Avoid Strategic Mistakes in Real Estate Decisions

 Service providers of all sorts like to say that they’re “strategic”.   What does it mean for a real estate broker or consultant to be contributing to a client strategically, not just tactically?

Most brokers in the business more than a few years have some tactical capability.  They can be friendly, research options and shuttle paperwork to put a basic deal together.  While this is the primary objective of the landlord, and the structure by which most commercial real estate (CRE) providers are paid (through transaction fees/commissions), it is not a good criterion for success from the business tenant’s or buyer’s perspective. It does not rise to the level of strategic support for the client and leaves many important factors to chance.

For the user side of an arrangement, the criteria for success rests more on how the final outcome supports the brand, people and operations of the organization.  Of course there are financial concerns and fundamental tactical goals for a lease or purchase for the business.  In the long run, however, the larger impact will occur – positive or negative – related to the fit of the facilities arrangements for the company across a holistic array of impact areas.  CRE professionals that tailor their service to businesses instead of landlords work to ensure their clients are making informed real estate decisions.  Informed decisions rest on a good understanding and articulation of the range of goals, objectives, directions and values of the firm – broad, long term, strategic.

The best agreement is the one that helps the company thrive.  What that means and how that’s achieved is different for every client.  Sorting that out and helping the client get what they need in the process sorts out the dedicated tenant representative from the rest of the brokers.

What are some of the indicators to identify the CRE experts that will help your business the most?

If the broker starts by telling you about the market instead of asking you about your firm, they’re not focused on your needs.

If they talk about the size of their completed deals instead of the results and successes of their past clients, they’re not focused on your needs.

If they want to show you spaces before they’ve inquired about what is working and not working with your current space, and asking about where you see your organization headed for the next 3, 5, 10 years, they’re not focused on your needs.

If, on the other hand, they engage in a conversation around your firm’s needs and values - the relationship between you and your clients or customers, how you think about your employees, retention, what’s important to you and for the success of your firm, what’s needed for your operations now and going forward - then the process is off to a productive start.  This path is headed to solutions that support your firm broadly and forward looking.

Process is the key.  You want someone helping you and representing your interests that is asking good questions and really listening.  They should be able to articulate your range of desired outcomes, and to move through the decision making process with this foundation.  The better understood the range of desired outcomes, the better the ultimate fit of a lease agreement or acquisition in supporting your company’s success.

Good inquiry and process is valuable, and worth the time for you to find the right person to work with.  It produces consistently solid outcomes resulting in your facilities supporting your bigger strategic, not just immediate tactical needs.

CFO, BIg Picture - Great Business Space Decisions!

I had the pleasure of co-writing an article on the business space decision making process with a friend of mine and CFO, Dan Whitaker, who's very involved with the Washington State Certified Public Accountants.  The article captures how the financial aspects and function in a company have to incorporate a broad range of considerations to ensure a solid decision that supports the overall business goals and objectives.  Check it out - I posted a pdf of the article at http://www.kevingrossman.com/wscpa/OfficeSpace_TheWashingtonCPA_SepOct2011.pdf 

 Download a sample net present value worksheet referenced in the article at: www.smartofficespacedecisions.com/wscpa/example.xls

Top 4 Keys to Making Smart Office Leasing Decisions

A business space lease is something you only have to deal with every few years – but of course it’s important to your company so you want to make a good, informed decision. So what are the keys to making this decision, from the perspective of other business owners and people involved in many transactions? I’ve been representing tenants in leasing and buying properties for their business operations – office, high-tech and manufacturing space – and here’s a “quick list” distilled from client feedback and experiences over the years.


• Remember the big picture – keep the deal and specific points of the deal in context of what your business needs for its overall success.

• Approach it thoughtfully and with a good process in mind – this ensures you get the best deal in any given market environment for your firm.

• Use a team and tools to ensure you have the objective and subjective input you need to support your decision making process.

• Be sure the documentation reflects the deal you believe you’ve agreed to. The landlord may tell you the lease document is standard, but there is no standard and to avoid potentially crippling problems it deserves the time and attention to get it right.

