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. 

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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. 

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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. 

###

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.  

### 

Would a Landlord Really Kill a Deal Over Broker Fees?

I recently had lunch with a fellow commercial real estate professional who lamented  about how some old-fashioned commercial landlords he’s encountered will let a real estate transaction die, or actually kill it themselves, rather than pay a real estate commission on terms that they don’t deem appropriate.  I was amazed to learn that there still exists some of those landlords.  I thought they all had died off.  What these landlords, the type to which this real estate broker referred, often consider acceptable is a substantially lesser commission amount than requested by most real estate professionals, and one that they can pay via an extended series of payments over a very long time period.

The idea behind the long-term payment schedule is most often two-fold:  One is purely cost and cashflow management (Some will say it’s merely a way to make life difficult for brokers – I’m not that cynical!) .  The second is a means of sharing with the broker the risk that the tenant may not perform (pay rent!), default, or breach the lease.

Mind you, the real estate professional with whom I was chatting is no slouch.  He’s not one of those whiney “How come I don’t make enough money? – The world owes me a living! – All landlords are out to get me!” types.  He’s a respected, accomplished pro, who knows his stuff and works for a nationally recognized commercial real estate brokerage company.  In fact, a large part of his company’s practice includes representing commercial landlords.

I found it very interesting, based on what this broker told me, that in the year 2010 some landlords would rather put a transaction at risk, possibly lose a deal, before they agree to pay a market rate commission.  And, why?  The best landlords see real estate professionals as beneficial to transactions and seek to compensate them fairly.  The most successful landlords quickly dispense with  issues as minor as commission payments and agree to reasonable terms that are in-keeping with local customs.  Those landlords, the intelligent ones, recognize that losing 100% of a good deal never makes sense, especially if the reason is because of too great a focus on commissions, which in almost every case, represent  a very small percentage of transaction costs.   The best landlords by-pass that stuff and almost immediately train their energies on making the deal by negotiating favorable terms with prospective tenants.  Isn’t that what it’s really about anyway?

Let me clarify one thing.  Unlike many other commercial real estate brokers and advisors, I am not of the mindset that every landlord, every tenant, and every transaction must include real estate professionals.  If a landlord or tenant has the resources and the inclination to negotiate on its own behalf without engaging representation, then it should  do so.

And, another thing!  As for dealing with brokers and other real estate professionals, this is America, pal…land of the Free!  Despite many opinions about the current federal government becoming socialist, this is still a free country!  And, any landlord, company, or individual is free to conduct their business as they see fit.  A business person is allowed to agree or not agree to do business with whomever she chooses.  She can choose to pay any price for any service, so long as someone will sell it to her for that price.  That goes for landlords, tenants, brokers,  and commissions, too.

While we were at lunch, my friend commented that some landlords, no matter how outdated their approach may be, will often do almost anything they can to pay lower commissions, to pay those commissions over extended time periods, and to put those commissions at risk in the event tenants default.  I guess it is a landlord’s right to do that…isn’t it?  But, suggest to some of those very same landlords that they should pay commission rates that are higher than what may be customary, and watch the fireworks!  Can they have it both ways?

I get that some landlords believe tenant brokers don’t work for them and that those brokers should be paid by their tenant clients.  I’ve written about this topic many times.  My answer to that is:  When all the landlords and tenants get together to change how brokers’ compensation works, and when tenants elect to take-on the obligation to compensate their real estate advisors, I’ll be out in front of that discussion.  If that change ever occurs, landlords and brokers will finally get past this issue, certain landlords will stop pressuring tenant brokers, and the entire commercial real estate industry will be more in balance, will operate more efficiently, and will be able to focus on structuring more creative transactions.  Until that time, let’s stop wasting time…we’ve got clients to represent!

Since America is a free country, isn’t it also true that real estate professionals can choose who they do business with, how much they get paid, when, and what risks they’re willing to accept for the services they deliver?  The answer is a resounding “Yes!”, so long as the real estate professional acts in accordance with his client’s knowledge and approval, and so long as he adheres to the terms of his State’s licensing regulations and requirements of conduct.

