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VOL. 127 | NO. 144 | Wednesday, July 25, 2012

Master the Art of Compromise In Lease Negotiations

By Frazier Baker

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Every lease transaction involves two key parties – a landlord and a tenant. Each party has his or her own objectives.

Generally, landlords want to minimize costs, maximize revenues and mitigate risks. These things are most likely to occur when landlords are able to find good, credit-worthy, long-term clients who don’t demand outlandish tenant improvements, as well as tenants who consistently pay rent on time. Tenants want to minimize their costs, get move-in-ready space and obtain flexible lease terms that protect them in unforeseen circumstances, like the ability to sublease if downsizing needs to occur, etc.

Understanding things from the landlord’s perspective helps a tenant rep broker to work more effectively for a tenant in setting realistic expectations and negotiating a fair and equitable lease. For example, a good tenant rep will be very aware of the details of recent deals in each submarket. This helps the tenant rep conduct a lease negotiation with the knowledge of what specific landlords are likely to accept in terms of rates and concessions. Landlords are going to prefer dealing with knowledgeable tenant rep brokers who don’t try to “shoot from the hip” but, rather, are educated about what is reasonable given current market conditions.

Of course, from the landlord’s perspective, finding a credit-worthy tenant is critical and, in the ideal scenario, they’d want a personal guarantee from the tenant. Most tenants, on the other hand, don’t really want to have to go this far to guarantee payment of the lease. Finding a tenant rep broker who can look for creative ways to structure a tenant’s guarantee can be the difference-maker in whether or not a deal can be struck. For example, instead of that personal guarantee, maybe more rent is paid in advance. Particularly in today’s market, landlords are willing to make reasonable compromises and it’s simply a matter of understanding what each party is trying to achieve and finding a balanced solution.

Tenant improvements represent another major opportunity for compromise. Naturally, a landlord wants to minimize the improvements that must be made to a space before a tenant has moved in and begun generating revenue for the landlord. A good tenant rep will identify what’s truly important and critical to a tenant’s business operations, look for the most impactful changes, find cost-effective ways these things can be accomplished – and then present these to the landlord as part of the lease negotiation.

Finally, the question often arises about whether or not a tenant actually needs a broker to help negotiate a lease. After all, isn’t that a potentially avoidable expense? First, the tenant does not pay the tenant rep broker’s fee – the landlord does. Without question, having a good tenant rep who is representing the tenant’s interests will, in almost every case, result in a better lease.

So, then, wouldn’t the landlord like to avoid that expense? Well, technically, maybe. But in reality, most landlords anticipate and budget for tenant rep brokers’ fees. And at the end of the day, having a knowledgeable tenant rep broker involved in the transaction expedites the process, which is good for all parties involved.

Frazier Baker is vice president of office services for Colliers International in Memphis specializing in office tenant representation.

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