Keep the big picture in mind - all the way through

It’s easy to get distracted by urgency and the many small but important details and time involved in going through the lease process. The best context for all this, keeping things in perspective, is to be clear going in what’s important to your company and you going forward. Here are some of the top trouble spots to be aware of:

• It’s about the future, not the past – what are your priorities and needs going forward?

• Marketing, branding and positioning in your marketplace may be impacted by your space.

• Recruitment and retention are often influenced by business space decisions.

• Logistics to clients, daily transportation, goods & supplies or the airport may be important.

• Environmental issues for an increasing number of companies is critical – air quality, waste stream management, energy efficiency of the building, access to services and mass transit.

• Financial ramifications – everyone focuses on the rate, but flexibility can be critical, as can the clause about assignment and subletting. It’s a rude awakening if you want to bring in a partner or sell and you realize you’ve given your landlord the ability to approve or extract concessions from you to get your financing or sale transaction done.

Good Process provides solid foundation

A good process produces consistently good results. Given the complexity of many deals, a thoughtful approach ensures you make a well informed decision. A general framework should include:

• Clarify your needs and requirements

• Determination and preliminary assessment of options

• Request for proposal process for top contenders

• Keep a fallback until the end – you need it to not give up leverage

• Negotiate, clarify and systematically compare on an objective and subjective basis

• Document well

• Design and construction if part of the deal

• Move and celebrate

Use a good team and tools

It’s not rocket science, but it is a set of skills and information that you don’t deal with on a daily basis. It is in addition to all the other things you have on your plate running your business and you’ll be spending a fair amount of time with who’s representing you, so choosing a representative (broker that represents business tenants) that’s a good fit for you and your firm’s values. Some key elements and tools to consider include:

• When choosing someone to represent you - experience helping business tenants not landlords is critical. Representing landlords is a marketing job. Representing tenants is a service job and involves a broader, more technical skill set to do it right.

• Using net present value to critically evaluate the range of proposals you’ll see. There will be variations in rate, operating expenses, how tenant improvements are handled, rate increases, the load factor, how efficient the space is for your specific needs, parking costs, moving and rent abatement, off hour use, how the space is measured, etc. A comprehensively designed NPV worksheet is invaluable in the negotiations and to help you in having an objective apples-to-apples assessment of alternatives.

• Team players – it’s important that your tenant representative can work well with you of course, but also your CFO, Operations manager, legal counsel and communicate well with your banker, the architect, contractor and building management team. All of these are important to getting the best decision and setting in place solid go-forward expectations and working relationships.

Documentation - a critical clarification process

After the months of getting to a deal you’re good with, the deal isn’t quite done yet. The lease document is like its own mine field just before the finish line. It’s not uncommon for the lease and related addenda to be 40 pages, and if it’s a sublease you have essentially two lease documents combined and your situation is guided by the most restrictive elements of either document. This is where your tenant broker and your attorney working well together is important to ensure you get what you’ve spent a lot of timing working toward. Some key points are:

The work letter – the part of the document that spells out the improvements, who’s doing what, who’s responsible for the process, construction, what costs are the landlord’s and what if any are the tenants responsibility.

Who’s signing – you personally? The Company? If it’s the company, is there a guarantee? Is it a reasonable amount relative to the landlord’s actual risks or for the entire lease obligation?

Assignment is often glanced over but shouldn’t be. If you want to partner up or merge or sell, many leases don’t have any criteria or set a very low threshold at which the landlord has sole discretion to decide if they will allow and assignment or subletting. You don’t want your business subject to arbitrary involvement by your landlord.

Mechanisms for extensions, expansions, give-backs, determining market rent, and the timing of each of these are additional potentially critical issues to be aware of and understand – and to negotiate if the starting document is unreasonable.

Don’t get sucked into the “you can trust me” by the landlord regarding ambiguous language. The response I often use is “I’m sure that’s true, but since we don’t know if you’ll still be the person we’re dealing with we have to make sure the document reflects what is reasonable and not rely on a verbal understanding”.

