Category Archives: Landlord Motivation

Automatic For The People

By Ken Ashley

(ATLANTA) February 29th, 2012

Early in the spring of 1991, I was in college, and I was hungry. The University of Georgia in Athens, Georgia is the home to a number of fine establishments catering to the college masses, of course, but I ventured off the beaten path

Five Stars!

towards the Pottery Town neighborhood for some good “Q.” I had heard about a great establishment with a unique feel. The restaurant, which is still there today, is known as Weaver D’s Delicious Fine Foods. It’s a down-home cafe at 1016 East Broad Street in Athens.

The restaurant occupies a 1950s commercial building with a false front parapet. The neighborhood around the building originally served as the mill village for the workers of a local pottery factory.

I walked down the long hill to get to the restaurant. What I didn’t know is that I’d get a lot more than a great meal that beautiful day. I got an unexpected life lesson from proprietor Dexter Weaver (AKA “Weaver D.”).

You see, Weaver has a large signboard outside of his cafe that reads “Delicious Fine Foods – Automatic for the People.” As I ordered my food from the now famous Weaver D, I asked him what “Automatic For The People” meant. He

And Now World Famous!

smiled a really big smile and crossed his arms thoughtfully. With a very serious, but friendly tone he said “Young man, that’s how I deliver my customer service. It’s fast and right; heck it’s just about automatic.”

“And it’s always for my customers,” he continued, “the people who spend their hard earned money for my food. I listen hard and we make them happy – quick.”

I thought a lot about Weaver’s seemingly simple comments. I was, and am impressed that a then small time purveyor of pork could think about his business in

The Wise Man Himself

this way. He’s not focused on his food, he’s focused on his customer and taking care of their needs as best he can.

His approach has made him world famous (thanks to REM, as described below). Weaver has spent his life in the service of others, but I think he’s making a fair

return. All these years later he has a book deal, and he’s become quite a celebrity in Athens, GA with his own Facebook Fan Page. Oh, and the food is terrific as well.

REM is Automatic for the People

It is this very same slogan that a little Athens act named REM chose for their 1992 album. The album went four times platinum (16 million copies sold worldwide)

One Of The Great Albums of the '90s

and was one of their most successful releases ever. It is still one of my favorites, and I am in fact listening to the music as I write this.

Automatic For Your People

Weaver D would have been a fine landlord. He understands the focus on customer through delivery of both a great product and service. Do your landlords across the portfolio have the same understanding?

Whether you are signing a lease for 5,000 feet for the sales office in Des Moines (nice town, by the way) or 1 million square feet for your jumbo new headquarters, how the asset will be managed is important. I have seen even tenured real estate executives forget to ask about property management. Many simply assume that landlords will take care of things. Besides, it’s in the lease, correct?

Weaver D would shake a finger at us for making that assumption. If you are performing the real estate function for your company, many are counting on you to deliver the right office space. Part of that equation is the service after the sale, also known as property management.

So what can you do to make the new pad Automatic For Your People?

1)           Determine who will be managing the property on a day-to-day basis. Taking them to lunch is usually a great investment of time.

2)           Is the manager on site or at another location? If they are at another building, how are day-to-day issues handled?

3)           What is the tenure on property of the manager? How many buildings do they handle?

4)           How many engineers are assigned? What is their experience and are they union or not?

5)           Is the management company in-house with building ownership or is the function outsourced to a third party provider? Both can be great resources, but it’s good to understand where the paycheck comes from.

6)           How does your user group interact with management? When problems occur how are they reported and managed? Most firms today will have a technology solution (webpages that feed engineers with smart phones), but ask lots of questions about how the process really works.

7)           Ask to see the capital improvement plan for the property. If you get a blank stare, beware.

8)           Does the interaction seem to be reactive (we’ll respond when the light bulb burns out) or proactive (let’s meet quarterly to make sure your needs are being met)?

9)           Ask if you can conduct tenant interviews with other major users in the building. You will learn a lot about the asset and have someone in your database if you have issues.

10)        Tour the physical plant. Can you “eat off the floor” or is it a mess? It should look as clean as a navy submarine, if you ask me.

11)        Inquire about “life safety.”  A manager must have a well documented and prepared emergency response plan for fire, storm, wind, etc.  Ask the manager to share his or her plan.  If no such plan exists, then this is a clear red flag.

12)        On the same subject, how does property management handle building security? What are the staffing levels? What technology does the property use? Have their been incidents, and if so, how is this information shared with tenants?