So, why would any landlord…any intelligent business person…risk 100% of any transaction because of a commission…a small percentage of any transaction?  I never have figured that one out.  There has got to be more to this story!  What am I missing?

What do you think?

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

Where is Andrew Zezas?

Check out ’2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

10 Reasons Why a Lender Might Cancel a Commercial Tenant’s Lease?

In a recent post, I wrote about the “Dangers of Ignorance” when tenants don’t aggressively seek to understand the financial stability (or, instability) and creditworthiness of prospective landlords  before executing leases.  I wrote about the risks of lenders terminating leases when they take over foreclosed or bankrupt buildings. It is a widely held misconception, and frankly a dangerous and naive one, that when taking over buildings lenders won’t terminate commercial leases.  Think so?  Read on.

How many times have I heard this:

“If the landlord goes bankrupt, the building can’t go anywhere…we’ll still have our space and we’ll be able to do business!” 

Actually, while a foreclosed building won’t likely pick up and move, a company’s lease actually could go away.  Very often, when lenders seize buildings in financial distress through bankruptcy, foreclosure, deed-in-lieu-of-foreclosure, or by other means, they often have no obligation to recognize tenants or their leases, and can take a number of steps that may not be in tenants’ best interests.

When taking over buildings, lenders can very often terminate leases; increase, decrease, or change the spaces associated with certain leases; change rents and other lease terms; and a lot more.  When they are able to terminate leases, lenders are typically not required to recognize options, rights, or other hard-won protections tenants may have secured from the previous building owner.  Moreover, when terminating leases, lenders have no obligation to reimburse tenants for leasehold improvements that they’ve installed in their space at their own expense, relocation costs, business interruption, or otherwise.

Here’s another doozy: 

“No lender will terminate our lease in this economy.  Our rent will be too important to them!  So, we’re safe!”  What a naive perspective!

There are multiple reasons why a lender might terminate a lease, even in the current economy.  Here are a few:

 1. The tenant’s rent is under market

2. The lease contains options or rights that could impede future leasing efforts

3. The terms of the lease are not favorable to future landlords (possible purchasers of the building)

4. The lease term is too short to positively impact value

5. The tenant occupies too much of the building, thereby making the building a potentially unstable or unattractive investment

6. The tenant’s creditworthiness is too risky

7. The tenant’s use of the building doesn’t support that which could optimize the building’s value

8. The tenant’s space is an obstacle to a more important tenant’s growth

9. The lender sees greater value in making entire floors available

10. The lender seeks to empty the building and offer it for lease or sale on a completely vacant basis, because it might yield greater value to a single owner or tenant, or because the lender plans to convert the building to some alternative use

Are there other reasons?

“But, we got a non-disturbance agreement when we signed the lease.  So, we’re safe, aren’t we?” 

Are you?  Did you secure a non-disturbance agreement or just a promise from the landlord that it would provide one?  Did you actually receive it?  If the lenders changed in your building during your lease term, did you obtain a new non-disturbance from the new lender?  Was the landlord obligated to provide a non-disturbance from the original lender AND all future lenders? 

Like any written document, the terms of a non-disturbance agreement may not be sufficiently strong to protect a tenant against the actions that a lender may be permitted under the law.  And, not every tenant gets a non-disturbance agreement!  In fact, in most buildings, only the largest tenants (typically measured by company size  or square feet), or the most important tenants are usually successful in securing non-disturbance agreements.  Those tenants without non-disturbance agreements can be at significant risk of having their leases terminated by a lender that takes over their building.

What’s a tenant to do?  Tenants should consult their attorneys to review their leases and non-disturbance agreements.  They would be well advised to ask their real estate advisors to find out what’s going on with their buildings and their landlords.  Taking steps now to protect a company’s flank before it’s too late would be a wise move…especially, in the current economy! 

What are your thoughts?  Have you been through a lender lease termination?  How did it work out?

Follow me at http://twitter.com/RealStrat

Where is Andrew Zezas?

