Corporate real estate leases Featured

10:24am EDT July 31, 2006
Whether it involves negotiating a lease on a 50,000-sq. foot office facility, interfacing with a car salesman or simply negotiating terms to refinance an existing mortgage, people respect the opinions of those who consistently come out on top.

“When negotiating corporate real estate transactions, we learned that there are many factors that create optimum results — from the broad market to an individual’s personality and temperament,” says Ken Ward, managing partner at CRESA Partners Orange County in Newport Beach, Calif.

Smart Business asked Ward to share his thoughts regarding corporate real estate transactions.

What are the advantages of a short-term versus a long-term lease?
A company’s business plan should dictate the term of the lease. Communicate your short- and long-term business objectives with your corporate real estate adviser. He or she should then be sure to align the real estate transaction with the company’s long-term business plan. Where we are in the real estate cycle can also have an impact on the ideal lease term; however it should not in and of itself drive the real estate decision. Rather, the business objectives and operational needs of the company should do that.

Accordingly, positioning your company to maximize economics and/or landlord concessions is both an art and a skill. In some cases when it’s appropriate, we will advise our client to pursue a short-term extension in order to support the company’s long-term objectives and/or to position a company to take advantage of lower costs likely to occur if and when we expect real estate values or rental costs to fall. For a 15,000-sq. foot office tenant, the difference in striking a five-year lease at the height of the real estate cycle versus the bottom of that cycle can be $800,000 in rent and $300,000 in tenant improvement dollars. With everything else being equal, companies that effectively address this issue actually realize a competitive advantage because their cost of doing business is less.

Are there issues other than the standard economic or cash issues that executives should consider?
Companies should pay more attention to liability issues that may have an adverse economic impact to the company over the term of the lease. These can include costs that the tenant is responsible for, like paying the landlord 50 percent of any sublease income you may generate during the lease term or bringing the property back to its original condition after the lease expires. Other considerations include cancellation rights and/or the right to give space back to the landlord. HVAC repair and/or replacement can be another black hole to tenants. Most tenants carry insurance, but there are issues involving whose deductible is met first and who ultimately pays for what in the event of a loss.

If I want to retain the very best real estate adviser, what should I look for in personality and temperament?
1) Experience: decades of experience, having completed hundreds of negotiations involving assignments representing tenants.

2) Skill and ability: that is self-evident and sets them apart from the crowd. Included in that would be strong communication skills.

3) Creativity: the ability to see and create an extraordinary result through unconventional means.

4) Strategic mindset: a personality that is clearly strategic and unconventional, including the ability to think in the abstract and prognosticate landlord reactions and/or responses.

5) Professionally aggressive: As a general rule, ‘Type A’ personalities have a tendency to produce better results because they are less adverse to conflict. Look for someone who is relentless and consistently pursuing every angle in order to create additional savings and a better overall result for your company.

What what other considerations can increase the probability that a company will achieve the best economics, terms and conditions possible?
First and foremost, I would hire a specialist. Even if you have worked with the same real estate broker for years, taking the time to interview at least one or two other real estate specialists most often will result in hundreds of thousands of dollars in unexpected savings. Listen to how each adviser approaches your specific issues. Look for a strong history of superior performance. Walk away knowing what it is that makes that specific adviser unique. How does he or she measure up against competitors? I would always avoid retaining a company or adviser wherein a potential conflict of interest could occur. Ask if the adviser’s real estate company is focused specifically on supporting the objectives of your company, or whether they also represent landlords.

KENNETH D. WARD is managing partner with CRESA Partners Orange County. CRESA Partners is an international corporate real estate advisory firm that exclusively represents tenants/space users and specializes in the delivery of fully integrated real estate services. CRESA Partners along with their integrated service groups, represent more than 50 percent of the Fortune 1000. Reach Ken Ward at (949) 706-6623 or kward@cresapartners.com.