Estoppel. Prospective purchasers and lenders frequently require tenants to agree in writing to the terms of their lease & occupancy and to stipulate that no default exists. Due to time restrictions in the lease, as well as the challenging investment sales and financing market, landlords frequently push tenants to sign off on estoppels immediately. However, given the binding effect of these documents, tenants should have the estoppels professionally analyzed by their attorney and tenant representative not only to ensure that there are no inconsistencies with the lease, but also for completeness with respect to other agreements with the current landlord that may impact a tenant’s occupancy.

Rules. The landlord typically reserves rights to impose building rules for tenants to follow. However, sometimes the rules can be inconsistent with a tenant’s lease; in that case, what prevails? The rules may also not be enforced consistently; what protections exist in the lease?

Subordination. Lenders oftentimes require tenants to confirm in writing that the lease is subordinate to the lien of the lender. At the same time, the tenant should have protection against the landlord’s default. In some cases, the tenant may have protections in its lease, in which case the document would need to be expertly analyzed; in others, such protections could be professionally negotiated.

There are numerous other notices that a tenant may receive from a landlord, such as reconciliation statements, default notices and notices regarding options. In each case, the document needs to be promptly & professionally evaluated prior to the tenant taking any action. By resisting a landlord’s push and instead taking the time to review notices properly, tenants can avoid increased costs, preserve their rights and mitigate their risk.

Landlords know that a tenant’s business is not real estate, and therefore cannot afford to be engrossed in protracted negotiations. When a landlord is able to speak directly to an unrepresented tenant, the landlord knows that it’s best to sound accommodating to placate the tenant and to keep the tenant from seeking representation. The landlord will typically offer token discounts, while keeping key lease protections, important facility improvements and other market concessions out of sight and out of mind. Even if such terms were cited by the unrepresented tenant, the landlord knows that the more time a tenant spends on a negotiation, the less time a tenant has to focus on its business.

To make the landlord compete and agree to provide the tenant with the best terms possible, the tenant must demonstrate that it’s not captive by its actions not just its words. It’s important to not only have adequate tenant representation, but also implement the right process that demonstrates that the tenant is effectively a free agent. It starts by understanding how the space efficiency, layout and facility can be improved. It continues by evaluating the market, facilities and landlords pursuant to the tenant’s needs, and having those needs successfully negotiated elsewhere to compel the existing landlord to renegotiate them for the tenant.

Tenants must demonstrate negotiation leverage to avoid leaving money on the table and taking undue risk. Tenants should view a lease expiration or termination option within the next few years as an opportunity, not a and inconvenient operational task, to do right by their organization. By breaking through the inertia, tenants can ensure a win-win scenario for both parties, instead of a one-sided windfall for the landlord.

We’ve discussed some of the important clauses that tenants need to have negotiated long before they ever get to an initial lease draft, so this article will discuss why landlords get away with conditioning some tenants into focusing on the rate. Landlords view real estate as a commodity; in other words, they own their buildings and want to lease them in ways that maximize their proformas. To do so, landlords try to convince tenants that they should treat real estate as a commodity as well. Landlords know that many tenants may opt for the path of least resistance, rather than professionally evaluating their real estate to maximize savings and mitigate risk; therefore, landlords quote rental rates without any explanation for how the facility is measured, what additional future costs may be applicable and what upfront buildout costs may be hidden.

The solution to landlords’ ostensibly simple but actually time-consuming strategy is to treat real estate as a process integral to your business. Here are a few basic steps to demonstrate to your landlord through your actions that you’re taking the process seriously:

- Have your lease, facility & operating expenses professionally analyzed
- Program future needs against your existing plan to understand efficiency
- Study the landlord’s portfolio & debt to gauge potential renegotiation success

By treating your real estate as an integral business process, you will not only save money, improve your facility and mitigate your risk via the other 24,999 words in the lease, but also save time. Landlords, by design, make the leasing process seem simple initially then stall during negotiations knowing that time is on their side. By taking the process seriously, you will ultimately save time by forcing the landlord to take you seriously as well.

After most companies sign a lease, it goes in a drawer somewhere for the next several years. In some cases, the lease or renewal was well-negotiated; a tenant representative was engaged to properly determine needs, thoroughly evaluate options, leverage the market and work in concert with your attorney to negotiate every aspect of the lease. Here’s the problem: your lease is only as strong as your ability and willingness to enforce it.