If you take the time to do some basic due diligence and note your findings to the file, you will have something to lean on when problems arise. Weaver D would be proud that you thought about your customers and went the extra mile. Automatic.

Thanks to “Automatic” Mike Mire, Regional Lead of Property Management at C&W, for his sage advice on this blog post.

What Would Warren Do?

By Ken Ashley

(ATLANTA) October 21st, 2011
As reported in this recent WSJ article, even Warren Buffet
is buying back his own company’s stock. The Journal reports that Berkshire
Hathaway has a stunning amount of cash totaling nearly $50 billion dollars
on hand. In the first 6 months of this year, the company generated $9.7

Mr. REALLY Big Money

billion in cash or nearly $54 million per day.

Mr. Buffet is in good
company. According to Deallogic, $347. 5 billion has been squirreled away by corporate America, which is the most since 2008. We read similar stories about Apple, GE, and
many life insurance companies, among others.

In early October, the Journal ran another article “Companies’ $2 Trillion
which again referenced the “massive cash hoards” being built up
now. The article went on to suggest that a  “vicious cycle of
underinvestment” may be upon us as corporate America (a) can’t find suitable
investments and (b) continues to worry about the future economic outlook.

Not every company is so fortunate, of course. Many are dealing with cash
flow issues, but this is true in every economy. What is amazing is that
corporations are sitting on such a huge volume of cash combined with
relatively low debt. Even the guru of all financial gurus Mr. Buffet is
spending money on his own stock as opposed to sopping up more companies.
That fact indicates that building huge piles of cash will be trendy for
sometime to come in the executive suite.

Don’t I At Least Get A Toaster With This Loan?

So, why do cash rich corporate tenants reach out to their landlords and ask
for even more money? It’s traditional in many real estate transactions for
building ownership to invest cash in the form of a “tenant improvement
allowance” (“TI”). The landlord then amortizes this cash into the lease rate
over the term of the commitment. Tenants use this money to carpet, paint and
build out their space. The thinking is “This is the landlord’s building and
I’m only here for the term of lease. Why would I dump my cash into someone
else’s asset?”

Peel back the onion, and you will see that the lender, I mean landlord, is
actually making a tidy sum on that investment in your new space.  You knew
this intuitively, but lease proposals are always silent on the
interest rate on TI money. It’s certainly a worthwhile exercise to take a
few minutes to check the math and solve for the imputed interest.  Regardless of the decision of your cash or the landlord’s, you can send your broker in to make the interest rate on the landlord’s cash a negotiable item in the deal.  I’ll bet in today’s environment you can improve on the first offer.

The length of your commitment will have to factor into this decision on
whose cash to use as well. If you are only committing to a space for three
or perhaps five years, it might be best to let the professional landlord
spend his money on the space. However, in longer term situations, a good
side-by-side analysis will help decide if your cash or theirs is the better

Pass Go and Collect $200

Determining whose cash to put into the build-out is like any other investment decision in the real life Monopoly game we play in business every day.  If you invest dollars to pay for some or all of the TI, then you get the depreciation (check to see if bonus or accelerated depreciation will apply to your situation),

Thank you sir, may I have another?

and of course you get the benefit of the lower lease rate during the term.  You’ll abandon the improvements when you leave the building, but this is true even if the landlord builds out the space and amortizes the cost in your lease rate.

If you let the landlord invest his cash in your deal at your now negotiated
lower interest rate then you get to keep those dollars you otherwise would have spent. But remember, at the end of the term, when you are considering renewing the lease, you should deduct the amount of the TI amortization from the new lease rate. Otherwise, (depending on market rates) the landlord will be happy to leave that line item in your cost at 100% profit.

A big factor in the cash deployment decision has absolutely nothing to do with real estate. Only senior finance executives can see the full picture of a
company’s investment opportunities, including internal projects and M&A
options that may pop up.  Admittedly, in most economic cycles, investing in
sheetrock doesn’t even come close to the internal hurdle rate.  It’s only
the vast amount of cash lying around at very low interest rates that makes this even a consideration.

At the end of the day, most corporations will let the landlord pay for the
TI.  However, you will feel better having run the traps on the analysis and
negotiated this often hidden part of the real estate deal.

Before you finally decide who will write the check on your improvements, asking a few simple questions might significantly improve your deal either way. And
that’s an investment even Warren Buffet can get behind.

