Tuesday, December 28, 2010

You deserve a broker that fits you and your company!

Most lease negotiation articles are about rates, tenant improvements and “top 5” type lists of things to avoid or do or pay attention to. There’s one very critical element I believe should be in these lists that’s always missing - be sure the broker you choose is a fit for you and your organization. You know, that person you’re going to rely on for advice, market information, strategy – and who you’ll undoubtedly spend more time with during the process than you planned for and with who you'll rely on to help you in making the best decision.

I’ve often come in to help clients restart a lease process after seeing many buildings with someone else. This generally happens when the prior broker started with the buildings and rates instead of what the client needs. It takes some time and well developed inquiry and listening skills to help you ensure that the facilities decision will support your company's objectives going forward. It is time well spent if your broker takes the time to talk with you and perhaps your key stakeholders about your business – fundamentals, growth, image, people, values, and decision making processes. If you don’t have this foundation developed with your broker, you’re setting yourself up for a ready-fire-aim scenario that costs you time and unnecessary anxiety, and probably  money as well.

Lease decisions impact not only your finances, of course, but many important non-financial aspects of your business. Your branding, recruitment and retention, operating effectiveness in some cases and flexibility going forward are all available for fine tuning during a business space decision making process.

A very common issue is lack of transparency in the relationship between the broker and client. While you have brokers stating they work for the tenant, do they really? A very brief checklist...

  • Who’s paying them? If not you directly (since many brokers participate in the listing fee instead of “charging” the tenant) then is the broker transparent about their income from every deal or willing to fix the number to eliminate bias?
  • Is there a written agreement with a scope of work, deliverables, timeline, expectations and declaration of fiduciary obligation? You wouldn’t hire an attorney or accountant to represent you in a deal worth millions or hundreds of thousands of dollars without one – so does your broker provide this level of professional documentation of expectations and responsibilities?
  • Do they or someone in their office represent any buildings for lease? It’s hard to be objective when the landlord is responsible for more income to their firm than your deal will provide – where’s the long term financial motivator?

On the “softer” side, a broker that "fits" you and your organization can be valuable at the margins – critical margins, sometimes – if your broker’s values are aligned with yours. If you are concerned about the triple bottom line, but you have to explain to the broker what this means, you may not be on the same page. If you have a commitment as a firm and personally to sustainability, it’s more likely you’ll get a deal that supports that if the broker has some history of results helping clients achieve this.  LEED facilities or an active dialog about the tradeoffs of one alternative vs. another relative to the overall list of important features that make a difference to you, your team and the planet ensure triple bottom line results. If you want someone that understands getting buy-in from your partners or senior management team, it helps if your broker understands the importance and has some experience in accomplishing that.

This doesn’t supersede the technical expertise necessary in today’s world. You want to be sure your representative can assess the numbers – there are wide variations in the deal structure that can make a meaningful financial analysis a key factor in negotiating and understanding how to balance the issues, the dollars and the total final package. If the broker can’t have a meaningful conversation with your CFO then they may not have the skill range to get you the best overall transaction that addresses both the “hard” and “soft” aspects of your facilities needs.

Another important fit aspect is that of teaming and leadership. I personally prefer a relationship where I’m leading the group to help clients get a lease that fits well. Not driving, not directing, but leading by understanding the needs of the client, the opportunities of the market and a range of ways to get the two to mesh in a successful outcome.

Time is a challenge in all of this. You have a full plate already, most likely, so how do you deal with the additional issues of dealing with the lease? My approach is to work with clients as a “real estate department for hire” – being the sort of assistance that you can count on to have your back in the process. It takes a lot of time – typically more direct and calendar time than people assume. Coordinating tours, designing, permitting, buildout, moves, documentation – it all takes time and much of it is serial not parallel so it adds up. You want to allow for it and keep your personal time reasonable by having someone you can count on to keep things moving and raise the issues necessary as things progress.

So, be sure that you have a broker who:

1. Has the skills to understand your business – functional, values, direction

2. Has the technical skills to work the process professionally

3. Truly and clearly represents you, not the landlord, without bias or conflict of interest

4. Has your back and ensures the process and market are addressed in a manner to best serve you, your team and your business.