Of course you have to tailor the approach to the landlord – many are quite reasonable. Some you will need to rely on your fallback to have the fortitude to hold firm on some critical items (and of course stay reasonable yourself – keep the big picture context in mind).

Celebrate Completion!

This isn’t one of the four keys, but I highly recommend that after you’ve executed the lease (and the landlord has too) you should do a provisional celebration. It is a long road to get to that point. Then after you’ve moved in have a broad based, all hands celebration with your team and clients. Let your marketing folks have a fun time with it. By that time you will have really earned a party.



Kevin Grossman provides commercial brokerage and project services to businesses leasing or buying business space. He’s assisted firms with transactions involving over 3 million square feet of space from Eugene to Bellingham from his office in the Seattle area. kevin@kevingrossman.com

Collaboration and a Good Process – Keys to Successful Outcomes

Good process and collaboration can save the day.  Bad process and a silo approach set us up for painful project failures.  Save yourself and the other stakeholders from trouble by insisting on collaborative, thoughtful process basics.

·       Clearly articulated top level goals – re-articulated often and firmly through the process

·       Distinguish deal breakers from nice to have characteristics

·       Require communications loop-backs to ensure a common understanding across the decision makers (and implementation team if possible) of all critical aspects

·       Expect and require transparency and appropriate decision item documentation in the process

·       Be respectful and firm, while staying open minded to achieve the best outcome

·       Keep the goals in mind (don’t take ownership of problems that aren’t your problem!)

I’ve been in intense, long and challenging meetings for the last few weeks where everyone around the table is working hard to fix a big problem and keep a deal on track.  We are working to get a LEED Gold light manufacturing lease deal moving again.  It was derailed by bids that were 50% over the  90% design completion estimates.  Needless to say, there were some hard questions being asked around the table.  In reflecting on what went sideways and what we’re doing that seems to be getting it back on track, it really has brought into the spotlight the need for the above list of bullet points to be in place.

We did articulate the top level goals at the beginning.  I always start there with clients.  We actually restated them often during the process.  Where I dropped the ball was not recognizing scope-creep as various consultants reflected their vision for the project that exceeded the primary goals, and ultimately the budget.  I understand that we all want to leave our fingerprints on deals – especially fun ones that are unique in character as this deal is.  This will be one of a very small list of LEED Gold advanced manufacturing facilities in the State, and we believe the only one that involves a landlord/tenant relationship instead of an owner/user situation.  Many people on the design team – smart, well intentioned people all – let their excitement flow into the design process.  Excitement is good, but needs tempering by realistic budget and  baseline needs.  We needed more differentiating between needed items and additions that would be terrific if there were money to fund them (but there wasn't).

Once the bids came back beyond any possible go-forward amount the tenant had the option of walking away for a modest termination fee I’d negotiated to cap the exposure my client had on this phase of the deal.  After all the work to get to that point - by everyone on all sides of the table - and after some intense conversations with the landlord and design team, we decided it was worth the energy to try to intensively re-design and take one more shot at making the budget – with the tenant retaining the veto option if the revised design to meet budget didn’t meet his needs.

So then the question is how to re-visiting of the top level goals, now with a clear requirement to understand deal breaking elements vs. nice to have, and make the budget. It is a very different project when you have to trim a third out of it.  The challenge at this point in the process is as much psychological and emotional as functional, since things are being "taken away".  It’s analogous to house shopping at a price range above what you can afford before you get to a point you can buy – you like the things in the more expensive home, but you can’t afford them so it feels like a letdown to look at your price range even if it would have been terrific had you not seen the higher end things that are unaffordable.

One of the keys to the redesign process has been an acknowledgement that there were breaks in the communication loop and process in the first pass that we were determined to resolve.  Information from the consultants on electrical and mechanical systems had not been clearly or timely relayed back to the client’s operating people originally, nor to the cost estimator by the 90% completion point.  There were many nice things that were in the spec that were not needed or designed with mis-understood priorities. In some cases items were not requested or not discussed, just well intentioned but very off base assumptions, and they exceeded the functional needs and budget constraints of the project. 

