“How to avoid forfeiting millions to your Landlord during a lease renewal or a new facility lease negotiation”
For more than four decades, the overwhelming majority of professionals working throughout the commercial real estate industry have been and continue to be employed by landlords. Every year thousands of property managers, architects, contractors, construction professionals, and national real estate brokers, aggressively promote their services to savvy, highly experienced landlords looking to increase their building’s value and maximize profits. In contrast, successful tenant company executives focused on growing their own businesses, remain mostly unaware of the multiple millions of dollars in “unnecessary” corporate facility costs discreetly apportioned to their company by their landlord and broker. A large knowledge disparity relating to key factors impacting corporate real estate costs and building valuations, combined with a tremendous imbalance of skilled representation, leaves companies vulnerable to increased facility related risk, unnecessary building systems expenses and countless millions of dollars in higher rent payments. With over 32 years of experience in corporate real estate strategy and negotiation for mid-size and Fortune 1000 companies, we understand why and how companies needlessly forfeit tens of millions of dollars in available economic value every year. Central to the issue is a lack of transparency related to the most critical economic factors impacting real estate value, mediocre representation and the over-emphasized value attributed to “market data.”
While nearly 95% of all commercial real estate brokers make their living representing landlords, a more disturbing fact is how often landlord circumstances and key landlord related economic data critical to leveraging value and cost savings back to a tenant company, is purposely withheld or simply unrecognized by the brokers upon whom companies rely. Examples include: (i) the landlord’s economic risk, “gain and loss” exposure related to the contemplated lease, (ii) the value apportioned to the tenant company’s credit standing, and (iii) critical to large lease negotiations, the consequential increase in building value resulting from the net operating income (NOI), paid by the company over the contemplated lease term. Companies should consider if and when their broker ever disclosed the representative value these specific metrics represent in each lease negotiation, how he/she intended to leverage them to convert unrealized value back to the company, and/or if their broker mostly referred to and relied on “process” and “market data” to justify their recommendations and landlord proposals. The overwhelming majority of seasoned brokers and real estate directors are not trained or incentivized to leverage and convert intrinsic economic value related to these metrics. Effectively leveraging “all of the value” an individual tenant company brings to a landlord is essential if a company is intent on capturing the available dollars typically retained by their landlord.
One tactic used to increase costs and reduce economic concessions to a tenant company, is the broker practice of convincing company executives that “market comparable data” (information related to recently completed transactions concluded by the same landlord or other landlords, on similar size buildings in the area), should be the basis for measuring and/or justifying lease terms proposed by a respective landlord.
This practice initially introduced by landlord/developers, has evolved into a broker perpetuated exercise that has been readily accepted by company executives as an “easily understood” and seemingly “fair” way in which to justify a decision to buy or lease. However, it is landlord risk & cost factors, building value impacted by future NOI, and company credit strength that when effectively leveraged, will most influence economic value to an organization. The fact remains, companies rarely receive the total value their tenancy could produce for them. If a company expects to capture the available dollars typically retained by their landlord, corporate real estate policy must shift from “process” and reliance on a “real estate broker mindset”, to a mandate requiring (i) elevated strategic aptitude and (ii) high-level negotiation competency. These two attributes more than anything, will impact economic value, lost or retained by a company. Accordingly, facility related risk is reduced and “all of the value” a company brings to a Landlord’s building can be effectively leveraged and secured.
2014 (SB 1171) Disclosure Bill – In late 2014, tenant companies operating throughout California were provided some help in recognizing the bias levied upon large national brokerage companies and their brokers. That year Governor Jerry Brown signed a new agency disclosure bill into law, (SB 1171). The bill effectively requires local and national real estate companies and their brokers to disclose to a prospective tenant client, that they will also be representing a landlord or that they already represent the landlord(s) who is or could be a party in a contemplated real estate transaction. While this does not address or guarantee skilled, unbiased representation for tenant companies, it is at least a start in acknowledging the need for it. The new law is evidence there has been and continues to be significant consequential costs to companies resulting from the inherent conflict of interest that exists in an industry heavily weighted to the service and interests of landlords.
Case Studies – Company executives would do well to better understand how and why landlord circumstances, economics, risk, and critical point-in-time facility valuation analysis, can be effectively leveraged to dramatically reduce lease costs, increase cash concessions, and minimize facility risk. This insight also provides perspective that helps validate the use of proven strategies used to maximize critical negotiating leverage. Two recent examples include the re-negotiation of fully negotiated leases delivered by our client’s incumbent national broker, prior to execution. These were “same facility,” “same landlord” assignments where within approximately ninety days, the increase in cash allowances and direct rent savings went from $1.5 million and $2.1 million, to $8.6 and $16.6 million, respectively after CoreStrategy Corporation was engaged.
Our sharing detailed strategies, structures, and case studies linked to actual assignments is the most substantive and credible way for you to see and understand first hand, how you can use your company’s real estate needs and objectives to increase EBITDA. The strategies and structures we share, will apply specifically to your company’s facility lease renewal, a building acquisition, expansion, consolidation, or build-to-suit. The use of Capital Market Discount Structures and Bondable Lease Structures on large projects has also generated tens of millions of dollars in unexpected occupancy cost reductions and cash allocations for our corporate clients. The proceeds realized from these strategies and structures have then been used to partially or fully fund other key business initiatives.
By Ken Ward – President | Managing Principal, CoreStrategy Corporation