Monday, October 18, 2010

Why Are the Landlords Too Sticky?

With rampant vacancy, recovery hard to see and empty space losing non-recoverable income why, many people have asked me, are the Landlords so darn sticky about doing a current market deal?  Since it is good to understand how the world looks to the other side of the negotiations, here are some of the perspectives and realities of the Landlord's view of the world – financial, emotional, and externally imposed on them. 

Financial considerations are of course a big deal – people own property to make money (when the markets are not doing their once a decade chaos dips).  You’d think that they want their building full.  Well, sort of.  Here’s the rub – there are two competing priorities; cash flow now vs. capitalized future revenue which determines future valuation of the building.

For current operating costs that rack up regardless of occupancy – loans, taxes, insurance, some base line of utility services – there is tremendous pressure to get deals done and generate cash flow.  Add to that the fact that each month of vacancy is money that cannot be recovered.  It’s a use-it-or-lose-it asset.   So while the vacancy rate is historically high, there are deals being done and a landlord doing market deals can secure tenants.  There are some big costs in securing new tenants – commissions, tenant improvements, often concessions around moving and transition costs – but there are deals being done.

So what about the other landlords?  Some are simply not in touch with the market.  They may be in denial, or so far under that they can’t muster the funds to secure the new tenant.  These are the walking dead. If someone who can’t come up with a reasonable response offers you a good deal to have you take on all the up front costs, beware and be sure to do a title search and get anyone with liens against the property to sign off, or your lease is at risk if they take the property back.

Some building owners have external constraints – lenders or partners that have agreements in place regarding approvals or previously defined limits of negotiation latitude for what the owner can do. In these cases if the person/entity that controls these constraints doesn’t want to do a deal or doesn’t understand the current market environment, the owner (a term loosely used in many of today’s building ownership structures) may feel good about you as a firm and want to do the deal, but just can’t.

The other side of the cash flow goal is the long term value goal – capitalization of revenue.  Without going into sleep inspiring detail, building values are tied to the capitalization of current and anticipated net operating incomes – a multiplier in essence of that net income resulting in a calculated value.  While this isn’t the only component of the value, it is a major component, especially when it comes to loan underwriting, since net income pays debt service.  So the rub is that a discount of a couple dollars a foot to meet the market means a capitalized value decrease of around $25 a foot.  If the basic deal is $20 full service deal, minus maybe $8 a foot in operating costs (mid-rise class B office building example) they can sit on the space for two years to get the extra $2 and still be ahead, assuming they have the cash to carry it.  That’s their dilemma.  If they hold out and eat the carrying costs anticipating the market firming up or a tenant that for whatever reason just really wants their specific space, they come out ahead on multiple measures – but it’s a real gamble.  It’s a gamble many owner’s are losing right now.

As a tenant what this means is to take advantage of the down leasing market it helps to have a broker that has your interest and needs at heart and who understands the landlords perspective and issues to get you as the tenant the deal that best suits your company.

Kevin Grossman represents businesses in their lease negotiations for office, flex-tech, and light industrial spaces in the Seattle, Bellevue and Redmond markets.  For complex projects he represents businesses as far away as Vancouver, Spokane, Bellingham and central Washington.  Clients report Kevin invests the time to listen and really understand their organization, ensuring they make an informed decision and he gets the right deal completed for them out of the process.

Thursday, October 14, 2010

Stay well during the leasing process

Over the years I’ve seen many very capable, smart, driven folks succumb to the malady of “well-being deficit disorder”.  It’s a rarely talked about unanticipated risk of having a full time job on steroids running your business - and then adding the decision making process for a business space lease on top of it. What are the symptoms and remedies, you ask?  Well…

One early sign is an increase in those moments when your brain seems to be taking an unauthorized break from doing what you want it to do.  The basic cerebral processing stalls out, and often all the trying to power-through-it push does is make it worse.  Since it’s an issue with how our brain is designed to a large degree, cut yourself some slack and take a mini-break to allow your brain to reboot.  The barista a couple blocks away would love to see you now, especially if you’re a generous tipper.