 During the redesign process the architect has worked with us to document discussion items and be very clear about things on the table; what’s ok to drop, what’s critical to keep, what needs more information regarding cost against which to weigh the respective value, characteristics relative to cost. The consultants have been proactively looped in on better understanding needs and coordinating with the value engineering (cost reducing) process.

In future projects of this complexity I will require better loop back or check in communication pieces from day one.  We requested more clarifications that we got the first round, but we didn’t force the issue and it was an important part of missing the budget target the first time.  We believe we have the needed additional tracking tools to ensure we’re all on the same page so the project reductions we’re making are the ones that make sense.Most importantly, the team has rallied together to collaborative and aggressively address the issue - this resolution focused attitude seems to be getting the job done.

This conscious attention to communicating clearly and grounding it back to the functional requirements and LEED Gold objectives has been very effective at improving focus and has added transparency.  Being able to see and hear the suggested changes and modifications in this format, with drawing modifications too, of course, has improved the client’s comfort level that we will still achieve a great building meeting his LEED objectives and functional requirements within the new design that will likely meet the budget this time around.  While there is disappointment about some of the things left on the editing room floor, he has the big picture perspective to still see the great improvement in facility the resulting building will provide his firm over his current facility.

Given the personalities, egos and personally desired outcomes at stake, this revision process has been an amazing thing to participate in.  It has required the best from everyone – focusing on the successful revision of a project everyone has a professional and emotional attachment to in its former, unaffordable form.  So all around a mindful, sensible, egos checked at the door approach has been required – and it’s coming together.  It appears at this stage that we have a LEED Gold, very functional project with a number of special features still retained.

This is a work in progress – I’ll add a “how it turns out” note at the end of this post in mid-July when the new bids come in.  I’m keeping the faith that it will be a good update and that this hard work and refocusing will pay off.

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Index of all blog posts by Kevin on “Business Space Decisions” is at:

http://businessspacedecisions.blogspot.com/2011/06/index-of-blog-posts.html

Kevin Grossman helps businesses lease and buy space. Taking a  “real estate department for hire” approach, Kevin ensures clients are engaged in the right questions, are deeply listened to and then receive the attention and assistance to make and implement the best decision.  Kevin can be reached at 206.730.5567 or via email at kevin@kevingrossman.com

Index of Blog Posts

Avoid Strategic Mistakes in Real Estate Decisions

CFO, Big Picture - Great Business Space Decisions! 

Entrepreneurs and Early Stage Businesses Rejoice! 

Stay Well During the Leasing Process

Why Are the Landlords Too Sticky?

You Deserve a Broker That Fits You and Your Company!

Triple Bottom Line Business Space Decisions

Hire a Space Planner Early in the Process – Broker Collaboration with Space Needs Programming Produces Great Lease Outcomes

Business Tenant Representation – The Cost and Pain From Not Having a Good Tenant Rep Broker

Collaboration and a Good Process - Keys to Successful Outcomes

Top 4 Keys to Making Smart Office Leasing Decisions 

Business Tenant Representation –the cost and pain from not having a good tenant rep broker

Lots of brokers talk about representing tenants in leasing space, but do they really?  Well, there are three main things that should get your attention – value for your money (yes, it truly is your money even if brokers tell you it’s free because the landlord is writing the check), accountability in the relationship, and, ultimately, the end results.

A little background may be helpful…  Landlords hire a listing broker to market their space and agree to pay a percentage or a $ amount per foot to the brokers for leasing their space.  The listing broker agrees to share the fee with another broker who brings a tenant to the table or is working with the tenant.

However, think about that for a minute – do you include sales costs when you calculate your costs when going after a large sale?  Of course you would – and so do landlords.  The money paid by you for rent going forward absolutely includes the costs the landlord pays for this process, which by design is to lease their space – not to ensure you as a tenant are getting the right deal for your business. It’s nice from a cash flow perspective to be able to use someone that is being paid directly by the landlord, but since you are paying it over time you’d be well served to think of it as your money and get that value of service out of the process.