Ranch Dressing

By Ken Ashley

(ATLANTA) September 6th, 2011

Ah, the economic malaise continues. This New York Times article (Fed Divisions Led to a Compromise on Interest Rates) starts with a pulse quickening statement: “No one knows what to do to fix the economy.” With the certainty of uncertainty continuing to be a daily



media subject, interest rates are trending near all time lows. Yes, one day, Ethel, it will be ok. The cycle will turn and joblessness will no longer be the headline de jour.

But with all the fun in the economy,  there’s an unintended consequence of this “condition” we are in: bad real estate deals still have life (perhaps it’s an after-life at this point). Low interest rates propped up many a real estate deal in the darkest days of ’09 and ’10.  And now, the low rate party continues right on into the 2011 college football season.

To put this another way, low interest rates cover up bad real estate like ranch dressing covers up a bad salad. Tenants need to be aware that over-leveraged assets supported by unnaturally low interest rates are ticking time bombs. You can certainly make some great deals these days as a credit tenant, but make sure you are doing business with a credit landlord, or else.

Can I Get A Witness?

Several years ago, the presumption was that landlords had great credit. Heck, they own this beautiful building, and the leasing agents look like a million bucks. Now, we advise tenants to perform as much due diligence on the landlord as ownership performs on tenants. Both parties are making an investment in the other. The landlord gets rent; you get improvement dollars and space in which to make your fortune.

Don’t Call Me; I’ll Call You

Checking the asset’s “credit stack” is important at the beginning of the relationship, but every tenant needs to have strong protection during the  lease term as well. Work with your real estate broker and attorney to make sure that you have good language around the landlord’s responsibilities in the lease (it always bugs me that the tenant’s responsibility is many, many paragraphs long, but the landlord’s is two sentences).

Also, work on so-called “self-help” remedies that allow you as the tenant to perform certain landlord functions if ownership doesn’t live up to its end of the bargain. If things go bad during your lease term, you can always sue, but what you really want is a high functioning facility in which to conduct business. While there are very real limitations on what you can and should do as a tenant (as opposed to being an owner), keeping your space operating when the landlord doesn’t perform is vital.

I’m Outta Here

There are other legal devices you should ask your advisors about. One is the very technical sounding “subordination and non-disturbance agreement (“SNDA”).” To sum up an SNDA: you, as tenant, agree to recognize the landlord’s banker if the landlord defaults. The non-disturbance verbage means that the landlord/banker agree to let you keep your lease in force after a default on the building loan. SNDA’s are required by many lenders because if they take the building back, they need to know they can count on you, Mr. Tenant, to keep paying the rent. Just make sure that in return for agreeing to give protections to the lender, you are properly protected by the document.

Perhaps the most important legal issue is the ability to quit the lease if the landlord can’t or won’t do his/her job. Termination provisions for landlord non-performance are not the easiest to negotiate, but if you are a significant tenant

And one more thing, your......

with good credit, you never know what you might get in this market. Besides, it would be a great feeling to tell your non-performing, no good landlord “You’re Fired!” You and The Donald can be one.

So, we hope the Administration, the Fed and the Congress can jump start things, because this economy is simply getting boring. In the meantime, watch out for capital starved landlords, and maybe a little black pepper will help that salad out as well.

Everywhere a Sign

By Ken Ashley

(ATLANTA) July 18th, 2011

It was a different time. In the early 1970’s the hippy movement was in full swing, and an unemployed 25 year old singer in a rock band in Ottawa, Canada sat down one day, mad at the world. The results of his youthful anger – the song “Signs” —

Oh wow - those pants rock, Dude!

would become a powerful anthem for those who were changing our culture from a strict para-military rules following people to a new generation of free expression.

The song debuted as the “B” side of  an unsuccessful single record in 1970, but without warning, Signs became a huge hit for The Five Man Electric Band. Lead singer and writer Les Emmerson, still living in Ottawa today, now makes a healthy living in large part from the 2006 hit “Don’t Let The Man Get You Down” by the hip-hop (later version of hippy?) artist Fat Boy Slim. Mr. Slim sampled Signs, and therefore Les gets good mailbox income. Maybe signs aren’t such a bad thing after all – if you sing about them.

What’s Your Sign?

Before you warm up  GarageBand on your Mac and start penning your own ode to the hippy generation, maybe you can become more successful by

Thanks Officer!

working on signs for your hip new offices.

One of the big reasons companies invest millions in their digs is to make an impression on customers and prospects.  Occasionally, businesses want to keep a lower profile because, for example, they are in industries related to defense or conduct research that is deemed secret. However, the vast majority of corporations are interested in getting their name out there.