One of the most common ways companies get overcharged by virtue of not enforcing their lease is operating expense passthroughs. A year or so after you sign the lease, you start getting bills from the landlord for projected increases to building operating expenses, such as maintenance, snow removal, landscaping, insurance, utilities and various building repairs. How much time do you spend with those statements? Around the beginning of each subsequent year, you’ll get a reconciliation statement showing the difference between what the landlord budgeted and what the landlord actually spent. Spend a lot of time on that statement? Do you tap into your extensive database of nearby buildings to compare expenses to make sure they are within the arms-length competitive market? Do you compare your operating expense exclusions in your well-negotiated lease with those for which the landlord is charging you? Of course not–-you have a business to run.

That’s where we come in. Over the past three years, the Ezra finance team has saved clients (and prospective clients) millions of dollars in erroneous operating expense passthroughs. Our team has been conducting these reviews for over 15 years and discovers errors over 70% of the time. So how do we get the erroneous charges removed/refunded? Sometimes, the landlords will acknowledge the error and cooperate. Other times, our buying power in the market helps; we complete 2 million square feet of transactions each year and have been in business for over 30 years. As a landlord, you don’t want us to view you as a landlord that overcharges our clients. Here’s the best part: we don’t charge for the service, because over 90% of companies that use the service engage us to handle their leases when the time is right and we take pride in enforcing the leases that we work hard to negotiate.

So how do you make sure that you’re not getting overcharged? Send us your reconciliation statement when you receive it over the next couple of months along with your lease, if we don’t already have it. Those documents will get us started on our confidential, no-cost and no-obligation review.

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 expectation should be of a tenant representative.

Accounting: 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.

Legal: 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.

Lease Management: 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-makimg, is critical to hold the real estate process together and to maximize savings, minimize risk and avoid costly facility disruption.

What electrical capacity standards are in place, and what constitutes excessive usage? Are your rights to a generator or UPS clearly defined?

Who is responsible for water & waste lines in your facility, and at what points must the landlord provide tempered water?

If you’re not exclusively on the first floor, is the landlord required to keep one working elevator in operation at all times?

What are the landlord’s cleaning specifications?

How strong are your access rights and to where do they extend? Under what conditions may the landlord inhibit your access or employ their access rights in your facility?

What standards exist for HVAC service and what maintenance requirements are in place? How much notice and payment is required to obtain service “after hours?” Even tenants with their own service accounts and maintenance contracts still rely on the landlord’s cooperation and ability to properly maintain utility lines.

If the landlord fails to provide the services in accordance with defined standards, what are your remedies?

Too often, tenants settle for vague landlord service requirements because neither they nor the people representing them have the time or the facility expertise to understand what specific protections need to be negotiated based on the tenant’s needs and the building’s capacity. The resulting costs and disruptions can erode any other favorable aspects of a lease (i.e. low rental rate). Further, the absence of protections, particularly for more technical facility users, may diminish the value of the lease in the eyes of a perspective purchaser of a tenant’s business. With the right programming, evaluation and negotiation, you can strengthen your lease and avoid costly interruptions to your business.

Fewer options: It’s counter-intuitive, but especially for full-floor and multi-floor facility users, a weak market may actually yield fewer opportunities. When landlords (and their lenders) are confident, they’re more likely to forgo breaking up buildings and floors for relatively smaller tenants and instead hold out for a single user. During uncertain markets, landlords that are under more pro forma pressure (i.e. REITs) may increasingly forgo the long-term, single-user strategy in favor of locking in cash flow where they can.

Funding Issues: Just because a landlord says it wants the deal, doesn’t mean it can complete the deal. The listing agent, asset manager or even managing member of the landlord is limited in their decision-making power. They may want to complete a lease and increase occupancy, but may be constrained by equity partners who want a stronger pro forma return or lenders who reject a lease due to its impact on the debt coverage ratio or loan-to-value threshold.

Wait & See Approach: Even absent the issues above, some landlords have patient money. They don’t need a tenant’s rent, especially if there isn’t a long term, ubiquitous buildout or strong credit associated with the lease.

The most important reality for a tenant to remember prior to judging its ability to improve its current lease is that not only every submarket is different, but also each landlord, and its priorities, must be thoroughly understood. Too often, tenants start the process assuming that buildings are monolithic and landlords simply want to lease available space. Savvy companies and organizations understand that there is a critical process for evaluating landlords, buildings and deal structures.

Here are just a couple of barriers that you’re up against in a “negotiation” with your landlord:

-The landlord knows more about commercial real estate, facilities, lenders, building codes, construction and lease provisions than you do.

-All of the landlord’s service providers, seen and unseen, including the listing agent (in-house or third party), property manager, contractors, architect, engineer, real estate attorney and lender know more about commercial tenant leasing than you do.

