ‘renewals’  but, instead are new deals? 

In a recent blog post I asked the question “Do Tenants Really Need Brokers When Negotiating Lease Renewals?”.  When we posted that question in a Corporate Real Estate Group on LinkedIn, a discussion began where numerous brokers, landlords, attorneys, and tenants from around the world added their thoughts.  One particular real estate professional very clearly exclaimed that there is no longer any such thing as a renewal. That made a lot of sense to me because for many years, I’ve viewed renewal options as nothing more than providing tenants with an extra element of future control over their premises.  In almost every transaction in which I’ve been involved where a tenant contemplated remaining in its premises beyond the initial expiration date, instead of exercising renewal options, those companies negotiated new terms.  So, those transactions weren’t “renewals” at all, but were actually new deals with new terms.

What is a renewal?  A renewal is when the previous terms of a lease are… renewed…when a tenant and landlord apply the same terms of a previous lease to a new term.  Except, for years, in almost every renewal clause  certain terms, like rent, almost always change.  So, since rents change, then renewals aren’t REALLY renewals anyway, right?  They’re renewals with changes…new deals!  

Even the kind of renewal where only the rent changes rarely occurs anymore.  In fact, I cannot remember when any of my clients simply sent a letter to their landlord “renewing” their lease. 

Let’s face it…companies that occupy real estate change.  Their employees change in type, function, experience, skill, quantity.  The way they conduct business, the type of businesses they’re in, and so much more, often changes over the 5 or 10 years that they occupy space under a typical lease.  So, it makes sense that their real estate needs will change, too.  That’s why few companies just exercise renewal options anymore. 

Prudence demands that companies examine their operational and financial needs before making major decisions like those about real estate.  Moreover, transparency and disclosure expectations of stakeholders, Boards, and senior management force companies to consider competitive alternatives, examine market availabilities, and secure terms that best suit their businesses in the present day.  Few executives would describe good business practice as automatically entering into real estate transactions on terms created five or ten years earlier, instead of based on their current and anticipated future requirements.

So, are renewal transactions really “renewals” anymore?  Not really!

Please tell me your thoughts on this.

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

I Guess Tenants Really DO Need Brokers When Negotiating Renewals!!!

The overwhelming results are in!  Tenants, tenant representative brokers, landlords, landlord brokers, and real estate attorneys from the United States, Canada, Australia, the United Kingdom, and elsewhere, responded to my recent blog post, entitled “Do Tenants Really Need Brokers When Negotiating Lease Renewals?”  We posted that title as a question in a Corporate Real Estate Group discussion forum in LinkedIn and received tremendous feedback every day for almost two weeks!   

Not one single respondent said that tenants couldn’t benefit by engaging brokers, consultants, or advisors when negotiating renewals…not even the landlords!  One landlord responded, saying ” Bring them on! I love doing renewal deals with tenants when they’re not properly represented!” indicating that he exercises greater negotiating leverage and achieves more favorable results for his company when tenants are not represented by brokers in renewal transactions. 

I found some of the quotes to be very telling: 

  • Paul Wyne:  “As a past director of real estate, I renewed over 40 leases.  One of my goals was to make each lease contemporary.  In 90% of the renewals, we achieved modifications”
  • Bradley Siegel, Esq.:  “As a lawyer, I recommend that tenants get representation as a way to level the playing field.  I represent both landlords and tenants, and was the in-house General Counsel to a major NYC landlord for many years”
  • Aaron Weiner, CPM, CCIM, LEED AP:   “In the US (I have done deals in 33 states), it is a given that the landlord pays both brokers, usually through a provision that the listing broker pays out of a standard commission; therefore, the landlord does not pay more if the tenant is represented”
  • Mike Giles:   “I don’t believe I’ve ever seen a tenant just automatically renew its lease without negotiating, unless there was an auto-renewal clause and they missed a notice deadline”
  • Gary Wells:  “If one is relying on lease comparables to negotiate their transaction, they are probably months behind the market trend. Current market conditions, trends and nuances can only be understood by being “on the street”
  • Craig Trbovich:  “Even if you have real estate and contract experience, current market knowledge that will be invaluable.  And being in the trenches every day is the only way to be current”
     
