by Alice Devine
The first task is to separate the people from the problem. Once you have acknowledged personal interest and emotion, you can focus on your respective concerns rather than individual positions. Next, you brainstorm for solutions to your issues. Finally, you engage objective criteria to resolve the outstanding issues.
Negotiations that are “hard on the merits, soft on the people”10 work well, according to authors Fisher, Ury, and Patton. The emotions and temperaments that individuals bring to the table make every negotiation unique. For example, a property manager may acknowledge, “I know you have been upset at the recent noise level from the building renovation, but let’s see how that may benefit you. We have the ability to offer you expanded signage, and the elevators operate much more quickly now.” By recognizing and acknowledging this human element, Fisher explains that parties are then able to concentrate on solving the problem in a more collaborative fashion.
Negotiations that are “hard on the merits, soft on the people” work well, according to authors Fisher, Ury, and Patton.
Fisher emphasizes the importance of focusing on concerns and interests, rather than entanglement into stubborn positions that one feels compelled to defend merely because one has taken a stance. Otherwise, compromise can be seen as capitulation. Fisher draws an analogy to splitting an orange. Conventional wisdom holds that splitting the fruit in half works. However, if one party wants the pulp and the other the peel, why not hear the concerns and then address them? Clearly, one party getting the pulp and one the peel works better than simply dividing the orange in half. In this example, addressing individual concerns means a bigger win than what might have been achieved with a traditional approach.
Getting to Yes: Four Crucial Negotiation Steps
People: Separate the people from the problem.
Interests: Focus on interests, not positions.
Options: Invent multiple options looking for mutual gains before deciding what to do.
Criteria: Insist that the result be based on some objective standard.”11
Keep Emotions Under Control
Deal strife seems inevitable, and although it’s easier said than done, recognizing the onset of heightened tensions can forestall a crisis. Author Daniel Goleman delves into psychological changes that affect behavior. When a stimulus triggers the primal part of the brain responsible for fight-or-flight survival instincts, you become, according to Goleman, “emotionally hijacked.”12 This emotional five-alarm fire obviates our ability to think and act calmly and rationally.
Goleman reports that there is good news, though: you can learn emotional intelligence. The key is to be able to recognize your feelings and then regulate them. Of course, that’s easier said than done.
Sometimes, charged emotions or adversarial personalities strain the deal-making process. In this instance, taking a break—the adult version of a time-out—diffuses tension. Consider rescheduling the lease clause review or leaving the conference room. Also, it may be helpful to enlist a neutral or congenial personality to handle an aspect of the deal. FBI negotiator Gary Noesner explains that the harder one pushes, the likelier the other party is to push back.13 So rather than continuing a hard line of negotiation, step back and consider a range of approaches to turn down the temperature. They may include involving others, reiterating your desire to work with the tenant, or turning attention to another–less contentious–lease issue.
Be the Captain of Your Own Ship
Are you irritated by a long morning commute? Are you worried about the consequences if you can’t close this lease deal? Recognizing underlying feelings prevents them from influencing negotiations unduly. Self-soothing strategies, such as a minute of deep breathing or simply acknowledging peripheral feelings, can calm you enough to negotiate well.
Invoke the Big Dogs
When negotiations become heated, it can help to invoke others. Saying that a point is a deal breaker for an investor (assuming it’s true), allows others to shoulder some of the responsibility for saying no. Similarly, telling the tenant that you need to seek approval from or run a point by investors can buy you time for emotions to cool when things become heated. These techniques keep the focus on content, rather than individual stances.
Identify Deal Breakers
Ah, the sacred cow. Distinguishing deal-breaker points from lesser priorities is critical to leasing success. Oftentimes part of the partnership contract, loan documents, or investment strategy, deal breakers are generally known issues. Typical examples include insurance, indemnification, capital expenditure thresholds, and use restrictions. If, during the course of a negotiation, a critical issue arises, it’s best to identify it as a deal breaker. Do not, however, cry wolf too often, or the prospective tenant will view your statement as a negotiating ploy rather than a legitimate concern. Wise landlords take a nonnegotiable stance only when they are willing to walk away from the deal over the issue.
Too many times, inexperienced parties assume that some aspect of the proposal is hard and fast, when only a few points may be deal breakers. That’s why you should have a conversation while reviewing the proposal (instead of simply delivering the proposal). The worst-case scenario is having a tenant decline to lease based on a review of written terms only, without any dialogue. Deal breakers are usually few and far between.
There’s a difference between the rigors of negotiating a deal and a stalemate that degrades a long-term relationship. If the deal has progressed past the financial review and the parties have agreed on the business terms, there’s very little that can’t be worked out with legal language. Still, serious unforeseen issues can arise—deal-breaker issues—that force a landlord to walk from the deal. It’s heartbreaking, but it can be a prudent decision. At any rate, make the decision to walk based on reason, not just fatigue, which can set in once negotiations become difficult and lengthy.
