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Understanding the tenant's perspective.

Understanding the Tenant's Perspective Lease negotiations are often visualized as one or two high-powered meetings during which attorneys sit down with the prospective tenant, tenant's broker, owner, and owner's broker to discuss, negotiate, and finalize the terms of a lease contract. Indeed, this hypothetical scenario is an important part of the lease negotiation process.

However, effective negotiations begin much earlier and encompass far more than just final bargaining. By the time the players reach the actual written contract stage, all parties should be fairly comfortable with the anticipated outcome.

Because so many people are unrealistic in their approach to negotiations or are negatively influenced by personalities and attitudes, we have witnessed dozens of seemingly successful transactions dissolve for reasons unrelated to the actual merits of the property or the economics of the deal. This article will help you, the manager, visualize what a prospective tenant is going through at each step of the process and look at frequently encountered problem areas that could be avoided by arming yourself with a realistic attitude and a broader outlook.

Expand your horizons

A successful negotation process begins the first time a prospective tenant and owner or manager meet. Already at this stage, the manager can increase the chance of procuring a lease by qualifying the prospective tenant's needs and constraints and empathizing with his or her concerns. When you are leasing office space or otherwise dealing in commercial real estate on a day-to-day basis, the whole procedure can become routine. For the prospective tenant, however, it is often unfamiliar territory, typically encountered only once or twice in a 10-year period.

Furthermore, a lease is often a tenant's first or second most expensive overhead item. An informed and realistic manager understands this and never assumes anything--the impact of the decision confronting the prospective tenant is too far-reaching for the process to be taken lightly or to be perceived as being taken lightly.

A seemingly basic, but extremely important, factor is the difference between the owner's and the prospect's objectives. A prospective tenant is not concerned with your return on investment, your security risk, your construction financing, or your reversionary interest. A prospective tenant's priorities are usually a series of functional and subjective considerations, such as:

* Lowest cost of occupancy--What is the effective cost of the property relative to others under consideration?

* Ad quality--Will the final space selection have a desirable location and image for the business?

* REntable vs. usable square footage--Is the space designed efficiently?

* Growth control--Will more space be available, if necessary, and how much will it cost?

* Maximum services--What is available and provided by the building's management staff?

* Amenities--Does the building have parking, conference facilities, and so forth?

Temporarily shelving your marketing plan and focusing on the prospective tenant's concerns will give you an advantage over other, shortsighted managers. Basically, most prospective tenants are looking for the optimal space at the lowest possible cost of occupancy. Replace buzz words like "proforma" and "yield" with tenant language like "cost of occupancy" and "functional space," and your position will be improved at the onset.

Know where you are

To become a more effective negotiator, you will have to be patient and thoughtful. In other words, keep your eyes on the big picture. Start by familiarizing yourself with a prospective tenant's action plan, as illustrated in Figure 1. (Boldfaced areas show the stages which may involve the landlord.) In each successive meeting with a prospective tenant or tenant representative, determine which stage of the process has been reached. Knowing where the prospective tenant stands will help you evaluate what aspects of the eventual lease are presently being assessed.

* When a prospective tenant is formulating needs and constraints, a high-pressure approach is counterproductive. In many cases, the prospect is still adjusting to an unfamiliar setting and procedure and may not even know yet what his or her concerns should be. This is a purely informational phase, a time to separate real needs from desires.

If you do meet a prospect at this early stage, try to win trust by answering even the most basic questions in his or her own terms. Offer to help by preparing a sample floor plan or simply by forwarding helpful information on your project.

One of our clients was recently approached in two very different ways by owners, at a time when he was still unsure of his firm's specific requirements. One owner called him daily, sent over a proposal, and invited him repeatedly to lunch to discuss the project; the other offered to help with any market questions. The executive refused to meet with the first owner, but had friendly discussions with the second and, while collecting general information about the area, gave the owner insight into the requirements he would not otherwise have gotten.

* In the survey stage, the prospective tenant is comparing you with your competition. Be as accommodating as possible and work closely with the broker to ensure your building is being presented in its best light. Stress the quality of your building and its management services, and help to create a sense of urgency by mentioning recent activity on the project.

