Suite Deal

by Alice Devine

  The tenant’s feedback, whether spoken or expressed via body language, will give you clues as to what points might be contested. In most cases, prospective tenants will focus on and ask questions about the issues most important to them. Pay attention to these points because during negotiations, it’s helpful to understand a tenant’s priorities.

  One developer told me that, early in his career, he invited a client to a baseball game. After the seventh inning, things were going so well that the developer produced a folded lease from his back pocket and his client signed it. Lucky? Sure. Prepared? You bet. Sometimes relationship building does produce great in-the-moment opportunities on which an organized leasing agent can capitalize. Most of the time, however, social events are just that. Focus on the rapport, and the deal will likely come (but it doesn’t hurt to hope for the best and be prepared!).

  Follow Up on the Proposal

  Clarifying

  After reviewing the proposal (hopefully in person), follow up with the broker or tenant in one to two business days. Again, keeping the momentum of the deal going allows progress. If a prospective tenant stalls when responding to the proposal, it may indicate apathy about the property or possibly a slow decision-making process within the company. Ask the broker when the prospect plans to respond with a written counterproposal, so you can schedule time for review.

  In my twenty-year career, I have had a prospective tenant sign and return a proposal without negotiating any of its terms, once. That’s right, once. I practically fell out of my chair. So I consider the proposal a starting point from which we’ll discuss and settle on terms. Usually, a two-round session gets us to agreed-upon business points. From there, the tenant is ready to review the lease document. And when too much time elapses between proposal discussions, I know the deal has gone cold. The prospect may be negotiating more earnestly with another building, isn’t serious about moving, or has a dysfunctional decision-making process.

  Maintaining Momentum

  During the proposal and follow-up stages, let the tenant know the building and your time are in demand. For instance, you might tell the tenant, “I want to be sure I have allotted time on my calendar to discuss your important proposal. Do you have time Wednesday morning from nine to ten?” In this way, you lend a sense of urgency and efficiency to the process and communicate that, while desired, the tenant is not the only fish in the sea. By keeping up the momentum, you are able to move on to the next deal phase: negotiation.

  Chapter 9

  Negotiate a Deal

  “I think of real estate as a little bit like cooking or like art.”1

  –Jerry Speyer, founder Tishman Speyer

  Goal: Examine Various Negotiation Approaches, Styles, and Techniques to Reach Agreement on Proposal Terms and Progress to Lease Documentation

  In order to close a lease deal, you’ll need to wind your way through a maze of negotiations. Prized by flinty labor leaders and diplomats alike, negotiation skills are considered a core competency for nearly any profession today. Conflict is “an inevitable—and useful—part of life,”2 according to author Roger Fisher, coauthor of the iconic book, Getting to Yes. If you are frightened of conflict and the chaos that can accompany negotiations, you might settle for avoidance in exchange for concessions. Instead, you can strive to embrace a new process that maximizes potential solutions in a respectful manner, while accepting that you will encounter turmoil and disagreement along the way. In the process, you’ll need to cultivate your own best negotiation style, suited to your temperament and personality strengths.

  Adopt an Approach to Negotiation

  Start with a Mindset

  Setting expectations may be exactly what you need to cross the finish line. According to Dr. Alex Lickerman, author of The Undefeated Mind, data shows that expectations determine our perception of the difficulty of a task.3 So, by anticipating obstacles, you can take the expected challenges in stride. Conversely, when you foresee an unencumbered path, any stone might throw you for a loop, resulting in your own early defeat. By reframing your perspective, you perceive negotiation as a natural phase of lease transactions that will require constructive problem-solving. Yes, deals can steal our sleep, but a revised mindset helps us leap the hurdle of negotiations.

  I heard an anecdote about an Olympian who, when he went home to the snowy Midwest, slept naked with the windows open and without blankets. His rationale? He trained for pain. The athlete theorized that his competitors might not be accustomed to such high levels of discomfort. By exposing himself to bitterly harsh environments, he earned an advantage. The same theory might apply to leasing (or any difficult task in life). Ironically, acknowledging—and expecting—a certain inevitable level of hardship can ease a journey.

  Consider Your Style

  The way in which individuals express their signature style depends largely on temperament. Susan Cain, author of Quiet, discusses the power of understanding and utilizing your own negotiating style. Cain explains that extroverts—articulate, sure-footed, and sometimes loud—tend to shoot from the hip. In contrast, introverts tend to prepare well and ask questions that tease out solutions.4 For example, an introvert that has prepared well can use a modulated, even voice to diffuse emotions and present a deal that appears logical and fair. The exuberant extrovert, on the other hand, might announce recent fitness center upgrades and emphasize how much the landlord looks forward to a long-term relationship with the prospect. For practice in developing your own style, try role-playing a proposal with a colleague. Cain says the question of temperament—where we fall on the introvert-extrovert spectrum—dictates our preferences and that both can work. The point is to recognize your own style so you can play to its strengths.

