The everyday commercial real estate transaction is fraught with confusion and sub-par results. As in any relationship, all parties of a deal have needs they’re trying to meet, and it’s difficult to understand and have consideration for the needs of others when each individual is personally investing so much time and money. The overall deal will mimic the lob-sided focus of its constituents, but you and your team can reach a common ground and prevent bad decisions if you start the negotiation process with full awareness in key areas. Added benefits to such understanding include swift negotiations and a good deal for all parties (or no deal at all – sometimes no deal is the best deal), not to mention preventing the burning up of resources in decision paralysis.
Ask for Advocacy
If you’re a top chef embarking on opening your own restaurant, the world of real estate leases and buildouts isn’t likely to be familiar, in contrast with the real estate manager for a large, established chain restaurant opening a new location. Top chef won’t necessarily have access to the kind of history and knowledge needed to navigate the leasing and buildout processes that an experienced real estate manager does, but that doesn’t mean he has to remain at a disadvantage.
Take the time to ask and understand what defines a successful negotiation for the other parties. Reinforce your understanding by communicating it aloud, and additionally, attempt to understand the business models of all parties involved. You will be amazed at the human response when understanding is high and perceived threats are low. In the standard commercial real estate transaction, think about who benefits from surfacing possible issues and major cost drivers in the project scope and lease documents. The property owner or broker? Doing so might scare off prospective tenants or raise costs. The bank? All the lending conditions are time consuming, so even though there are countless hoops to jump through, the bank celebrates closing the deal, too. Tenants can run the risk of seeming high maintenance when the competition for space is high, so often they’re encouraged to take what they can get and halt their diligent examination to hastily sign a lease.
Typically, the tenant is the least experienced in the real estate equation, with the least knowledge of possible issues, hidden costs, and barriers to opening for business. This can mean that the available information is asymmetric because the seller tends to possess more awareness of the product than the buyer. Therefore, the buyer assumes the risk of possible defects in the purchased product- a common circumstance referred to as “buyer beware.” This asymmetry can be overcome by engaging all parties on the due diligence process early on. It’s both relevant and necessary, and not just reserved for major property sales and development transactions.
Ask for Transparency
B.C. Forbes, genius finance journalist and founding author of America’s oldest and arguably most relied upon business publication of the same name, described the nature of a good deal by stating, “if the deal isn’t good for the other party, it isn’t good for you.” In other words, the only good deal is a win-win deal. Performing due diligence can feel like dredging up issues that will stand in the way of everyone’s ‘business as usual’, but a lack of transparency will disrupt a good deal. It really is of no benefit to contribute to a bad, one-sided deal, if for no other reason than that the truth becomes known in time.
Downplaying concerns and red flags, or dispensing with research all together, although it might seem to be a sure way to move a deal along, is putting the good-deal-cart before the horse. There may be planning and zoning, structural, or regulatory compliance issues that will inevitably become part of the deal equation, whether it’s signed or not. It’s best for all parties to have all the information on the front end so it’s accounted for in negotiations, planning, and decision making, and so resources are earmarked to manage it. Not volunteering all the characteristics, including the deficiencies, of a property in order to make it more appealing to tenants, for example, may lead to a quickly signed lease. But when hidden costs rear their heads later-on, stress, spoiled relationships and reputations, even litigation can ensue. Unnecessary stress and the risk of loss and failure all stem from, and are upheld by, gaps in understanding. The more disclosure, understanding and awareness everyone involved has about the property and the documentation, the more likely a good deal will come together and serve everyone involved better long-term.
Ask for What You Need
You likely know what you don’t want out of your next deal, no matter what role you have in it: to scare away ready, willing, and able partners; to pay more or make less; any disadvantage or disruptive force to a good deal. A list like this likely comes together more easily than a list of desirable positive outcomes for your next deal. And that makes sense, as modern psychology tells us that we humans tend to focus on the negative. This has the disadvantageous effect of triggering more negative events, according to the Law of Attraction, but Psychologist Gregory L. Jantz Ph.D. summates that’s all in how we perceive our environments, and we can actually choose how to do that. A smile and a shift in occurrence from con to pro can therefore trigger a chain of positive events (alongside the many supported theories that positivity is correlated with both success and health). Dr. Jantz has some tips on making every more positive, and one such countermeasure is making statements and requests in the positive. That means the next time you want to exclaim, “Don’t rip me off,” instead make a request that represents what you do want; “Let’s make this a win-win deal.”
The fundamentals of such a request are to “…get the property leased as soon as possible, at the best rental rates possible, with the least amount of expense,” according to Brian Hennessey, real estate investor, tenant representative, and author. His books, like The How to Add Value Handbook for Commercial Real Estate and The Due Diligence Handbook for Commercial Real Estate, are designed to help all investors add value to every real estate transaction, and this excerpt exemplifies the common goal of all parties, be they tenant, buyer, seller, lender or broker. Today’s American free market economy is ideal if its rooted in honesty and driven by supply and demand, as well as access to information. The growing contrast between those who have access and those who don’t has parented a fierce and automatic me-or-you approach to every transaction. But understand that there’s a choice to tackle your next commercial real estate deal from a me-AND-you perspective. Buyers and sellers can simultaneously engage in a win-win negotiation by supporting advocacy, understanding needs, and maintaining transparency.
If you’ve been involved in a lob-sided deal in the past, there’s hope. Malcom Forbes, son of B.C. Forbes and heir to the family publication once said, “Failure is success if we learn from it.” Design-build contractors, if engaged before lease execution, can offer a unique and valuable perspective. Consider that the people who end up most intimately involved in your commercial space when opening a business are the very people who can give accurate and unbiased real-time information on costs and are less likely to underestimate to stay popular. APSGC, Inc. can be your ally and help jumpstart the due diligence process for your next deal. Make it a good one!
by Jamie Accetta + Lindsey Andress
APSGC Services: Commercial Site Evaluation
APSGC: The Big 3 Before You Sign the Lease
APSGC: Engaging a General Contractor During Due Diligence (+ the First 5 Things to Assess)
APSGC: Evaluating Hidden Costs on Your Commercial Property
APSGC: Open Your Restaurant Under $200k
APSGC: Putting the Value in Evaluation
6 Ways to Become More Positive Today by Gregory L. Jantz
Corporate Finance Institute: What is Caveat Emptor?
How to Add Value Handbook for Commercial Real Estate by Brian Hennessey