When quoting numbers at this stage, leave room for future negotiations, but beware of pricing yourself out of the prospective tenant's range of acceptability. In a recent survey for a large institution, a developer, whose building's quoted rate had been considered too expensive, offered to lower the effective rent we had estimated in the survey. He also gave us a spectatular rendering of the building with the prospect's logo superimposed in the building facade. Reacting to the combination of realism and personal attention, the prospective tenant put the developer's project back onto his short list.

* If y ou receive a request for proposal (RFP) from a prospective tenant, try to respond in the requested format, even if you strongly prefer your own. Remember, a manager does this daily, but a prospective tenant does not. He or she will better understand proposals formulated in a similar fashion. We frequently see instances where a prospective tenant receives three proposals in the requested format and one formulated totally differently. Quite often the prospect will neglect the fourth project because the proposal is not understood and translating it is inconvenient.

For example, many associations need to budget several years in advance and, therefore, want fixed annual rent increases rather than rates tied to the Consumer Price Index (CPI). Whenever we replace CPI-tied increases with fixed ones in RFPs, one manager invariably comes back with a CPI-tied proposal. Similarly, some firms prefer to get their free rent over several fiscal years while others prefer to get it up front.

Owners clearly have finance or evaluation needs which make one method of payment favorable to another. Yet, you must keep in mind that it is easier for you to be financially flexible than it is for a prospective tenant. Respond quickly to all RFPs and, whenever possible, give reasons for points that cannot be accommodated. Personal contact and indications of interest can be very beneficial at this stage. Determine which issues are most critical to the prospective tenant, and give these points the most serious consideration.

* Help the prospect through the space analysis phase by providing complete and accurate information--drawings, building systems information, work letter allowance, construction agreement--to the broker and architect. In most markets, an owner should agree to pay for a preliminary plan whether or not a lease is ultimately signed. If necessary, let the prospective tenant use his or her own architect by providing credit for this purpose. The prospect's comfort level with you and your property will be greatly enhanced.

A client recently had her architect perform analyses on three projects she was investigating. At a fourth, the owner would only pay for the building's space planner to perform the analysis. The prospect felt the fourth analysis would not be as objective as the other three; she paid her architect to redo the analysis, but the episode hurt the relationship.

* When a prospective tenant is evaluating economic ramifications, determine the computation methods used in the broker's lease analysis. Your subsequent (counter-) proposals should be tailored to the program. For instance, one owner was offering our client a $30-per-square-foot rate with five months rental abatement until he learned that our discount rate was a relatively high 12 percent because of short-term savings programs and budget cutbacks. The owner changed the offer to $33 per square foot with 10 months rental abatement, only a slightly better (five-year) effective rate, but a much better deal on the present value analysis.

Throughout the process remember that a prospective tenant wants to feel that a manager is interested in him or her. Paying close attention to each stage of the prospective tenant action plan and responding in a fashion that reflects your appreciation of any potential concerns will facilitate the decision-making process and will greatly enhance your chances of reaching final negotiations.

Get the facts straight

When one of our clients wanted to lease more square footage than his firm needed to occupy, the owner of the first-choice site assumed he would sublet the extra space for a profit and reacted negatively to further growth space options during negotations. In fact, the prospect had uncontrollable growth potential and wanted to be prepared. The prospect had even planned to accommodate certain affiliate groups within the space. The prospective tenant had absolutely no intention of taking on high-cost property and entering the real estate business.

Had the owner asked more questions, both parties would now be happily settled together. Instead, the prospective tenant signee elsewhere.

Making the wrong assumptions can be very damaging to you. The more you understand prospective tenants, the better you will understand their requirements and any special needs. Spend the time to learn about a prospect; avoiding potential misunderstandings will increase your chances of securing the lease. Start with initial, basic questions:

* What business is the firm in?

* What is the state of that industry?

* What is its strategic planning in this market?

* Where is the firm headquartered?

* What is the firm's profit and size?

* Who are the principals?

Once you have gathered some basic information, you will need to qualify the prospect further and any individuals you might meet at various stages of the negotation process. To simplify your work and help stimulate your memory, we recommend using the "numeral" process:

* Needs. More space, better location, lower costs? Your approach will need to be different if a prospective tenant is seeking an upgraded image than if the primary factor is economics. What is the desired form of occupancy--lease, lease equity, sale/leaseback?