  Cain explains that extroverts—articulate, sure-footed, and sometimes loud—tend to shoot from the hip. In contrast, introverts tend to prepare well and ask questions that tease out solutions.

  Regardless of your temperament, as in other arenas of life, those who manage their emotions fare well. According to Gary Noesner, chief negotiator for the FBI for ten years, many personalities can be good at problem-solving “but one of the universal attributes that we see is self-control”5 in negotiators who “don’t get flustered or react to events in a highly emotional way.”6 Calming yourself allows physiology to work at its creative best because your brain can explore solutions rather than contend with the fight-or-flight sensation that overwhelming emotions can create. As a bonus, it’s just more pleasant to work with someone under emotional control.

  I know a sly cat who placed an orange and black penholder from Princeton University on his desk, facing guests. Although he did not attend the Ivy League institution, he insinuated he had. Business has all types—the posers, the outrageous, the honest. It’s important to maintain a sense of humor and perspective, especially when working with some of these characters.

  Preparing for Successful Negotiations

  Now that you expect some disruption, how do you better solve the inevitable conflicts over price, tenant improvements, and lease clauses? Let’s start with the basics.

  Identify the Decision Makers

  When discussing lease terms, identify the appropriate decision makers and negotiators; debating terms with unauthorized personnel is a waste of time. One way to avoid confusion is to ask prospective tenants to describe their lease negotiation and signing processes. Whoever has the right to sign the lease is a decision maker, although there are likely others as well. A contact who won’t actually sign the lease but is responsible for concluding the process also has decision-making authority. By confirming that you are indeed negotiating with the appropriate parties, you avoid stalemates and delays.

  I once sat in a conference room alongside a landlord who was meeting with the anchor tenant of a large office park. Flanked by three beefy men, the petite tenant representative stood barely five feet tall in heels. During the meeting, the landlord directed his comments to the
men. I watched the woman become annoyed. I left the room, ostensibly to take a phone call, and scribbled a note, “Annie is the lead negotiator. Talk to her.” I then returned to the room and handed the folded “telephone” message to the landlord. He cringed and redirected his attention, thereby salvaging the deal. It’s important to speak to the decision maker.

  Set the Right Time

  Be conscientious when scheduling negotiation times. For instance, avoid lunchtime or end-of-the-day-talks that might result in a difficult commute for others, and be aware of the differences in time zones. Studies show that the hour before lunch (when hunger strikes) and the late afternoon (when fatigue occurs) can be cantankerous negotiating times. Negotiations are tough enough without imposing the added stresses of hunger, fatigue, and looming commute traffic.

  Draw a Boundary

  Focus conference calls and meetings by setting a time deadline and agenda. For example, saying, “I’ve scheduled the conference call for 45 minutes,” helps attendees focus on the issues at hand.

  Let’s Get Physical

  Pay attention to your physical setting and cues, so as to encourage cooperation rather than competition.

  Seating Arrangements

  Negotiators typically take sides on opposite sides of the table, literally and figuratively. Fisher suggests that negotiating parties sit side by side to encourage collaboration as parties seek to settle concerns. A desk that separates the parties, a chair that sits higher than the others, and cold room temperatures all conspire to create an environment where conflict may be exacerbated. Instead, use equal seating and a comfortable room to encourage joint problem-solving.7

  One of San Francisco’s leading asset managers relayed his secret formula for interviewing potential employees. He places the interviewee’s chair close to a large, leafy plant in the corner of his office. If an interviewee sits down and bats palm fronds from his head he’s a no-go. However, if the interviewee adjusts the chair forward (and out of the plant’s reach), he progresses to a second interview. Why? Well, the executive considers negotiation, which includes physical awareness, a critical facet of the job. The test evaluates one’s recognition and correction of compromised situations.

  Stand Up Straight and Look ’Em in the Eye

  Mom was right when she told you eye contact indicates confidence, connection, and respect. A Wall Street Journal article reports that people should be making eye contact 60–70 percent of the time to create an emotional connection, with a feel-good gaze lasting seven to ten seconds.8 Any shorter and you may be dismissive; longer and you may border on creepy. Typical poor habits include lacking steady eye contact, gazing downward at a table or at notes while in a meeting, staring intensely into others’ eyes, or worse, making eye contact while typing a text message or doing something else at the same time. In a world of flashing lights and pinging notifications, personal connection—primarily conveyed through eye contact—has become increasingly important.

  Once again, temperament plays a role in how you (literally) see others. For instance, introverts may gaze into space, not because they are distracted, but because others may speak in a too-loud voice. And boisterous extroverts with their dominating gazes may unnerve listeners. Those who want to modify their presentation habits often videotape themselves, hire a business coach or corporate trainer, or participate in groups such as Toastmasters.