Other readers offered these comments:
  • “Tenants often only see the rent as the headline cost and don’t appreciate the associated savings to be made through reviewing operating costs, insurance, etc.”
  • “Is it just coincidence that many landlords tell their existing tenants NOT to retain brokers – that they’ll “end up paying more”?   Additionally, a lease renewal should never be just about the rent – and the corporate executive who just focuses on that is probably missing the boat on other important considerations”
  • “We renegotiate many key points in each lease, allowing for buyouts, terminations, removal of guaranty, etc.”
  • “I represent both Tenant’s and Landlord’s.  One would be crazy not to have tenant representation on a renewal!”
  • “In renewal transactions, with the tenant hiring a broker, the cards are stacked all in the landlord’s favor.  When a tenant hires a broker it tells the landlord that the tenant is serious about its renewal and that the landlord will have to treat the tenant fairly”
  • “The tenant is ceding to the landlord an incredible amount of leverage not to have a tenant rep broker involved in the transaction”
  • “As a property manager on the landlord’s side, I prefer working with a broker.  To me, some of the toughest deals we do are renewals, and having a broker, even on the tenant’s side gets the deal done”
  • “…negotiating a renewal gives the tenant an opportunity to renegotiate any risky language which may have been overlooked in the original lease”
  • “As an in-house corporate real estate department manager I can attest to the benefits of broker representation during renewals.  It is about more than securing a low rent, but it is also about best all around deal the best all around deal, streamlining the process, and making sure the information is always presented the way the tenant needs”  
  • “Extensions and renewal options should never be treated as simple extensions of the existing lease.  They should be thoroughly negotiated with new lease terms reflecting today’s economic realities, current market valuations supported by site specific market data, and new priorities of the tenant’s business” 

Most companies will go through significant operational and / or financial change between the time they first negotiate their lease and the time their lease will come up for renewal.  As a result, most companies typically negotiate to modify their lease terms before extending their lease.  

The punchline?  Unless a tenant has truly qualified internal real estate resources and a keen understanding of lease transactions and structure, along with access to timely local market intelligence, the overwhelming majority of respondents strongly believe that “Tenants DO Need Brokers When Negotiating Renewals!” 

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.   Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies. 

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery.  Visit www.RealStrat.com

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions

Where is Andrew Zezas

  

  

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.  

### 

Do Tenants Really Need Brokers When Negotiating Lease Renewals?

Do Tenants Really Need Brokers When Negotiating Lease Renewals?  Short answer?  OF COURSE THEY DO!  

Less sophisticated landlords have difficulty with the concept that a tenant, a company who has occupied space in a landlord’s building for 3, 5, or maybe even 10 years, would wish to engage a commercial real estate broker when it comes time to renew their lease, expand, or engage in some other transaction.  

So, riddle me this:  How is a renewal transaction so different from an initial transaction, such that in a renewal the tenant would not require the same intelligence, market and transaction knowledge, experience and expertise that can be provided by a tenant advisor?  Especially, nowadays, when corporate executives are held to very high standards of ethics, transparency, and disclosure, when boards of directors and other stakeholders demand that companies seek the best alternative transactions and select only those that are most beneficial, how could any company agree to renew a real estate lease without being properly advised by a qualified third-party professional?   

Don’t lease renewal transactions contain the same components as initial leases?  Don’t decisions have to be made about important questions like: 

  • How much square feet does the tenant really need? 
  • What kind or configuration of space in what location would best serve the tenant’s business needs? 
  • Will the tenant’s space need to be modified to support changing business criteria? 
  • How much will interior improvements cost and who should pay for them? 
  • Should the tenant secure expansion or consolidation rights? 
  • Are other rights or options required? 
  • How will operating expenses and real estate taxes be addressed? 
  • What length of term would provide the tenant with the right balance of cost, flexibility, and overall value? 
  • What is the optimal rental structure that would support the tenant’s needs? 
  • How might free rent play into renewal negotiations? 
  • What other concessions and incentives should the tenant seek? 
  • How will competitive market conditions affect negotiations and the terms the tenant could ultimately achieve? 
  • What is the building’s real occupancy and vacancy ratio?  How does that stack-up against other comparable buildings? 
  • How has the building’s tenant mix evolved during the initial term, and how might that affect the tenant if it renews? 
  • What is the financial condition of the building and its landlord? 
  • How seriously should the tenant consider relocating to other buildings?

 ….and, that’s just the beginning!