 

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

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The Dangers of Ignorance in Commercial Real Estate

Do commercial tenants recognize the dangers associated with not understanding the creditworthiness of their prospective, or even their current, landlords?  Standard operating procedure for most landlords is to gather financial information on prospective tenants and assess their associated risk before entering into leases.   Historically, commercial landlords, as a group, have been considered to be financially stable.   Tenants didn’t concern themselves with the possibility of landlords becoming insolvent.  

Despite some reports of stabilizing markets, in most of the country commercial real estate vacancies continue to rise, albeit at a slower pace.   Demand for office space remains very low, with little change foreseen in the short-term.   A substantially lower percentage of new leases are being completed than in previous years.  Many lease renegotiation transactions are taking place throughout the United States.  Lease renegotiation transactions often result in longer leases for less space.  While modifying existing leases in this manner could have long-term positive effects on landlords and the values of their buildings, the short-term effects of higher vacancies and the resulting lower positive cash flow could lead to devastating results for some landlords.   In the current global economic environment, many companies (tenants) previously considered to be rock solid are experiencing severe financial challenges.  Most landlords are stepping up their focus on tenant creditworthiness and are modifying how they negotiate leases to protect themselves.

I’ve heard from commercial landlords that few tenants, both those engaged in negotiations for new leases and those seeking to renegotiate existing leases, request financial information from those landlords. Why not?  Since most landlords are not publicly held, this lack of inquiry can’t be because tenants are satisfying themselves with publicly available information.  Are most tenants just happy idiots?  Are they not aware that like any other companies that require sustained revenue, landlords can become insolvent, too?  Are tenants completely confident in the landlord industry, the economy, or the bankruptcy system, such that they don’t feel the need to conduct due diligence into the financial backgrounds of their commercial landlords? 

Are commercial tenants completely ignorant to the dangers and risks of buildings in financial distress and landlord insolvency?  Are they simply not aware that when landlords become insolvent, it does not happen in a single day, nor does the situation get resolved the next day?  Both the financial decline and the eventual resolution of a landlord bankruptcy typically occur over extended time periods, and are most often accompanied by significant declines in building services, repairs, response times, and more.  And, during bankruptcy and receivorship, the transitional states in which commercial buildings can find themselves often create extreme challenges to tenants’ operational efficiencies and employee productivity.  

Are tenants also aware that, depending on the terms of their leases, in a landlord bankruptcy or similar legal action those leases may be terminated with no recourse by the tenant and no reimbursement for leasehold improvement costs incurred by the tenant?  Are tenants cognizant of the risks associated with the fact that most building leases limit the liability of landlords to their equity in that building alone, which equity is typically the first element to be eliminated in bankruptcy,  thereby often leaving little or no recourse against landlords by tenants?   

Are tenant advisors and legal counselors not properly cautioning commercial tenants as to the very real dangers associated with potentially insolvent landlords?  Well?

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

Where is Andrew Zezas?

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

As Commercial Buildings Mature, Will Tenants Lose?

By the end of the 1980s, almost half of the office buildings that existed at that time were constructed during the previous ten years.  When leasing space in new office buildings, it was easy for tenants to understand that they would not likely experience significant pass-throughs of capital expenditures.  Why?   Because the majority of those buildings were new, and even in a poorly conceived or constructed building, a tenant had a reasonable expectation that at least for the first few year of its lease term, substantial capital improvements would not be required.

Another interesting trait of the 1980s was that every third dentist became a real estate developer over night.  And, many of us have heard of those stories where buildings were so horribly constructed that they immediately started falling down around their tenants.  Thank you cheap money and speculative construction!

Those shiny new office buildings had brand new elevators, HVAC systems, electrical and safety systems, facades and parking lots.  Their tenants, not expecting to bear the financial burden of major capital improvements,  negotiated their leases by restricting their landlords from passing through such costs.   Landlords, who also recognized that their buildings would not likely require immediate capital re-investment, most often agreed to such restrictions.

That was in the 1980s….30 years ago!  Now, those buildings are mature, the warranties on their roofs, windows, elevators, HVAC systems, parking lots, and other infrastructure and capital components have long since expired.  Replacements of capital items have been made once, twice, or more (at least in better run buildings!), in order to properly maintain functionality and service levels.  That’s the nature of buildings…as their systems wear out, and they will wear out, those systems must be replaced. 