When your key managers and stakeholders are concerned about you, don’t ignore them.  They are often a path to dealing with the process in a way that spreads some of the thinking and processing load, and you will likely benefit from their participation as a valuable side benefit.  Building a team helps you make more informed decisions, building ownership by those participants of the final decision along the way, and you get to spread around some of the processing work load.  You really should not be the one getting information on new copiers, moving services and researching the B&O taxes in the various places you may be looking – you have a company to lead.

Another critical indicator to pay attention to yourself in the middle of the chaos is when your spouse, significant other, kids or for some people your dog or cat or best friend look at you like they don’t recall who you are.  Even in the midst of extraordinary hours of work, we need to stay in touch with those closest to us.  I know for me personally that the proverbial “date night” has been a relationship saver.  You have other solutions to keeping your important relationships alive through the trials of adding a major project on top of an already very full set of responsibilities – just don’t forget to schedule them and honor those blocks of time.

Diet and exercise get to be secondary, but your body doesn’t know it’s supposed to just suck it up – it actually believes and acts like it’s really important.  One of the worst “wake up” calls I’ve seen is a serious health issue exacerbated by not taking care of himself.  A client of mine recently was limping pretty badly and it was after he took some pain medicine.  When I asked what was going on, he said he’d done a ½ marathon and for the first time in doing these 13 mile runs he really injured himself.  As we talked a bit further it came out that he’d stopped his regular training out of schedule overload.  Since the training runs both helped him de-stress and kept him prepared for the longer runs, the extreme pain in his lower leg was a pretty uncomfortable way to get his attention, ensuring he takes some time out for himself during the heat of the negotiations process to go for a run.

So, the “take a ways”, as my old econ professor would have said, are:

·         Pull together a good decision team to support you in making an informed decision, of course with a great tenant representative broker as a key member
·         Stay in communication and engaged with your key people - family, business and personal – maintaining your social connections will keep your mind clear and you more content
·         Keep up your activities – it will  pay big physical and psychological benefits (and help you avoid injuries!)

Overall, you’ll need all your attention and intention skills to juggle the extra issues.  Cut yourself some slack by letting others on your team do some of the worrying and together you’ll get what you need to support your organization well going forward.  You’re smart, you’ve heard this all before – sometimes it’s just good to have a reminder.

Kevin represents businesses in their lease negotiations for office, flex-tech, and light industrial spaces in the Seattle, Bellevue and Redmond markets.  For complex projects he represents businesses as far away as Vancouver, Spokane and Bellingham.  His clients report they especially like the time he takes to listen and really understand their organization and help them to get the right deal at the end of the process.

Thursday, September 23, 2010

Entrepreneurs and Early Stage Businesses Rejoice!

 (at least regarding leasing space for your business…)

It is great working with early stage companies – the energy, optimism and vision are contagious, and it’s always encouraging to be around teams that are growing, hiring, figuring it all out.  There are a lot of variables on the plate – and at least for now one of them is really in favor of the entrepreneurs; great deals on the office space and facilities they need to ramp up.  Rates are down, flexibility on terms is good and even bootstrap companies can get space on reasonable terms.

The high vacancies in all commercial properties has pushed rates down – a lot.  I recently represented a digital arts company in downtown Seattle.  Their prior landlord misjudged their wiliness to move if he didn’t come close to current market – a bad position to take on his part when the market is over 20% empty.   We went through a good process and got more space and at a rate that was about 20% less – and the terms were more flexible for their expansion as well.

One challenge for earlier stage companies is that everyone wants the owner to sign personally, unless they’re backed by some heavy hitter. For the scrappier startup, being a bit flexible on the layout can mean even deeper discounts on the rate, and no personal obligation on the line.

Another common challenge for the early stage organization is determining the growth path.  Will you be still getting your feet under you in a year?  Will your service or product get picked up in a big distribution agreement and you’ll need 10 times the people and space to deliver?  With a good market search you can find the landlords that will accommodate the flexibility you need to ensure that the main paths you may see or are hoping to see are taken care of.

The flexibility is possible in office space, light industrial, manufacturing and many retail locations too.  I work with firms from Tacoma to Bellingham and have seen amazing deals, so if you’re growing your company think about what you really need and want in your lease deal and with the right broker you’ll be able to get more in your favor than you’ve seen in the last decade.