A good landlord will placate your ego from the second you walk in the door, because they want you to believe that you can successfully negotiate for yourself. They know that you’re successful and are involved in other business negotiations. They also know that real estate has a certain appeal to it, and many people think of all real estate as a commodity, because they have, in their personal lives, rented an apartment and bought a house before. Here are just some of the costly mistakes you can make by treating the commercial tenant representation process as a commodity:

-Waiting until you receive their lease to negotiate legal terms
-Not fully understanding the competitive pressures and drivers of each landlord
-Negotiating when you should be going silent
-Failing to understand the entities that comprise or work for each landlord
-Divulging information about your company at the wrong time
-Failing to understand how landlords make up for the cost of rent discounts
-Relying on their architect & contractors

There’s no textbook, Google search or past business experience that will enable you to properly manage the tenant representation process. You need the right experience and the right process to avoid getting burdened with undue additional rent, buildout costs, inefficiencies and excess liabilities after you sign the lease. You need a representative that the landlord will take seriously and that is not emotionally involved.

Like in chess, successful leases are structured by those who think several steps ahead. Too often, people view the leasing decision, such as a renewal, as an item that needs to be checked off a list. Decisions that will not only comprise what is typically your second largest expense, but also help determine the value of your business should not be taken so lightly.

Below are some steps you can take to not only better protect yourself now, but also position your company for stronger value in the future.

Reprogramming. Most tenants are content with their space, but if you force the landlord to truly compete for your tenancy, allowances for reconfiguration may be negotiable to add value and efficiency to your existing facility, or to achieve greater total cost savings elsewhere.

Sublease & assignment rights. Firm consent standards on the landlord and limitations on restrictions imposed are only part of what you need to enhance your lease. Tenants often think about cost reduction, if they need to get out of a lease, but they often don’t pre-negotiate particular merger rights.

Renewal and expansion options. These options rarely actually get used, but they provide assurances for prospective acquirers, especially if they’re properly negotiated.

Operating expense standards and reviews. Savvy business purchasers know that tenants are susceptible to runaway facility costs. Having well-negotiated cost controls and an annual review process in place will reassure potential buyers.

Alterations. Your acquirer may have different plans for your facility; for example, they may want to combine their own operation, that of another business in their portfolio, or change the focus of your company, once acquired. Having the right consent standards, restoration restrictions, personal property protections and cost controls will enable the purchaser to better align your facility to their new business plan.

By taking the long view of your lease and facility, you will not only reduce costs, mitigate risks and improve your facility today, but also enrich the value of your business well into the future.

There’s no question the best economic terms for tenants are typically achieved with 10-year terms. Many tenants don’t realize that landlords make very little money off of the annual cash flow from the rent. In fact, landlords typically don’t make any money off of leases until the second or third lease year. As I’ve written previously, this is partially why landlords would rather endure vacancy for a long period of time rather than lock into a low-cost lease that will diminish the value of their asset. Landlords actually make their money off of the capitalized value future cash flows, which means longer terms enable landlords to achieve a better return, and therefore, to provide more concessions. For example, specialized tenants, especially medical users, with unique buildout requirements are able to achieve a higher level of landlord investment into the buildout, as those costs can be more easily amortized over a long-term commitment.

On the contrary, other business advisors will note the risk of locking into a long-term lease. What if the business requires you to scale back? What if you grow out of the space? What if you’re planning a near-term exit? These are important considerations, especially for more general users that don’t require as much of a landlord investment in their buildouts.

By viewing your real estate through the lens of your business plan, you can refute the general one-size-fits-all provisions of both arguments. For instance, even if you are paying a lower rent and enjoying more concessions, it’s costly to get out of the lease for a facility that you no longer need. Many tenants are only able to obtain fifty cents on the dollar from subleasing, after accounting for downtime and transaction costs. Termination options are difficult to obtain, and they may be expensive depending on the negotiation. Also, in the case of an exit, the remaining liability may diminish the value of the business. However, assuming shorter is better is also flawed. What about the cultural impact of having to move on your staff particularly if the landlord is obstinate in the case of a renewal, or if you get bumped out of the space? Also, growth is typically a good problem to have. Oftentimes, the remaining liability can be absorbed as part of an expansion within the landlord’s building or portfolio, or as part of a negotiation with the new landlord. Particularly for specialized use tenants and tenants with long-standing track records, going shorter for the sake of flexibility can be very costly, not only in terms of the total occupancy costs, but also in terms of internal disruption.

Like with other aspects of real estate, there is no one-size-fits-all solution. Real estate should be aligned to your unique business plan. The process begins with a professional understanding of your existing lease and facility, continues with the benchmarking of your existing situation to the market and concludes with the proper execution of a strategy to better align your lease and facility to your business.