So what’s the value to you for this money?  Reflect on the amounts – it’s common in downtown office space in today’s environment for the broker representing the tenant to get 5% of the total lease amount or over $5/sq.ft.  If you’re leasing 5,000 square feet, your broker is probably getting north of $25,000.  If you were hiring a consultant to provide you with $25,000 of professional service – an attorney or accountant, for example - what level of clarity in scope of work, documentation and understanding of process and project would you expect?  You should expect this level of professionalism from a broker who represents you in a lease negotiation as well. The stakes are high if the broker doesn't have your back in the process.

Many brokers who want to represent you won’t clarify the relationship and scope of work for two reasons.  One, they aren’t usually held accountable for clarifying their relationship or scope of work.  The second is that they have a conflict of interest they’d rather not discuss.  They work for firms with signs up on buildings – meaning the firm represents landlords.  If they represent landlords and they want to represent you and the landlord and you have many polar opposing objectives in the negotiations – well, you see the problem.

To represent you fully, true tenant rep brokers – and there are a few to choose from – need to only represent and negotiate for tenants.  

So at this point you may be saying, “Kevin, who really cares?  I mean, isn’t all that matters that we reach a mutual agreement?” To answer that I’ll share some quick issues I’ve helped people with after they used the wrong broker to help them …

• Dramatic expense increases due to the poor wording of how operating costs are calculated and passed through
• Trouble with closing business expansion equity deals due to bad language around “assignment” of the lease, giving the landlord the ability to terminate a least due to partial ownership changes
• Derailed sale of businesses due to related issues around assignment and subletting
• Expensive problems relative to timing on renewals, expansions or early terminations and related unequal language around the process of determining “fair” market value
• Not including all costs in alternative to alternative net present value comparisons, proving for substantial unexpected costs only clear after the lease was already agreed to

It’s better of course to hire a better broker in the first place. 

These issues are really important, often critical to a business.  A broker who really has the tenant’s interest at heart will not shirk the negotiation duties around these issues, or gloss over them because they are inconvenient and with some landlords can be very contentious.  Experience and skill applied to a well understood set of tenant’s needs in  a context of truly representing the tenant will produce the best outcome.

So, ensure you don’t pay dearly by hiring the wrong broker.  When selecting someone, discuss the issues and process to a standard or level that you would your legal or accounting service providers.  Hold the person and team accountable for professionally  representing you, treat them as the consultant and adviser they should be for you given the money they’ll get for representing you in the deal.  Ensure they really do take care of you through the process.

Kevin Grossman has been helping businesses make sound business space decisions since the 80’s.  His “real estate department for hire” approach ensures clients are asked the questions, really listened to and then receive the service to make and implement the best overall decisions for their company.  Kevin can be reached at 206.730.5567 or via email at kevin@kevingrossman.com

Hire a Space Planner Early In the Process - Broker Collaboration with Space Needs Programming Produces Great Lease Outomes

Understanding your space needs – now and into the future, is critical to making informed business space decisions. If you’re growing, changing or in a dynamic market, thinking fresh about your needs will avoid common pitfalls of simply extrapolating from your current situation. With help from a good space planner and programming firm you’ll be able to use a move to support your company in many ways more than just having a spot for each desk – and preventing problems common from just being reactive to your current space.

The involvement of an experienced space planner will aid you in finding great solutions and choices for your facilities layout, design and furnishings. They are terrific team members for this process. While many brokers will default to advising you to let the landlords’ space planners lay out options for you (it’s easier for them this way), you may want to ask some questions…

• What is the motivation of that planner? They’re paid by the landlord as part of a marketing process, not a needs assessment of what you and your firm require.
• If you use landlord’s planners you have to explain and educate each one, help them understand your company situation, culture and values to ensure they understand what you need from the space, and trust that they’ll reflect your objectives and values even though you don’t have a relationship with them and they are on contract to the landlord – how much time and exposure is that for you?
• Their scope of work is to lay out a space, not understand your short, intermediate and long term staffing and functions, or adjacencies, or corporate culture and values. Their job is not to really understanding of the values and elements needed for you to sustain and grow your company, it is to make it look like the space their employer is trying to lease look like it is the perfect fit for you – and they have many tools at their disposal to make pretty marginal layouts look quite beautiful if they need to.