* Urgency. Considering a move or already decided to move? Why and when? Urgency (or lack thereof) will separate your "prospects" from your "suspects." You might be spending a great deal of time with someone who will never move. Moreover, you may be wasting time if your timetable is very different from the prospective tenant's.

* Motivation. Lease expiration, consolidation, growth? The cause that drives a prospect's actual needs should similarly impact your focus.

* Expectations. What quality is expected and at what price? What type of transaction is desired? Is there a realistic understanding of the market and the relocation process? Expectations give you an idea of a prospect's knowledge and understanding of the market. A prospective tenant's view of the market may be very different from yours. Take care to address his or her view of the market or you might as well be speaking different languages.

* Resources. Can the prospective tenant pay for what he or she wants? Guarantee the lease? Is there a security risk? If necessary, cutting your losses will be much less painful now than later.

* Authority. How much authority do the people meeting with you have to negotiate a transaction? What is the decision-making process? Who will sign the lease? Without stepping on toes and antagonizing a possible ally, you will wnat to meet the final decision-maker(s) as early as possible.

* Loyalty. Is the prospect loyal to his or her representatives and their advice? Have they worked together a long time? If so, you will wnat to win the representatives' trust. If the prospective tenant basically ignores them, you might later be treated poorly as well. In addition, do you sense respect for "good faith" negotiations? If you agree to a proposal, will the prospective tenant proceed to a lease or use it elsewhere as a bargaining chip? Before entering final negotiations, you want to know how well you can trust your future tenant.

After closely evaluating all the gathered information and separating the needs from the ideals, you are now much better prepared to enter into serious negotations. You should now have invaluable insight, not only into the prospective tenant's perspective, but into your own ultimate negotiating power as well.

Know your weaknesses

As mentioned earlier, most prospective tenants receive a survey that presents an overview of the market as well as a detailed report on the specific buildings under consideration. This information eventually leads the prospective tenant to inspect sites, which is your opportunity to begin negotiation by giving the published price or quoting deal in the initial walk-through.

To convince a prospect that you can satisfy his or her requirement, you need to know and understand not only the specific needs, but every detail of your product. If you ignore a significant economic gap between your building and the one down the block, your space may remain vacant. Two buildings in the same area should have the same rates only if they offer similar physical characteristics and amenities.

We once represented a tenant-owner whose property was extremely competitive in all respects but two--a lack of parking and a too strong identity. The building was named for its owner and associated with it to such an extent that prospective tenants felt their own identities would become nonexistent or at best secondary.

After enough firms had said they would not pay top dollar for a building without parking and into which they might "disappear," the owner finally faced the problem and provided some acceptable alternatives. Parking space was found in other area buildings and tenants were given additional privileges, such as use of the executive dining room and signage capabilities.

Prospective tenants often get frustrated in their search because they feel owners try to ignore or gloss over weaknesses such as inferior HVAC systems, lack of security after hours, or poor access to public transportation. Know what the competition is offering, and know its value to a prospective tenant. If certain amenities are considered standard in your market, be prepared to explain why your building does not offer them, or what you offer instead. Knowing

your product and its relative value within the market allows you to anticipate potential trouble areas.

Viewing your building objectively should also indicate how flexible you will have to be during negotiations. Believe in your property, but do not, at the onset, price your product unrealistically out of the market, or you may not get the chance to negotiate.

Be honest and accurate abut yourb building's capabilities and costs. Responses such as "that will only involve a nominal charge" or "we can take care of that" to specific questions may get you past the business proposal, but will come back to haunt you during the final lease negotiations when each point is discussed in detail. If your integrity is questioned, you may lose a good prospect.

After investing so much time and money in a project, many owners understandably become very attached to their building. If this affinity leads to a loss of objectivity, however, the owner may ironically become the greatest impediment to a successful and rapid lease-up. To offset this danger, carefully select your listing brokers and trust their market knowledge when comparing your project to others.

Follow the system

Many lease negotiations fall through because an owner refuses to respect intended lines of communications. You might have had a bad experience with a broker, or simply be more comfortable working directly with the ultimate decision-maker, but you might create an impression of having something to hide from a professional eye. Many prospective tenants fell intimidated or unduly pressured when an owner or a manager calls them directly rather than working through their representative(s).

