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jerryn@inhousecorp.com

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Three Parts to a Negotiation
or
Why a Deal Takes So Long

 

Negotiations don't stop with the proposal. In another chapter, we offered you a laundry list of what to include in a proposal to the landlord. One would think that all you have to do is go back and forth a few times, nail down a couple of deal points by compromising here and there, and the deal is done. Wrong. As a matter of fact, you've only just begun.

 

There are actually three parts to a deal negotiations. They are:

 

  • Deal points.

  • Tenant improvements. 

  • Lease negotiations.

 

A hang-up with any one of these three items can either delay or actually blow up a deal at any time. What we suggest is using the proposal as a tool to negotiate all three areas at the same time. Too often we see that after the deal points have been generally negotiated, the broker disappears and turns the lease over to the attorney who is working only off of sketchy material.

 

  • Delay number one: He is asked to document the transaction to your benefit without having all the necessary information. Basically, he’s fighting with one hand tied behind his back.

  • Delay number two: Let's suppose you do get through the lease. Now the landlord starts to prepare the premises by doing the improvement work. Are you getting what you thought you agreed to? Where's the documentation? Quite probably, you’re facing another delay.

 

A big benefit of properly tracking every step of the deal is the ability to insert specific lease language in your proposal, and thus document it throughout your paper trail. If the landlord rejects one of your points (which, on the surface, appears to be a rejection of a deal point), he may actually be rejecting your proposed lease language at the same time. Did you ask for and actually get a "boiler plate" copy of the landlord's lease to review prior to accepting the deal?

 

What did you ask for in the “tenant improvement” section of the proposal? When the landlord said he would improve the space to “building standard," did you get a list of what exactly the building standards are? Not only can that cost you time, but if you're not clear up front, expect to spend lots of money when the landlord tells that “change" is an upgrade, and that you have to pay for it.

 

Let's start with some deal point hang-ups. While most of the time the focus is on economic issues, be careful of non-economic issues too. We'll go over some problems we've seen. In the mean time, go back and reread our chapter, “Didn't We Discuss That?” to see what deal points you need to be negotiating.

 

Lease negotiations are what can really make or break the deal. Maybe you didn't know this, but the landlord's asset manager (for large institutional owners) or his broker often has the initial say on approval of lease language. Most of the time, they are either looking to cover their rear end or are in fear of having to go to the landlord's attorney with comments. Keep in mind that, typically, they know little about leases in the first place. If he puts quashes it, you're either dead in the water, or you will be forced to live with an onerous lease.

 

Normally, when we receive a copy of the boilerplate lease, we tailor our proposal response to include some specific lease language we want that reflects the deal point to our client's benefit. Specifically, one such clause might establish a definition of "fair market value" for renewals. Even though it may not be accepted verbatim, at least it gives a heads up as to what we expect.

 

A good broker/asset manager knows his "business deal" parameters and can usually reach a compromise. If it's a legal point or legal language, the good broker/asset manager will take it to the attorney. If it were a deal point outside his parameters (which had hopefully already been negotiated in the proposals), he would go back to the landlord for specific guidance.

 

Then again, there's the other guy, the one we referred to above. We recently received an institutional lease, which we reviewed on behalf of our client. The deal was a three-year lease where the landlord only had to paint and re-carpet the space. The problem was, the lease was written to cover the landlord's entire national portfolio, had been bastardized by layers of attorneys over the years, and contradicted itself at numerous instances. To top it off, the broker's responses to our proposal never addressed 80% of our issues. His Big Firm boilerplate response addressed only the ten-twelve items those brokers usually concern themselves with. Our client’s attorney’s fifty-sixty items topped our forty or so comments. What did the asset manager say? He "gave in" on about ten items (that were in most cases red herrings on our part) and refused to modify something as standard as the fact the tenant would be in default if he vacated the space, but continued to pay rent (this is a carry-over from retail leases) - basically, he sent up a big red flag.

 

At this point, both sides have spent thousands of dollars in legal fees, the tenant has been delayed in moving in, and tempers are flaring—all because an asset manager looked at the deal as being small, and he just sought cover himself. Go back to “Finding Space if You're Not a Ten-Ton Elephant” for further insight on this sort of case.

 

We had a similar situation several months ago with an asset manager representing a large institutional landlord. In that case, the broker representing the landlord came to the rescue. He was extremely knowledgeable in lease language, understood the market, and was a good salesman. That lease got done in a matter of several days, despite the initial negative position of the asset manager.

 

These are some of the things you can do to assure the lease negotiations don't drag on:

 

  • Bring up as much of the lease language issues as you can in your proposals.

  • Be sure your broker understands the lease from a business perspective, so that when you give it to your attorney (always have an attorney review your lease), most of the lease negotiations have been completed.

  • Pray you have an asset manager on the other side that is confident in his ability to understand your needs and comfortable in his ability to handle lease language modifications.

  • If all else fails, pray that the broker representing the landlord can intercede and make it work.