To ensure the best outcome for you, the best approach is for you to select your own space planner at the front end. Work with them to be sure they understand your requirement – both objectively and subjectively. There will be some additional cost to you in this approach – but the value of the information and control in the process is well worth the investment. I’ve seen the difference it makes over and over again. Often the landlords will agree to pay the tenant’s space planner what they would have paid their contracted provider anyway, offsetting some or much (it’s all negotiable, of course, so sometimes it’s all) of the cost. You will be well served if your leasing broker understands how to work collaboratively with and leverage the information from your space planner in the selection and negotiation process.

Objectively, there are current and anticipated staffing levels, by category, level and function. There will be ranges of space sizes to accommodate various functions. Storage, work space, conferencing and reception are all typical components to be incorporated. This approach is a rough baseline – a baseline that with the subjective attributes included in the thoughtful designers design for you will greatly improve functionality and your team’s satisfaction with the space.

The important subjective overlay includes adjacencies, potential growth or contraction, flexibility and values.

You want to have a layout that results in the support people being near who they support and work with, and their work areas and needs near that. By investing your time with a your space planner, and having them talk with your key people and your internal functional/logistics thinking people, the planner will help develop options of how to improve on the current situation and situate people and teams and divisions in ways that improves things. You can stimulate communication, encourage collaboration and increase opportunities for the whole firm to work well together.

Growth for most companies is difficult to anticipate – as is potential contraction. Take a look at customer acquisition history and goals, for example. If you have a lot of customers providing diversified revenue you’ll have a different perspective than a consulting firm with a few clients, or especially if one client is a very substantial portion of your revenue stream. Designing the space with the potential expansion or ability to sublease or give back portions is possible – it just requires forethought and a good planner on the team.

Flexibility is often needed not just in size of the space, but in the way the space is designed. You know many firms have ever evolving ways of getting things done – yours may be among them. Similar to LEAN manufacturing, office processes can be changed and modified to improve outcomes as well. Engineers that would have had private offices 10 years ago may be in open work studios and senior sales people may have small work stations since they’re out of the office most of the time. Virtual staff, flex time, seriously cross trained team members and flexible grouping of people for specific projects require a thoughtful approach quite different than organizing a group of lawyers and their staff. It’s all good for some companies, but each company can be very different – and that uniqueness needs to be reflected in the space.

The softer components are important, but often not explicitly addressed. What are the values of your company? If natural light is a high value, you can place private offices on the core with low height workstations along the window line, so everyone gets to see the sky (and trees if it’s a shorter building). It’s not uncommon to see very open space with even the executives choosing to be in an open, workstation type environment with scattered conferencing areas for privacy or team work areas. If privacy is a major factor then more traditional private offices are probably a better fit. It’s about your broker and space planner taking the time to understand your goals, objectives, culture and value to reflect in the process.

Corporate culture characteristics are supported or inhibited by design. Some examples of themes that benefit from very different approaches to their space layout include: deliberative, traditional, established, creative, intellectual property driven, dynamic and high growth. Different companies do well with different approaches, and ensuring your space is consistent with your culture. This fit impacts your people the entire time they’re at work, so you want to capture in the physical space what you believe will move your company forward.

A team approach produces the best results. A broker that can work collaborative and can coordinate and integrate the feedback and help of a good space planner into the process will be able to secure a much better overall deal for you. Hiring the space planner to be explicitly on your team, to really learn about you and your company, really addressing your culture and values, will pay off. The objectives and values that you can incorporate and create support for through thoughtful, experienced design help will pay dividends to you throughout the term of your lease.

Kevin Grossman represents businesses in leasing, renegotiating and occasionally acquisition of their business space. He believes strongly in working as an ally for his clients in making informed decisions, and encourages an integrated approach to achieving triple bottom line results with his clients.
http://www.kevingrossman.com/
http://businessspacedecisions.blogspot.com/