#lease

TenantSee Weekly: Modern Workplace Planning: Solving for Experience Part VI: Negotiating the Lease

TenantSee Weekly:  Modern Workplace Planning:  Solving for Experience  Part VI:  Negotiating the Lease

Leases vary by building, by market, and by market circumstances.  In most major metros, when dealing with larger buildings, the lease document is sophisticated and complex, addressing a broad range of variables that will have a material impact on the occupier’s experience at the building, as well as its cost of occupancy.  If you’ve done a good job negotiating the letter of intent, you should begin the lease negotiation phase from a position of relative strength.  However, even when the letter of intent is fully maximized, there’s still a lot to negotiate in the lease.

TenantSee Weekly: Successful Negotiating Strategies for Office Tenants

TenantSee Weekly: Successful Negotiating Strategies for Office Tenants

Many business executives know how to negotiate.  Indeed, it’s a vital skillset essential to advancement in nearly all careers.  But not all negotiations are equal.  Negotiating leases on behalf of office tenants, for example, is a specialized undertaking.  As with all negotiations, successful tenant lease negotiations are highly correlated with understanding the motivations of the counterparty.  This means knowing everything about the landlord, including the equity and debt positions, the investment thesis, the leasing dynamic at the building (vacancy, lease rollover, etc.), the value of any recently completed comparable lease transactions in the building and in the market, and the overall market dynamic.  These factors are fundamental to assessing leverage.  Yet even when these basic elements are in place, the act of exercising leverage also requires special skills. 

TenantSee Weekly: Translating the Lease

TenantSee Weekly: Translating the Lease

Recently, we completed a lease for a client in a small San Francisco building.  The transaction was negotiated to provide our client with a tenant improvement allowance, and the right to manage their construction.  Because the client is a design firm, this approach suited them well.  They understand design and construction and can leverage relationships to mitigate cost.  The ownership of this building is not an institution, its management team lacks the sophistication you would otherwise see with professionals working for larger institutional owners.  The lease provided the landlord with the right to approve the plans prior to construction, but it notably lacked a specific mechanism for communicating such approval.  Our client provided detailed plans.  They received a few minor comments/questions to which they responded promptly.  Otherwise, the landlord agreed to the project schedule and let them commence their construction – implicit approval.  During the construction, the client invited the management team to attend weekly meetings, to walk the space and generally sought to keep them informed (under no obligation to do so).  Despite a few bumps along the way (the building had non-compliance in a few areas and a small amount of hazmat was discovered), the project was successfully completed.  However, after moving into the space, the landlord sent a letter stating numerous elements of the construction had been completed without its approval, and the space must be restored at the end of the lease term (an undertaking which would cost hundreds of thousands of dollars).  Naturally, our client was concerned.  Thankfully, they sent us the letter and asked for our guidance.

TenantSee Weekly: Meet WALT

TenantSee Weekly: Meet WALT

WALT, or weighted average lease term, is an essential metric in the valuation of office buildings as it forecasts the stability of future cash flow.  WALT was less important back when office markets like San Francisco were seeing aggressive year over year rent growth.  Back then vacancy was worth more than leased space, the theory being a buyer could take advantage of vacant space to capture higher rent (necessary to justify inflated pricing which baked in aggressive rent growth assumptions).  However, in the broader historical context of valuation, the idea that vacancy is worth more than occupancy is antithetical to defining value.  Indeed, the more prevalent (and logical) approach to value hinges on the quality and duration of the net operating income.  Of course, this approach is less sexy as it disables a seller’s capacity to “sell the dream”.  The buyer is buying stability and yield, both of which are measurable going in.