Contrary to even our expectations, one of our clients recently refused to renew his lease because the owner insisted there was no need to bring us into the negotiations. Another prospective tenant we represented became irritated when an owner started calling him directly with questions he had to refer back to us. The prospective tenant had neither the answers nor the time to research answers, and felt the owner's methods were unprofessional.

In the same vein, owners sometimes hurt themselves by trying to save on broker commissions. These have become fairly standardized within each market, and good tenant brokers typically seek further standardization. To further allay potential concerns about subjectivity or conflicts of nterest, more and more brokers today realize the importance of exercising full disclosure with their clients. If one building is offering a below-market commission, chances are the prospective tenant will hear about it.

In a recent, large transaction, a prospective tenant had narrowed his options to four buildings. Three were offering a standard market commission; the fourth was a full percentage point below market. The client, with whom we had been working for over a year, included the 1-percent additional commission as a business point in his proposal. When the proposal came back with no change in the commission rate, the prospective tenant felt that he would have to come up with the difference. He chose another building.

Finally, while there might indeed be an excessive number of brokers in many markets, making sidestepping them tempting, there is just too much leeway for subjectivity during the survey and proposal stagaes to make this approach viable. By working with the prospective tenant's representatives, the information flow throughout the process will be smoother and faster and the prospect's relationship with you will often be more comfortable.

Unless your property is the only one of its kind in its market and you have no plans to ever build or lease another one, your interests are probably better served by getting whatever edge you can within the system rather than reinventing the wheel with each prospect.

Stick to the deal

All too often, deals fall through after the parties sit down with the lawyers for final negotiations. By this time, the business and financial terms should be close to set, ready to be translated into legal points, not to be renegotiated. At this stage, do not re-open tentatively agreed upon points. A "selective memory" can create an impression of bad faith and change the atmosphere at a time when goodwill is critically needed.

Another problem during final negotiations is the need some parties have for fighting over each and every point. Present a reasonably fair first draft of the lease. Some prospective tenants shy away from managers with a reputation for turning negotiations into more of a battleground than necessary. Show a willingness to aggressively pursue a quality tenant and compromise when necessary. It is human nature to think you have to fight for the best deal, but your chances of winning the important points are increased by your willingness to give in on some of the minor ones.

Finally, do not let the lawyers try to act as brokers. Whenever possible, keep the attorneys focused on legal points and language. Lawyers for tenants are especially known for mistakenly trying to "help" their clients by looking at business terms and considering them separately rather than as a "bundle of rights." Lawyers should be available to interpret phrases such as "substantial completion" or "late delivery penalties," rather than to involve themselves with negotiating concessions.

Listen, listen, listen!

Throughout the entire process, listen and react to what is being said by the tenant. This tactic cannot be stressed enough. Too many negotiations fall through simply because one party does not hear what the other is saying or ignores it in steadfast pursuit of preconceived objectives and methods.

For instance, after a thorough space analysis, one of our clients determined that a $20 above-standard allowance would be necessary for planned improvements. It was made quite clear to the owner that this point was nonnegotiable to the prospective tenant, even if it meant less free rent or more base rent. Sticking to his pro-forma, the owner came back with a $15-per-square-foot offer and lost the tenant, even though the overall economics were within reach.

And, throughout...

Due to the complexity of our commercial real estate markets, today's lease transactions have become very sophisticated, and many players may be involved in helping a prospective tenant make a decision. However frustrating or inconvenient, recognize that each of these pl ayers performs a specific role in the overall process, and take advantage of these additional channels of communications. Whenever you can, use the system to your advantage--to better understand the prospect's needs, to smooth the information flow, to get your message across, even to get an extra ally.

Too many owners and managers rely solely on hardline tactics (Figure 2) in their approach to leasing space, and, in some cases, high pressure methods are indeed necessary. In most cases, however, being flexible and recognizing that every deal, every prospect, and every individual is different and acting accordingly will prove more beneficial to you. In the end, your goal is to lease your space, not perpetuate vacancy by lengthening an already long and complicated procedure.

PAtrick J. Haley and Joseph E. Kampa are vice presidents of Shannon & Luchs Commercial Brokerage Division in Washington, D.C. As tenant representation specialists. Haley and Kampa has negotiated transactions exceeding $250 million.
COPYRIGHT 1989 National Association of Realtors
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Author:Haley, Patrick J.; Kampa, Joseph E.
Publication:Journal of Property Management
Date:Nov 1, 1989
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