Because of how leases were negotiated in the past, under the terms of such older leases, replacement of major systems and the associated costs fell to landlords.  Now, with office buildings maturing and the expectation that building systems will require on-going replacement over time, should landlords continue to be responsible for these significant costs?  Should those costs be passed onto tenants?  Should both parties share these costs?  Should those costs be handled differently for existing and renewing tenants versus new tenants?  Who is rightfully responsible?

What do you think?

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Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

Amazed and Perplexed!

Wasn’t there a movie in the 1980s called “Dazed and Confused”?  Well, I recently had an encounter with a property broker who said he was Amazed and Perplexed!

So, a few days ago, I got a call from this commercial real estate broker who demanded to know why we hadn’t presented to our client the two office buildings he represented.  The two buildings are located in a part of the country where our firm is representing a client in the acquisition of a 100,000 square foot office facility.  In that market, a lot of vacant space exists and few 100,000 square foot tenants are currently seeking space there.  The broker first emailed me saying he was “perplexed” at why our client hadn’t visited his buildings.  When I invited him to call me to discuss his concern, he aggressively opened his conversation by exclaiming that he was “amazed,” and was particularly strenuous when he loudly proclaimed “because every company that considers over 100,000 square feet looks at my buildings!” 

I did my best to explain to this guy that we and our client were aware of his two buildings and why those buildings didn’t meet our client’s criteria. Afterall, despite this guy’s distasteful manner, he was doing his job.  During my explanation, he talked over me and seemed much more interested in voicing his opinion than listening.  And, when I wouldn’t yield, he began to yell at me, saying that I didn’t know the market.  This guy had never met me, had never spoken with me before, didn’t know what I knew, and had no clue about my market knowledge.  If this was his lame attempt to draw me into a fight, he was not going to accomplish that.  When I disagreed with him, he called me a smart ass and began to yell at me again.  I don’t think his charm school teacher would have appreciated his actions.  By the way, this all happened during a three-minute conversation.  Talk about amazed and perplexed!

This guy contacted me in an effort to inspire me to present to my client the two properties he represented, despite the fact that we already had.  What a salesman!  What an inspiration!  How motivating!  If, in his initial presentation to me he acted so arrogantly, how could I expect him to treat my client?!  What an idiot this guy was!  I really felt sorry for this broker’s clients.  He was obviously alienating potential tenants and their brokers.  And, after making a few inquiries, I learned that this guy had a reputation for pulling stunts like this and commands very little respect in his local market.  No wonder his buildings are so empty!   Note to landlord: If you wish to fill your buildings, hire a more professional representative, and send your current broker to therapy!

I ended the call by saying “When you’d like to have a polite conversation, please call me.” and I hung up.  I immediately called our client to advise him about the incident and told him to expect a call from this broker.  Our client reiterated his faith in our firm and our market knowledge (not that I was concerned, but very nice of him).  Our client laughed at that broker’s ridiculous tactics, and said he’d be ready for him.  And, while our client is generally a soft-spoken and relaxed kind of guy, he is a very accomplished executive, and a serious one.  A preference toward being laid-back, and in both my case and our client’s, being polite, is not to be confused with weakness.  Accordingly, I am absolutely certain (from that gleam I’ve seen in our client’s eye), that while he’d prefer not to hear from that broker, he is fully capable of disposing of this knucklehead with minimal effort!

For the remainder of the day, I received a series of emails from the broker, each of which was more negative than the one before.  In one email, he reminded me that his state was still a member of the Union….huh? 

Now, I’m no gentle touch, and this is not the first time (and, unfortunately, I doubt it will be the last) that I’ve dealt with a broker or landlord who got lost in his own ego and self-importance.  I’ve written before about the personalities that are pervasive in commercial real estate, and how a focus on customer service (using honey, not vinegar) is the way to win the day almost every time.  Evidently, this particular broker, part of a dying group that still gives commercial real estate brokers a bad name, doesn’t read my blog.  As for his silly and futile attempt at salesmanship, I can only say that I was amazed and perplexed, and a bit disappointed, but not surprised!