Nearly every deal I’ve worked on has reached a fatigue point, when momentum stalls. Giving up seems appealing. When that happens, I think of the most effective negotiator I know, who would tell the tenant, “We’re not confused—you’re a great company and we want to do this deal with you.” His confident expression of clear intent would soothe feelings and reinvigorate the discussions. Sometimes people appreciate reassurance.
Smoothing Over Trouble in Paradise
In the course of negotiations, you may employ some common techniques or recognize those used by others. Here are a few:
Quid Pro Quo
The Latin term quid pro quo means “something for something.” Some leasing professionals believe it best to receive a concession for each point. For instance, you might let the tenant know why you are compromising on particular points with a comment such as, “Because we value your creditworthiness, we are willing to lower our security deposit somewhat.” This discipline helps you make conscious decisions and communicate exactly what is being traded. Reciprocity is the name of the game.
At the start of negotiations, I visualize one hand extending itself while the other hand closes and pulls toward me. Somehow this image simplifies the daunting job of negotiation. It also keeps me conscious of securing something for each point I concede. And if I give a point without requiring an exchange, it’s a deliberate action on my part that I acknowledge to the tenant.
In many instances, making yourself “whole” with each minor exchange allows a better chance for a deal that feels fair at the end. Sometimes, inexperienced negotiators concede multiple points and fail to receive anything in return. They may believe that they are storing goodwill and expect the prospect to compromise on subsequent or multiple issues. Later, when a larger capitulation doesn’t happen—even if one party has granted many prior concessions—disappointment and bitterness can ensue. Perhaps it’s human nature, but the memory of a conceded point can fade quickly. To prevent this, barter issues along the way, or specify that you are compromising now in exchange for future considerations.
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br /> Split the Difference
There’s a real estate adage that advises, “He who names a number first, loses.” When two parties reach a stalemate on price, the sides will often offer to split the difference. With that in mind, remember to leave yourself some margin. Most brokers and business people expect to negotiate a bit, so naming your bottom-line number out of the starting gate—despite your straightforward intentions—can seem inflexible and lead to an impasse.
I knew a no-nonsense asset manager who would become frustrated during lease renewals because tenants would expect to negotiate the proposed rental rate. Meanwhile, the asset manager had offered her bottom line (or close to it). Where’s the fun in that? Whether she disliked negotiating rent or believed others would appreciate her directness, she boxed herself into a corner with little margin for negotiation. I learned that it’s a good idea to understand the culture of the marketplace. If others expect to debate terms, then leave some wiggle room.
Don’t Split the Difference
Parties can also make gains by focusing on the goals of each side, including the valuable noneconomic terms that play a role in any deal. For example, tenants may pay higher rent if they can obtain monument signage outside the building (assuming they’re renting ample square footage). That’s why it’s important to understand what items are priorities for your tenants, and yourself.
Require a Counteroffer
Oftentimes, prospective tenants or brokers will tell us that an economic or other lease point is unsatisfactory, without offering a solution. Assuming you have already submitted a proposal, the tenant should respond. Take turns! If a prospective tenant complains the rent is too high but offers nothing more, seek a specific counteroffer. Some leasing personnel say exactly that; “I can’t negotiate against myself. I look forward to your response.”
Once It’s Settled, Move On
Sometimes the prospective tenant will reopen an economic point of discussion. It is important to say, “That’s a business point we’ve already agreed on.” Otherwise, it’s hard to conclude the deal and you end up compromising twice over a single issue.
Leave Something on the Table
While getting something for what you give works, other times you may choose to leave something on the table. That is, you don’t drive as tough a bargain as you could have, with the goal of fostering goodwill. By being generous, landlords do their best to avoid festering resentments that can poison long-term relationships. With this approach, landlords may unbalance the quid pro quo just a bit, to leave tenants feeling satisfied that they negotiated a good deal. Some leasing professionals like to conclude negotiations with a concession at the close, which also helps them move on to the final phase: lease documentation.
Chapter 10
Understand Lease Clauses
“The devil is in the details.”
—American proverb
Goal: Understand the Intent of Important Lease Clauses and Typical Landlord and Tenant Concerns in Order to Consummate a Lease Contract
Disclaimer: The legal language used in this chapter is intended for reference only and you should confer with your own attorney for legal advice on contracts and language.
