Smart leverage Featured

8:00pm EDT August 26, 2007

If you don’t have any other options, are you negotiating or settling? Tenants looking for new space need to create leverage to land the deals that best achieve their objectives. “If tenants focus on one particular alternative, they’re putting all of their eggs in one basket,” says Jonti Bacharach, vice president with CresaPartners in Orange County. “If you haven’t created leverage, you don’t know if the landlord is taking advantage of you.”

Smart Business spoke with Bacharach about how tenants can benefit from real estate leverage.

How do landlords try to minimize tenant leverage?

The most common way landlords attempt to diminish tenants’ negotiating power is by outsmarting them in order to dictate and ultimately control the final terms and conditions of the agreement. If the tenant hasn’t covered his bases and completed his due diligence, then the landlord is much more likely to come out on top. Having strong, experienced representation that is able to generate leverage and produce credible alternatives levels the playing field.

How can tenants maximize their leverage?

There are many ways. At the most basic level, tenants create leverage by casting a wide net. This means they consider many alternatives in the marketplace. Rather than only considering what they have done in the past, companies might do well to think about options like purchasing versus leasing, buying land and building to suit, buying and rehabbing, or buying and changing the use, such as converting an industrial facility into an office building. By exposing themselves to the entire market, tenants create more options and better solutions.

Why is it important to look at the big picture?

A big-picture perspective helps executives make better decisions at every level. When running a business, most companies facing decisions with large financial ramifications are accustomed to taking a big-picture perspective. However, when confronted with a business lease or purchase decision, sometimes businesses react rather than plan. At this time, executives need to step back and evaluate the overall status of their company, preferably 12 to 24 months in advance of a buying or leasing decision.

Once companies determine their strategic business plan, they can use it to drive real estate decisions. Real estate should always support the company’s business plan. In this fast-paced business economy, businesses and the way they operate can change over the years while their office space and facility layout remain the same. Using defined objectives, companies and their real estate advisers can provide alternatives that better support the business and operational needs at lower costs.

What benefits can tenants receive from leverage?

Leverage most often comes from having options. More options allows companies to generate better terms and conditions in the form of:

  • More favorable lease rates

  • Tenant improvement packages

  • Free rent, moving allowances, lease flexibility

  • More beneficial sublease rights

  • Additional hours of operation without after-hours charges

  • Risk mitigation protection

  • Signage rights

  • Straight-line amortization of additional tenant improvement dollars instead of set-percentage amortization

With the aid of leverage, tenants can increase the probability of securing better terms and conditions within a lease or purchase agreement. Having back-up properties also allows companies to make educated decisions based on the overall market, not just one set of factors.

How can real estate advisers create optimal tenant leverage?

Our job as real estate advisers begins by educating tenants throughout the real estate process so they understand the process and what is at risk. We assist with the strategic planning process, provide comprehensive analysis and then lead the implementation process.

Real estate decisions aren’t isolated, onetime events. Effective real estate advisers ensure the real estate supports the business needs. Ideally, this begins 12 to 24 months prior to lease expiration. The best real estate advisers also know how to overcome tight deadlines and still achieve outstanding results. However, a shortened lead-time forces tenants to react much more quickly.

Once real estate advisers and tenants have pursued multiple opportunities, advisers can use this knowledge to help tenants achieve the most favorable terms and conditions. If one landlord refuses to offer reasonable concessions, leveraged tenants have the ability to move on. When tenants can tell landlords that they’re not willing to compromise on certain points, the probability is high that a better result will occur. When landlords know tenants have options, they often bend and agree to a meaningful compromise. Without leverage, tenants have no real negotiating power and are forced to accept whatever the landlord dictates.

The bottom line is this: tenants should always have a serious backup. Real estate advisers can help them start negotiations with five to seven options and then negotiate the fine-print terms and conditions with two or three alternatives before signing a final letter of intent.

JONTI BACHARACH is vice president of CresaPartners in Orange County. Reach him at (949) 706-6576 or jbacharach@cresapartners.com.