Why Large Companies Don’t Maximize Negotiation Leverage
It’s startling to read a large tenant’s lease and discover how less favorable it is compared to what smaller tenants with less leverage achieved at the same time in the market. Sometimes, the rent and other cost exposures are higher; other times, the work letter was poorly negotiated or the company is overexposed to liability. Typically, the reason for this unexpected dynamic is the company’s internal real estate process, which is often fragmented and precise but not accurate.
The most common barrier to real estate success for a large company stems from a segmented internal process that is not held together by strong tenant representation. For instance, for most large companies, whether they have one facility or multiple facilities, there’s usually a person focused on design/construction, someone else focused on accounting, someone else focused on lease administration and someone else focused on legal. In this system, the role of an outside tenant representative is typically to merely “find” space, provide market information and act as a conduit with the existing or prospective landlords. This disjointed process leads to delays, higher total costs and undue risk.
A more successful approach involves qualified tenant representation through every facet of real estate, including accounting, legal, design and construction and lease management. Rather than viewing real estate as a commodity, below are what your expectations should be of a tenant representative.
It’s not enough to leave it to the company’s accounting department to analyze the financial impact of a lease. A good tenant representation firm will not only analyze the basic rent, but also study the impact of likely passthrough charges, buildout scenarios and the landlord’s pro forma.
Too often, the lease is left for company counsel to negotiate after basic LOI terms are established. However, the company has the most leverage long before it ever gets to a lease or an amendment, and the tenant representative has a vital role by understanding the role that the landlord’s unique strategy plays in achieving lease protections.
Design & Construction
A good tenant representative will not wait for a company or landlord to design and price a space plan, he will leverage his own knowledge and project management resources to negotiate key provisions of a work letter at proposal stage and guide the programming, test fitting and pricing.
Typically, the company has a system to track key expiration dates, and sometimes the project will start with enough time to create some leverage for a renewal. However, the company may not be utilizing a tenant representative to actively study annual operating expenses for validity and analyze potential early renegotiation opportunities based on the landlord, lender and market.
Specialization makes the economy work and it makes companies work. The company must be mindful though that having a trusted tenant representative, knowledgeable in all facets of real estate decision-making, is critical to hold the real estate process together and to maximize savings, minimize risk and avoid costly facility disruption.
This post originally appeared on Ezracompany.com.