Frequently, we are asked by our clients whether it is more beneficial to lease or own their real estate. It is a great question and one that companies should be asking themselves and their advisors, particularly if the new international accounting standards are implemented and leases become “on balance sheet” transactions. The answer, however, is not black and white and will vary based on the company and the type of real estate involved.
For the first time in more than a generation, businesses are contemplating and, in many cases, implementing, dramatic changes in their office design and space utilization. In some instances, these changes were instigated by permanent paradigm shifts in their business as a result of the Great Recession of 2008. For others, the changes reflect a desire to stay current and competitive, and otherwise ensure that their space supports the way their employees actually work today. Regardless of the motivations, more and more companies are looking to shake things up. However, with change often comes fear, confusion and stress for the project leaders and employees.
You are in the jungle and are suddenly bitten by a poisonous snake. You will not survive unless you receive an antidote within one hour. You panic until you are assured that a local businessman, Joe, has the antidote. When you ask Joe for help he asks you how much you are willing to pay for the remedy. You have $1,000 in your wallet and only 20 minutes left to act. How much will you pay Joe? My guess is you’ll fork over the $1,000 without much haggling especially if Joe knows what’s in your wallet. Joe has what you need, there are no other alternatives and, under the circumstances, the product is worth everything to you. In fact, you’d pay more if you had it.
There are scores of “tenant only” brokerage firms around the country and hundreds of brokers who have dedicated their careers to representing only tenants. Thousands of companies have chosen to work with these firms and brokers because they believe there is an irreconcilable conflict of interest when brokers attempt to represent both landlords and tenants in the same market.
A very wise mentor of mine once told me that when a seemingly smart and rational person takes a seemingly irrational position in a negotiation, it can be explained in one of two ways: either the person is not as smart and rational as you thought they were or, more likely, they have a hidden agenda or knowledge of certain facts which, if revealed to you, would reveal the rationality of their position.
When you look at leasing comparables for particular building, one consistent pattern invariably exists – renewing tenants don’t achieve the same deal that new tenants receive. Tenants often believe that because they are a good, rent-paying tenant that their landlord surely wants to keep them on favorable terms. Many tenants don’t realize that landlords view renewing tenants as captive, and already have factored a high renewal probability on favorable terms for the landlord into their pro-formas. Tenants can avoid this discrepancy by taking steps to make their landlord compete to keep their tenancy.
Rate. Landlords focus tenants on the rate, and as a result, the rate is the most common term tenants and their business advisers focus on when discussing their leases with each other. Tenants need to go beyond landlord marketing tactics to understand the other 24,999 words in a lease that can cost them money.
Think back to high school math; it probably started with algebra and ended with calculus. Up until calculus, your math homework may have been easy; if you were so inclined, you could look up the answer in the back of the book and be done with it. This easy road came to dead end, however, when you got to calculus. In calculus, you actually have to prove the answer. In a lease negotiation, it’s not enough to tell the landlord that x=30 (dollars per square foot that is); you actually have to prove through the right process that you deserve the terms you seek and the terms that you should be seeking.
When it comes time to sign a lease on new office space, you’ve undoubtedly put considerable thought and countless hours into finding the perfect space. You have every reason to be excited about signing the lease and getting the show on the road. However, in your excitement, it’s vitally important to be certain that you really haven’t missed anything. That means you’ll need to put forth just a bit more effort in focusing on the fine print. After all, with all the time you’ve invested in your company, the last thing you need is to find some loophole that may wind up being a financial pitfall. Here’s a look at five items that warrant your attention before you sign that dotted line.