  Focus on Business Terms First

  Most landlords and tenants settle business (i.e., financial) terms before ironing out the remainder of the contractual lease language. The beauty of financial terms is that they can be quantified, which allows you to know more precisely what you are trading with each negotiation. Leasing business terms include rent, term lengths, operating expenses, security deposits, tenant improvements, insurance requirements, commissions, and any other monetary inducements or concessions. Other important issues such as signage, parking, extension and expansion rights, and so on may not explicitly entail dollars but can affect the financial profile of the deal. While the real estate industry often focuses on face rent, the truth is that the net value of a lease is a function of all the economic terms of a deal, as discussed earlier.

  The period of negotiating business terms is fairly short, usually a function of tenant size and lease complexity. Smaller leases can be negotiated in a few weeks (or sooner) while large suites with a national firm might take up to several months because of the bureaucracy involved. In tight markets, the demand for space creates its own urgency to come to deal terms in short order. In a market with excess space supply, landlords sometimes create their own deadlines to expedite an agreement.

  Know Your Amortized Capital Investment

  With a financial analysis of the proposed lease, you can tie every added dollar of capital investment per square foot to an amortized x dollars at a certain interest rate over the lease term. This one-to-one correspondence allows you to make appropriate trade-offs. For example, $1.00 per square foot amortized over five years at a 5 percent interest rate equates to $0.23 per square foot per year. So for every dollar contributed to tenant improvements (or other capital expenditures), the landlord would have to raise the rent by $0.23 per square foot per year. Understanding and calculating these numbers allows you to have an informed negotiation discussion such as the following example.

  Sample Script

  Assume the landlord has already proposed a rent including tenant improvements per an approved space plan. The conversation about lease terms might go something like this:

  Tenant: I’d like to add glass sidelights to our offices and be sure our carpet is free of any adhesives or chemicals.

  Landlord: I should mention that our building-standard carpet is installed over pad rather than with adhesive glue and that the new carpet will be aired out for several days via operable suite windows. Now, let’s talk about these proposed change orders. Say you choose to install Shaw’s Green with Envy carpet tiles; those will add $3,500 to our existing tenant improvement allowance. And if you want to buy three more sidelights, those total $3,500. We (the landlord) have the available funds, so if you want these upgrades, we can amortize this over your five-year lease term, and the rent will increase by $132 per month. Would you like to adjust the rent this way?

  Tenant: We definitely want the sidelights (at $3,500). I guess the standard carpet is fine because it’s a good quality.

  Landlord: With the sidelights only, the rent increases by $66 a month.

  Tenant: We can live with that.

  The same scenario applies to concessions with more free rent or other out-of-pocket expenses that are above the landlord’s pro forma rent and inducement package. This quantifiable way of negotiating clarifies discussions so that additional capital costs correspond to rental hikes. By delineating and quantifying the choices and changes, the tenant and landlord make informed decisions.

  Keep Your Priorities Straight

  Leasing negotiations should fit the landlord’s priorities for that property. For instance, one property owner may value long-term tenants while another wants full building occupancy, even with month-to-month leases. Or a landlord may value high contract (i.e., face) rents, knowing the building will be sold within the next two years. In addition, a landlord might prefer a certain tenant mix, such as accounting or legal firms, knowing that symbiotic businesses, such as notaries, temporary staffing firms, and insurance companies, create a vertical hierarchy of sorts within the property. Knowing and focusing on the landlord’s financial bottom line and priorities allows you to negotiate with clarity and confidence.

  Broker as Consultant

  Occasionally, a landlord and prospective tenant develop a rapport and converse directly, without the broker’s involvement. This arrangement can arise because the broker feels comfortable with the landlord, the tenant is an existing one, the logistics of coordinating all parties slow the deal to an ineffective pace, and so on. Still later, once the economic points of a
lease are agreed upon, some brokers step aside to let the landlord and tenant complete the discussions and documentation. Conscientious landlords copy brokers on marked-up lease copies and other correspondence. In addition, they let brokers know when execution copies of documents are distributed, so that the brokers may assist in expediting signatures. Depending on the broker and the tenant, this type of relationship can streamline negotiations to bring the lease to a close.

  Understanding Some Negotiation Fundamentals

  Preserve the Relationship but Do What’s Fair

  The classic book Getting to Yes by Fisher, Ury, and Patton is based on work by the Harvard Negotiation Project, a group that deals with conflict resolution, from everyday contracts to international diplomatic discussions. The Harvard Negotiation Project invokes the phrase principled negotiations to describe a process that “decides issues based on their merits rather than through a haggling process.”9 The group espouses looking for common ground and then, in the areas of discord, relying on objective standards rather than personal ones. The notion of principled negotiations also means that you don’t place yourself at the whim of every personality involved, but rather that you approach your discussions with a calm, thoughtful plan in order to reach an agreement.