THE VALUE OF RETAIL real estate is inextricably linked to the legal process of retail leasing. Without a lease and the resulting income, retail real estate doesn’t have much value. Unfortunately, for many retail landlords (and tenants), the leasing process is a black box of unknowns. Opening up that box, so the process can be more effectively and efficiently managed, is essential to unlocking the full underlying value of each retail real estate asset.
Here are recommendations for retail landlords who want to manage the often-murky maneuverings that take place in the black box so they can maximize their certainty of success and minimize the time, cost and risk of achieving it.
At its most basic level, the legal leasing process can be understood by imagining two intersecting axes of conflict that need to be traversed as the lease moves toward completion. The first axis represents the conflicts faced by both landlord and tenant between precision and urgency. The need for precision can be likened to the need both parties have for adequate insurance. The conflicting tension comes from the urgency to get the lease signed, stemming from the reality that time kills deals.
The second axis represents the conflict between the desire of both parties to get it all and the need to accommodate the other side and pursue win-win solutions.
At a certain point in every transaction, the landlord and tenant must recognize that urgency trumps precision, and the need to accommodate the other side trumps the desire to get it all. When the transaction gets to this point, insisting on crossing those last two “t’s” could jeopardize the deal.
Landlords have a lot of control over the ingredients that go into the lease negotiation. Using the best ones will expedite the leasing process. Scrimping and cutting corners will invariably slow things down.
The foundational ingredient is the tenant. Landlords are well advised to take the time – before starting lease negotiations – to make sure the prospective tenant has the financial and operational wherewithal to be a successful tenant.
Second is the landlord team: experienced professionals, such as brokers and attorneys who can adapt quickly to changing circumstances and know how to get a deal over the finish line, are essential.
The next critical ingredient is the letter of intent. If that letter doesn’t accurately reflect the key business terms or if the tenant doesn’t really understand what they’re agreeing to, negotiations will get bogged down, sometimes to the breaking point.
To avoid more pitfalls and delays, landlords should not start with a “dinosaur” lease, a cumbersome document that addresses every unfortunate landlord-tenant issue the landlord has ever dealt with.
Negotiating outside the sphere of what is reasonable wastes time and money. The boundaries will differ from lease to lease and in each case will depend on the relative bargaining power of the parties. The size of the sphere of reasonableness can vary from a pinhole (one of the parties can insist on getting it all) to an ocean (both parties need to compromise significantly to accommodate the other side).
For example, in negotiating a lease with a 100,000-square-foot anchor tenant, a landlord’s insistence on complete control of the entire parking lot would be negotiating outside the sphere. But in the case of a 2,000-square-foot tenant in the same center, a similar demand would be an example of negotiating within the sphere.
When negotiations reach that critical inflection point where urgency trumps precision and accommodation reigns supreme, the landlord is working in the red zone. Just like a football team that has the ball near the other team’s end zone, the deal can be so close, yet still so far from a touchdown – or a signed lease. When the negotiation is in the red zone, complacency and poor management can have radical implications, including a dead deal.
Examples of what can derail a lease in the red zone range from the franchisee tenant who “remembers” that its franchisor requires leasehold rights that are inconsistent with the almost-final lease to the promulgation of local regulations that impose serious restrictions on the tenant’s permitted use.
Rather than shying away at this crucial point in the process, the landlord’s team must embrace the negotiation (because they’re close to finalizing the lease) and use it to their advantage. Armed with the knowledge that the tenant is now more likely to compromise, the landlord’s use of teamwork, communication and speed will get the lease over the goal line.
By Ellen Sinreich (firstname.lastname@example.org), principal, The Sinreich Group