Let’s Put The Landlord Out of Business!

How many times have I heard commercial tenants say “I don’t care about the landlord!”?  That’s a pretty dumb thing for any tenant to say.  Why wouldn’t a tenant care about the business entity that is responsible for the very foundation, literally, the foundation…of the building, which supports the company’s ability to efficiently and profitably conduct its business on a daily basis?

On many occasions, I’ve written about the perspective of some one-sided landlords who blatantly disregard the needs of their tenants in the name of greed, arrogance, and selfishness.  Some tenants, too, can be selfish and miss the opportunity to build a mutually profitable relationship with their landlords.

Good tenant advisors constantly counsel landlords that, to be truly successful, landlords must care about their tenants’ success, and not just view tenants merely as rent payors.  Afterall, leasing commercial real estate is not like buying a used car.  When buying a, excuse me “Pre-Owned Car”, we often pray that the car will be in good working order because we plan never to see the car dealer again.  Leasing commercial real estate is a long-term commitment, most often for many years, between landlord and tenant.  Tenants deal with their landlords everyday, either directly or indirectly, by virtue of the services landlords provide.

Despite the fact that some landlords refuse to admit it (Why they won’t, makes no sense to me!), landlords have a vested interest in seeing their tenants prosper.  Conversely, tenants have a similar interest in seeing their landlords succeed.  This doesn’t mean that landlords and tenants should run each other’s companies or become joint venture partners.  It does mean that both landlords and tenants should view each other as more than transactional opponents. Once leases are executed, both landlords and tenants may benefit by taking a different approach than that of going to their separate corners.

Landlords and tenants would do well to consider their relationship with each other as one of interdependent partners, instead of transactional opponents.  The true recognition of interdependence between landlords and tenants is that without mutual benefit, the relationship simply won’t work.  A landlord with no paying tenants achieves nothing.  A tenant without a building to rent would have no place to conduct its business, and would likely be forced to divert capital from investment in its own profit-generating ventures to real estate ownership.

I find it amazing when over-zealous brokers get tenants worked-up by suggesting that landlords should not be entitled to profits when they complete new lease deals or renegotiate leases.  Writing as a tenant advisor, I must ask those brokers how silly it is to assume that anyone would engage in a business endeavor without a profit motive.  Everyone is entitled to profit!  The issue isn’t one of whether a landlord is entitled to generate profit, but more of how landlords generate profit, how much they generate, and are they transparent in doing so?!

Don’t get me wrong…as a tenant advisor, I don’t advocate overpaying for anything, let alone rent.  And, neither am I suggesting that tenants should consider themselves as the funding sources for commercial landlords’ profits.

Interestingly, landlords are not perceived as a group that deserves anyone’s pity.  However, given current global economic conditions, and those of credit and real estate markets, with many landlords holding on white-knuckled trying not to lose their buildings to lenders, if there ever was a time when landlords were entitled to anyone’s sympathy, now would be that time.  The government and business communities must recognize the challenges commercial landlords currently experience, along with the ongoing struggles that most of them will endure over the next few years.  If not, the tenants, we advisors and brokers represent, may have fewer stable leasing opportunities, and therefore, may have much bigger problems!

Given the above, tenants are in a great position to negotiate very aggressively to secure favorable terms, either in new lease transactions or when renegotiating existing leases.  How they do that, and with which landlords, makes all the difference in the world.

Aggressive negotiations don’t mean stupid negotiations!   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 the above, 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 it agrees to bad terms in the hopes of making-up the difference on the next lease, thereby putting its 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 landlords 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.  Tenants 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, that is a lot easier to accomplish, especially if tenants and their brokers aren’t careful.

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 generate profits, whether those profits come now or later.

Mounting a well-planned, well-armed negotiation with commercial landlords requires knowledge, resources, and skill. I never recommend “bringing 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, when negotiating with certain landlords!

The special challenge in this endeavor, 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 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.

Copyright Real Estate Strategies Corporation 2009.  All Rights Reserved.

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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.

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