So, do tenants require the same expertise and insight when contemplating lease renewal vs. relocation?  You bet?  Is it in the landlord’s best interest to circumvent the tenant’s real estate representative and attempt to deal directly with the tenant?  Not really.  Most corporations prefer to be objectively advised by a service provider whose role is to protect the interests of the corporation.  And, frankly, a landlord who will profit from a transaction with a tenant just can’t do that.  Moreover, when a landlord attempts to by-pass tenant’s real estate advisor, tenants don’t appreciate it and often view that landlord negatively. 

What do you think?

Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com.

Acquire new ideas about commercial real estate at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.   Follow RealStrat and Andrew Zezas at http://www.Twitter.com/RealStrat.

Check out The Executive’s Guide to Understanding Corporate Real Estate Transactions.

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved. 

###

The Term is ‘Tenant’ Advisor!

If you are a professional, high-quality commercial landlord, the text below is not for you.  You recognize the roles of various players in commercial real estate transactions and understand how to create balanced transactions while treating all parties fairly.  Because of this, among other factors, you are likely incredibly successful, your tenants and their advisors enjoy solid business relationships with you, you are profitable, and you are happy!  To you I say “Thank you!” 

To those commercial landlords who completely misunderstand my role as advisor, advocate, and representative only for tenants and other corporate occupants,  to those landlords who dislike the fact that my sole objective is to protect the interests of my clients, to those landlords who complain about paying our commission and those who don’t get that I don’t work for them…listen up!  The term is “Tenant” Advisor, Tenant Rep, or Corporate Advisor, not landlord broker! 

The situation is simple and clear…MY FIRM DOES NOT REPRESENT YOU AND WILL NOT BE SWAYED BY YOU!  You cannot get us to back down from you or negotiate less aggressively on our clients’ behalf by offering us commission bonuses, opportunities to represent your properties, relationship opportunities with you, or by threats of delayed payment schedules or reduced compensation.  We’re not interested nor affected by any of that!  While those tactics may have worked on some of your weaker local cronies in the past, it won’t work with us! 

Our job is to advise our clients and secure terms that favor them…PERIOD!  In fact, we are contractually obligated to do just that!  Unfortunately, that may mean that you will either have to find a middle ground that is acceptable to you and our client, complete a transaction on terms that you may not prefer, or pass on the deal altogether.  No matter which alternative you select, we won’t take it personally, we’re just doing our job.  And, please remember that if you do complete a transaction with our client, you will likely derive substantial benefits.   If you won’t benefit by the deal, then don’t do it.   That’s ok, you and our client will both find other transaction opportunities, and our feelings won’t be hurt. 

And, for those landlords who tell us they don’t like paying our commission when we represent tenants,  you should know that we also don’t like being paid by our transactional opponents.  But, we didn’t create the common practices that exist in most markets.  Until the commercial real estate market does a complete “about-face”, when tenants elect to pay their own real estate advisors, neither you nor we really have a choice.  You should also be mindful that our compensation is not a margin that is available to either make or break any deal…it is a transaction cost.   

You should know that before we first spoke with you, we advised our client of our compensation requirements and the games certain landlords play.  And, in the interest of disclosure, we keep them apprised of all conversations we have with landlords that might affect them, including issues concerning our compensation.  Many tenants take a highly negative view of landlords who don’t treat tenant advisors in a manner that those tenants find acceptable.  Many tenants believe that a landlord will treat them in a manner similar to how that landlord treats the tenant’s advisor.   In more than a few instances, such actions by landlords have swayed tenants toward, what they believed were, more professional and fair-minded landlords.  

Consider the fact that our client went to a great deal of effort to select and engage us, and has put its faith in us to advise and represent them, and to protect their interests.  As such, we understand what they need to achieve and can guide you as to how you can secure their tenancy.  Please know that while we can disagree with your approach and your perspectives on our role, we can still respect how you wish to conduct your business.  Accordingly, please respect how our client and we elect to do business, too.

So, please save all of the rhetoric (we’ve heard it too many times before), spare me all of the emotional outbursts, put on your big boy pants, get over yourself, talk to some of your more professional landlord competitors who get what this business is really about, and let’s get on with the most important part of the transaction…the reason we are involved together in the first place…making a deal between you and our client! 

Follow me at http://www.Twitter.com/RealStrat 

Visit Real Estate Strategies Corporation at www.RealStrat.com 

Check out the Executive’s Guide to Understanding Corporate Real Estate Transactions at www.TheExecutivesGuides.com 

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010:  All Rights Reserved. 

###


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 39 other followers

Follow Me on Twitter



THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

Follow

Get every new post delivered to your Inbox.

Join 39 other followers