Wait a minute, don’t the legal gurus negotiate leases? Well, yes, although the process can become a little murky. It depends on whether the agreement is an amendment or a full-blown lease, and how amenable the tenant is to signing the landlord’s lease form. Oftentimes, leasing personnel negotiate the bulk of the lease terms because if they are working from the landlord’s standard lease form and the changes are nominal, the legal language has already been crafted. When faced with an impasse or with technical legal issues, though, real estate personnel usually engage counsel. In any event, real estate professionals strive to learn about lease clauses and their significance in order to better their leasing results. To that end, this chapter focuses on some important lease clauses, explains the intent behind them, and notes the objections that tenants sometimes raise in response to such provisions.
I knew an executive who needed to let go of one of his two leasing managers. Both had represented the landlord in substantial deals. The executive combed through the respective leases completed by the project managers. On the surface, the economic terms of the various deals appeared similar. By digging deeper into the leases, however, it became apparent that one manager had negotiated like a tenacious bulldog, conceding limited rights and crafting tight language (with legal help). The second project manager had been much less parsimonious—giving away extension rights, extra parking, monument signage, and so on. In down markets, landlords and tenants experience hardships that test the fine points and details of these lease clauses. Guess which manager kept his job?
Nolo (www.nolo.com)
A useful website dedicated to helping the layperson understand legal clauses.
Clauses That Contain Financial Terms
Security Deposits
Most leases call for a security deposit, often in the amount of one month’s rent, from the tenant upon lease execution. Why have security deposits, especially when the tenant is creditworthy (as all your tenants should be)? Simply said, a security deposit motivates both the landlord and the tenant to get around the table to solve any problems that arise. All is well when the tenant and landlord enjoy a shiny new relationship, but should the dialogue crumble, a deposit provides an incentive to solve issues. Further, a security deposit may be the only no-risk, self-help remedy the landlord has under the lease. Last, by requiring a security deposit, the landlord retains a certain amount of leverage both during the lease term and after the term expiration with regard to the surrender of the premises. The security deposit encourages a tenant who is leaving to depart in a timely manner, with the premises intact.
A security deposit motivates both the landlord and the tenant to get around the table to solve any problems that arise.
Common Objections and Concerns
Tenants will sometimes say, “We are a creditworthy company that pays our rent on time. Why do you need a deposit?” Regardless of the financial strength of the company—although that most certainly can affect the amount of the security deposit—most leasing personnel explain that deposits provide motivation to solve any (unlikely) disagreements. A response might be along the lines of, “We want to make sure that we all have an incentive to get around the table and resolve any issues.”
Late Charges and Interest
This clause encourages prompt tenant rent payments by assessing late charges and interest if rent is not paid on time. The two methods—late charges and interest—address slightly different concerns. Late-charge penalties discourage the tenant from paying late every month, even though the tenant may eventually bring the account current. Interest charges, however, discourage a tenant from maintaining outstanding debt over longer periods of time.
Common Objections and Responses
Tenants sometimes ask for a grace period before interest or late charges start to accrue, and/or a lower interest rate or late charge. Some tenants will argue that they need protection against administrative mistakes, mail delays, and so on.
Many landlords try to avoid giving tenants a grace period because it takes away their incentive to pay rent promptly. After all, if tenants say their businesses are so disorganized that they cannot ensure timely rent payments, what does that say about their credit? In this situation, the landlord can explain that utility bills and other operational expenses need to be paid and that that requires timely rent payments.
With respect to interest, the rate must be high enough that throughout the term of the lease, it remains a deterrent to late payments.
I found the clause on late fees and interest a pretty easy one to negotiate. If a tenant asked me to change this language, I would respond, “Let me get this straight, you mean you don’t intend to pay rent on time?” It’s tough to have a good response to that question.
Operat
ing Expenses and Taxes
This section addresses the definition of operating costs and taxes, the calculation thereof, and the payment process. Office leases usually fall in the category of full-service leases, meaning that the landlord pays for the costs associated with running the building and looks to the tenant to pay a pro rata share of increases in such expenses.
Tenants commonly negotiate this section, and it can be difficult because some issues may be business (i.e., financial) concerns, while other objections relate to the clause’s language. Depending on the building, some tenants pay their share of increases in operating costs and taxes over a base amount that is expressed in dollars per rentable square foot, while in other buildings tenants pay their share of increases over the actual operating costs and taxes for the base year. (And still other leases are structured so that tenants pay their own operating expenses.) Note that operating costs and taxes are often defined and calculated separately so that, for example, a reassessment of the building that results in a reduction of taxes below the base level does not offset increases in operating costs. In other buildings, though, operating costs and taxes are bundled together for determining the tenant’s share, so you need to know the policy for your building. Also, note that the tenant’s share of increases in operating costs and taxes is calculated on the basis of the operating costs and taxes that would be incurred if the building were 100 percent occupied, even if the occupancy rate is lower. The rationale for this, which often has to be explained to tenants, is that absent such a provision, the landlord will end up paying a portion of the operating costs and taxes that are more properly attributed to the tenant’s space.