Insider Outlook

By Angela and Peter Hart Principals. Hart of NY Real Estate Co.

, ' ' . , In'former real estate. , cycles , a broker's negotiating skills were of paramount impor-tance in office leasing transactions. Today however, it isn't only about strategies in dealing with, landlords, for brokers find themselves in a position where educating the mature tenant can often be the largest hur-ill~ : . Since many of today;s "executives:' own and ml\llage Internet relate4 ,companies, their prior experience in the leasing of office space has been'little or none. (For that matter, their prior' experience, dealing in transactions in most of the business world has been little or none!). However" a sense of conventional business ethics and .experi- ence in protocol play ,a large part when we represent business owners who have "been around the block" a few times. For "ma-ture" established tenants who have dealt with lease proposals a.pd renewal negotia-tions on more than One occasioii:there are various psychological' .aspects of today' s transactions which need to bec'onsidered. To begin with, "often tenants .facing a pending lease expiration hav,e been in their space-for, close to eight years. This means that the, former negotiating experience they went,tlirough,occurred in the early 90's, a time when .wod< letters covered the actual cost ofconst!'!!ction and free rent truly was free rent, not construction time. And if the tenant had been in a position to require office space even before the early 90's, conceivably they could have negotiat-ed their prior lease in the 1980's! The rents at that time had not increased significantly over the recession cycle of the Seventies, but the square footage grew instead. Land-lords increased the loss factors, which resulted in higher annual dollars, but caused less sticker shock regarding asking rates because the tenant's attention was diverted towards impregnated building measure-ments. In addition, by raising the loss fac-tors instead of the rates, landlords were able to still afford to contribute substantial cash contributions and give generous free rent periods: Today, deals are usually structured on an "as is" basis, or, if the landlord does offer an NBI, or work letter, it is only worth about $15 a foot. For the mature tenant, this can be the most difficult part to swallow. In another time, in another era, the real estate game was piayed out with more negotiating room. Both parties usually began at differ-ent places, with the'broker bringing in the deal "somewhere in the middle," but in favor of the tenant. Now, we have to ex-plain to our mature tenants that the strategy - of starting an offer at five dollars off the asking price will probably result in being ignored, or worse yet, receiving a counter from the landlord at five dollars over the asking price! While it is a bit unusual not to have the luxury of time to compare. analyze and heavily negotiate elements of different site proposals. such as abatements, work letters and loss factors - in this market, "if thc shoe fits, wear it." In addition to the shock of having to nego-time a deal in teday's up cycle, today's mature tenant remembers eras gone by whet) a handshake or verbal approval actual-ly meant that they had a deal. Yet, we know that now some landlords are hand-shaking on "the same space simultaneously with several different prospects. Then, once the tenant gets a lease, we are forced to rush our customers through the lease comments stage in a manner that was unheard of in former markets - albeit. perhaps this isn't such a bad thing when we consider how long the legal process used to take! As brokers, we must tactfully explain this . phenomenon to our customers in a way that is sympathetic to who they are as mature business people, but yet doesn't portray our industry as one not unlike the used car or garment business. And speaking of using tact, it isn't any more fun getting the finan-cials from businesses who occupy less than 20,000 feet, because _,many of them are privately owned and the principals sti!l 'maintain that their tax returns I!l"C "private, ~ .:rItis psychological resistance on the part of our customers to releasing financials prior to agreeing to lease terms puts them on an uneven playing field, since they are compet-ing with four or five other tenants who immediately submit strong, certified finan-cial statements with submission of. their proposals. Thus, the prospect's offer which doesn't include the financial information can get "pushed to the side" if we aren't able to position him with and above the o~ers the lan~;ord is considering. When :representing mature, established business owner, brokers in this market are not so much bringing about a meeting of the minds, but instead, we are faced with meet-ing the minds (psychologically) of our pre-War customers.