Cutting through the market deal myth
Look at the Whole Deal
Can two deals where the lease for both state the same start rate actually be the same?
What if in one case the landlord pretty much handed the keys to the tenant who took the space on an “as is” basis and, to make matters even more complex, after the tenant found the space by simply calling the broker whose name appeared on the sign out in front of the building? Would that deal have the same economic value to the tenant if the deal also involved additional tenant improvements and brokers’ commissions?
Where did the extra Money Go?
It certainly didn’t go to the tenant! In reality, one might think in the first case that the landlord could afford to give the tenant a break because extra money the landlord would not have had to spend out of pocket cash for TI’s and fees.
Yes, one might think…but this is real estate. If the landlord were to lower his base rental rate because of such “give-backs,” the “market rate,” -what the building now sets as a comparative fair market value that other brokers and building owners would then consider “the market”- would appear lower. According to most listing brokers and appraisers, the market is simply the face rate of the last deal done.
Landlords have two incentives to not give back such costs by lowering the rent. Not only does the higher rate reflect a “higher market, but can you say “PROFIT.” (Or as Steve Martin said in the movie The Jerk, “It’s a profit scam”.) Not really, just good negotiation on the landlord’s part. The base rate stays the same but the landlord gets to pocket the windfall difference. If you’re looking for true market comparisons, make sure you understand all the concessions that went into the comparative deals.
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