Knowing Your When
We see a lot of confusion in the market around when to begin negotiations. It’s not an insignificant consideration. In fact, when you begin can make a huge difference in the outcome. It’s understandable that tenants would not know when to start. Brokers are not always keen to start at the right time, since compensation is derived by transacting and the closer the tenant is to lease expiration, the faster it will need to transact (and the fewer options it will have). Good for the broker, bad for the tenant. This creates a misalignment of interests that discourages thoughtful consultation on the front end – the more time a broker spends on a project, the lower the compensation. On the other hand, brokers often market their services to tenants in ways that are decidedly more about getting attention than they are based on realistic solutions. For example, a client of mine recently received a marketing email from a broker that detailed how the landlord was in trouble, having recently lost several tenants. The project had mounting vacancy and a pending loan maturation -- common factors in the market today. The message went on to suggest that now was an excellent time for my client to negotiate favorable terms with this distressed landlord. Finally, there was a FOMO element in which the broker noted he has been meeting with and advising other tenants in the project. The message was sufficiently interesting that my client forwarded it to me. But here’s the thing, my client has 5 years remaining on its ~8,000 sf lease and the very circumstances the broker suggested as a catalyst for action are the exact reasons why the landlord will not be interested in engaging in talks to restructure the lease. This landlord will focus on filling vacant space, not on lowering in-place rents on leased space. These types of marketing campaigns can create a false narrative about leverage and cause tenants to engage in fruitless efforts to negotiate when there is no chance of success.
Look, we’re the first to say that leases should be reviewed throughout the term, not just as they approach expiration. Business needs change. So do markets. In certain situations, the mid-term lease can be favorably modified. Indeed, we’ve had excellent success recently negotiating restructure transactions which result in immediate reduction of the rent expense (along with other concessions) in exchange for term extension. But there’s a lot to consider before undertaking these types of negotiations.
There’s 2 ways tenants get timing wrong; too early, or too late. Both are ineffective, but the former is less damaging as you can always reboot the dialogue later when the time is right, whereas in the case of the latter, you’ve lost your opportunity to create and exercise leverage. We call the tenant who starts too early a “LeverageLESS Tenant”. Our term for the tenant who begins too late is “Captive Tenant”. The LeverageLESS Tenant gets nowhere with the landlord, while the Captive Tenant’s negotiating efforts yield an outcome that is less favorable than the market would otherwise offer because they’ve failed to capture and exercise their leverage.
Understanding your “when” requires smart analysis. We do so by building a financial model to underwrite the sweet spot between the market, the existing lease expiration, the unique landlord/lender motivations, and the specific leasing circumstances at the subject property. Helping our clients identify their when is among the most important things we do as tenant advisors. While we’re compensated the same as other brokers, we take a decidedly different approach by offering front end consultation that is not biased toward transacting. In the end, while we miss out on quick-hit fee scenarios, our practice is more valuable because we deliver better results to each client.