In the last Tenant Tactics we discussed some of the many opportunities afforded by today’s topsy-turvy economy as it related to leasing commercial real estate. Landlords are more aggressive in many ways. They openly discuss and accept creative extensions to leases or reconfiguration of spaces. In addition, many are renegotiating renewals much sooner than the typical three to six months prior to termination and offering aggressive rents or additional concessions along the way.

Last month I was privileged to be asked to sit on a panel at the monthly NAIOP meeting. NAIOP is the leading organization for developers, owners and related professionals in office, industrial and mixed-use real estate. I sat on the panel with Perry Schoenfeld of LBA and moderated by David Wensley of the law firm of Allen Matkins et al. While in some ways I felt like a hen in a fox house, representing the tenants’ perspective in a room filled with landlords, it was most interesting hearing about lease restructuring from the landlords’ side. Interestingly, much of the rhetoric paralleled the framework outlined in our last Tenant Tactics.

On the other hand, I did observe one interesting point.  There was a level of frustration on the part of some landlords that the tenants “asked for the moon and didn’t understand the process.” Should they be surprised? For the most part, most all lease discussions landlords have with tenants are through their broker who interfaces with the tenant’s broker. Restructuring is much different.

In the case of renewals, tenants often try to negotiate on their own believing “we’ve been a good tenant so the landlord will give us a good deal.” The landlord starts by offering their view of fair market value. Tenants will usually at least make a call to a broker or surf the NET just to get an idea of market conditions so they have a base from which to negotiate. Unfortunately it remains the professional with all the tools against the weekend player.

That scenario has changed dramatically in the past ten years in that most professional landlords prefer to have brokers represent the tenant during renegotiations in that:

• Negotiations tend to go smoother
• Tenants feel they are getting a better deal by being represented
• Landlords find paying the broker fees saves as much as 16% on their cash flow considering should the tenant move out they would not only have to pay a fee to a new broker but also have to assume the cost of down time and additional tenant improvement costs 

However, today’s economy creates a unique situation where negotiations are based not solely on fair market value for which most brokers are equipped to provide market information but rather complex negotiations which significantly include a mix of the tenants’ business planning, multifarious lease restructuring issues AND fair market value.

While landlords have no issue dealing with tenants directly on renewals if the tenant is not represented, they find it frustrating when addressing today’s more complicated issues. It was not surprising at the reaction I got when I raised the point at the panel discussion that tenants are not real estate people and therefore certainly do not understand completely the finer points of real estate. I noted a 1993 survey I had helped develop for the UCI Graduate School of Business which clearly concluded that while real estate is the second largest line item on the budget, most all companies often shift their real estate management (other than actually located premises) to individuals within the company who are not involved in real estate on a day to day and continual basis. These individuals are often good negotiators in their personal sphere of influence so they therefore believe whole heartedly that the skills are transferable. The reality is that for the most part they manage the real estate process particularly when it comes to acquisition of real estate but their brokers primarily do the negotiations with the landlord.

Conversely, in the case of creative restructuring it gets a bit more intricate. On the tenant’s side there too often is little help that is available to them. The choice is, other than moving forward on their own would be to engage an attorney or possibly the broker who initially represented them in the transaction. Typically there is no commission on such transactions. Most brokers and landlords look at commissions as a onetime fee for completing an initial lease or renewal.  Brokers may likely turn down this type of assignment unless an additional fee is paid. Few brokers have our philosophy that commissions are in actuality a retainer for future services provided throughout the term and that service should be continual through the leasehold or engagement.

The best of both worlds is to engage a broker to address the real estate issues and a good attorney to review the legal portion. About half of the transactions we have completed in the past 8-10 months involved some sort of a restructure. Different times call for different approaches. If you are considering restructuring you need to engage outside advisors. You and the landlord will appreciate the process and the result will be a win-win for all parties.

Guest Post by our Orange County, Ca Member
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Today's economic climate is without a doubt unlike any we have seen in many years. One does not need an MBA to see that the present state of our economy has impacted both the public and private sector and it has no limitations as to the size or type of company affected.    

 The relationship a company has with their landlord is quite unique in that it does not follow the pattern of most other business associations. Typically, when one partner in a relationship has an issue, the other partner looks to make an accommodation so the relationship can continue to flourish.    

 Unfortunately, that may not be the case when it comes to addressing real estate issues. On the up side, there are some strategies tenants can use to gain temporary relief from the burden of their occupancy costs provided they fit into certain parameters and understand the guidelines. On the down side, most landlords in particular landlords controlling multi-tenant office spaces are extremely reluctant to offer relief in particular through renegotiation of existing leases.    

 We have spoken to numerous landlords over the past months regarding this critical issue. To be sure we were compiling the most reliable information; we approached landlords who controlled all types of properties including multi and single tenant office buildings, industrial spaces and retail properties. To be further sure the information we received wasn't considered biased, we sought out several of our client's landlords as well as landlords who we have dealt with in the past but did not presently have any of our clients in their building.   

 It is said that if something happens once it can be a chance occurrence, twice can be a coincidence but three times is a pattern. It wasn't hard to see a pattern forming in that every landlord, regardless of the type of property they controlled said the same thing, "We understand the issue but it has to be beneficial to us as well."    

 With that said and understood, there remains several strategies one may follow provided specific circumstances come into play.    

 The most common "success story" for renegotiating a lease in today's down market is determined by the length of time you have on your lease. If you have under one year remaining on your lease, a landlord will at a minimum be more than likely at lease talk to you. No landlord wants to see empty space but they don't want to give away the farm. After all, they have a certain level of expectations when it comes to return on investment.    

 "Blend and Extend" deals are out there if creatively designed. As an example, let's say you have nine months remaining on your 4000 SF space and you're paying $2.40/RSF/mo but the market rate is now $1.95 for new deals in your building. If the landlord reduced your rate, he would have a $21,000 shortfall. However, if you renewed for an additional  51 months, in theory, the landlord can then spread that loss over the 60 months of the new term by adding $.09 to the market rate and writing a new deal at $2.04/SF. You get an immediate reduction and the landlord has a guaranteed cash flow.     

 Another success story can be titled, "Extend and Expand." We have had some landlords agree to this option as far as eighteen months out. In one case a client was paying $2.35 on 2000/SF but wanted to expand to 3800 SF. Market was $1.90 for the space. We worked out a formula where the landlord would recoup the lost revenue on the initial 2000 SF and blend it into the larger space. The $1.94/SF deal included tenant improvement dollars.    

 Another opportunity may come into play should your landlord either sell or refinance the building. If the debt service on the building is reduced, you may be able to renegotiate longer term deals with the new owner or under the refinance structure. Should your building be taken over through foreclosure, you may want to contact your attorney as well as your broker. History tells us a lot of options open up under that scenario including the fact you may be able to get out of your lease completely. The foreclosures of the early 1990's and the court rulings under the Dover Case may shed some light on that. Your attorney should be able to provide additional information and strategies.    

 If you find none of the above scenarios meet your circumstances and you are having extreme problems paying your rent, you can still approach your landlord for relief but be prepared to not only provide full financial disclosure but also have a solid plan for how you anticipate dealing with the economic downturn. Yes, this does sound like the auto makers going before Congress.

Guest Post by our Orange County, Ca Member
About the Author