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Where is Andrew Zezas?

Check out ’2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

When Commercial Real Estate Brokers Get Greedy…and Stupid!

You’re not going to believe this one!  Frankly, I wasn’t sure I believed it myself, at first.  We recently experienced surprisingly greedy and stupid actions taken by a commercial real estate broker and his associate, both of whom were working on the same team that represented competing properties.  What these two did could land them in serious trouble.  The two brokers work for a well-known commercial real estate brokerage company, you know, one of those “alphabet companies” where, when people talk about it, they use the company’s initials instead of its full company name. 

Our client, let’s call them the Laboratory Company, is a rock solid company that has experienced steady growth, has maintained a quality reputation, and can demonstrate considerable financial credibility.  When we recently attempted to visit a particular suburban office building with our client,  the broker representing that property stone-walled us, saying  they were not interested in pursuing a transaction with our client.  You should know that the property, a multi – building complex with significant vacancies, had more than a few blocks of available space that could accommodate our client’s needs, and was situated in a geographic area where approximately 6 million square feet of office space sat empty and begging for tenants that rarely showed up.

So, when even before we provided the property broker with any details about our client’s requirements, he said they weren’t interested in, what was, a very desirable tenant, my antenna went up…way up!  When I asked the property broker to explain his very peculiar response, he gave me some back-handed nonsense that caused me to keep digging.  Then, I hit pay dirt!

What I learned greatly disappointed me.  Up to that point, I had held this particular broker  in high regard…up until that point!   What I found out was that the property broker and his associate had just been engaged to represent a competing office campus nearby.   The owner of that campus is active in the regional market with a substantial and growing portfolio, and is a player whose properties are sought after by many local real estate brokers.  I’m sure the property broker was counting on growing the number of properties he represents, including those of the competing owner.

Guess what?  Our client  was one of the major tenants in the competing owner’s office campus.  That’s the facility our client contemplated vacating in order to move to the suburban office building.  So, what I realized was that the property broker was in a real pickle.   The worst thing that could happen to the property broker would be for its first transaction at the office campus to be the loss of a major tenant.  The only thing worse than that would be for the loss to occur because the tenant moved to another building represented by the very same property broker!  In such an instance, the owner of the office campus would likely assume that the property broker pilfered its tenant, and the owner might even fire the property broker.  For the property broker, his dreams of future revenue opportunities and an expanded relationship with the owner of the office campus could quickly become dust in the wind! 

Instead of demonstrating integrity and doing the right thing by disclosing his predicament to both property owners and recusing himself from representation of one or both properties, the property broker did something that really surprised me.  Because he thought he and his associate had so much control over the local market, these two attempted to manipulate the properties, both owners, my client, and me, to protect their own position above the interests of everyone else. 

Here’s where it got silly:  The property broker attempted to block our client from visiting the suburban office building.  Then, his associate suggested that our client was expected to remain in the competing owner’s campus.  Were they kidding?  Not only did their actions constitute blatant conflicts-of-interest, but the property brokers surely breached ethics and their fiduciary responsibility to the blocked building owner, devalued the reputation of their company, made the competing office campus owner look bad, and most likely violated State license law.  Moreover, as brokers who I had previously admired for their achievements and approach to business, the property brokers lost my respect!

Can you imagine how upset our client was?  The CEO was an accomplished and easy-going, but no-nonsense executive, who did not enjoy feeling like anyone’s pawn.  Understandably, his first inclination was to tell the property brokers and both owners that he wouldn’t do business with any of them.  He also wondered if perhaps the competing owner was in on the whole thing.  Can you blame him?

Our client WILL have the opportunity to do business with whomever it chooses, irrespective of any actions taken by these greedy property brokers.  This story is still playing out.  I’ll keep you apprised.  The actions of these particular property brokers are the kind of pedestrian garbage that perpetuates the negative stereotypes of commercial real estate professionals…the kind of stuff the rest of us fight against! 

Have you experienced anything like this before?  Send me your stories.

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

Where is Andrew Zezas?

Check out ’2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.