Over the years, we’ve worked with a number of companies interested in maximizing their marketing dollar by obtaining prominent signage. We’ve encountered those who desire top-of-building exposure with relatively small office space requirements, all the way to big name companies  who look not only for building signage, but campus level branding. And of course, we’ve worked with those who have smaller office requirement but simply want to maximize their exposure package. We’ve seen many approaches to using someone else’s real estate as a billboard. There is no doubt about it, a major top of building deal can be worth millions in advertising dollars and can message consumers every day.

As you think about signage needs for your business units  – and they certainly don’t have to be just headquarters locations  – we advise you first consider the type of signage package you want.  Then determine how all the operational considerations will work to keep your really cool sign bright and beautiful.

Levels of Signage

Lobby and Suite  

– Signage in the lobby and on the premises. While this is fairly standard,

45 MPH, huh?

think about the use of your company logo on the entrance to your suite. Determine up front how the signage can be changed if your name changes, and determine in advance if you want Principles or Partners names to be posted on the sign in the lobby.

Exterior Monument – Confirm what position will you be on the monument, and get landlord agreement that you will have that level throughout the term and any renewals. Also, be aware that some properties have more than one monument at different street entrances. Make sure you have the same rights on all monuments.

On Building – Signage that is on the side of the building, but may not always be at the top. Some properties offer street level fascia signage that is very valuable, especially in dense urban settings. Of course, the ultimate physical location on the building is important.  You may not get exclusivity on the building. but you should be able to negotiate restrictions on competitors’ signage.

Top of Building  – Same considerations as On Building, but you have a much stronger case for exclusivity. In some jurisdictions, only one sign can be at the top


of the building (this helps the fire department, for sure), but confirm that you have the only top of building sign. In both On Building and Top of Building cases, you will want to put up your sign as soon as possible. You should take responsibility for its maintenance because the landlord is not in the sign business. You care about your sign more than anyone else, so take care of it.

Campus A campus package likely includes all of the above. As the major or dominant tenant, you can get other goodies, such as the right to name roads interior to the campus or display your product on the property, if applicable. Think Disney in the office environment.

Other Considerations

Exclusivity  – Mentioned earlier, but this is a major issue. For example, can others put signs up (including on the side of the parking deck) in the office park?

Who’s Tab?– Who pays to put the sign up and when can it be installed? Can the sign be paid for out of a tenant improvement allowance?

As far as maintenance, with the hot sun and hail damage, there will always be a need to baby your sign. Negotiate in advance for wide permission for your sign crews to change electronics or signage material. Make sure you have permission to get up on the roof in the event a major replacement is needed.

Party Over – Who pays to take it down? When your lease is up, you will likely have a restorative obligation. Make sure to address the particulars of what you need to restore. If you are patching a few holes, that’s likely OK, but be careful that you don’t have to replace an entire roof or part of the building siding. Also, in the event that another tenant is going to install a replacement sign, perhaps you can mitigate your requirements to actual repairs after the new sign is installed.

Lighting– You paid all that money for your lease and the beautiful sign. Don’t give up 12 hours a day of exposure. Negotiate sign lighting in the lease agreement.

Civil Disobedience

Additional Considerations – What happens if you shrink? What happens if you sublease space? How long can you keep the sign? You’ll have the most leverage during the initial lease negotiations, so address flexibility upfront.

Also, who runs the traps on government approvals? You and the landlord should jointly discuss approvals with the municipality. Don’t be afraid to retain a good lawyer who is an expert in this area. It can make a huge difference in terms of your time and the ultimate approval of your project.

So, peace, love, happiness, flowers and children have been good to Les Emmerson. Get your dream sign installed correctly, and they’ll be writing songs about you. Dude.

Git-R-Done; Time To Move Those Deals Forward

By Ken Ashley

ATLANTA (July 5th, 2011)

Disney’s acclaimed Pixar unit recently released Cars 2 with “co-stars” race-car Lightning McQueen (voiced by Owen Wilson) and tow-truck Mater (voiced by Larry the Cable Guy). In the movie, the characters head to Europe and Japan to compete in the World Grand Prix, but of course get side tracked with all manner of problems, including international espionage.

While the new movie is a hit, we like the original Cars movie better as it’s seemingly innocent humor is classic and truly funny. Our favorite character, Mater, resembles an International Harvester mining “boom-truck” from the 1950’s. The vehicle that is the inspiration for his appearance sits at a diner in the former lead mining town of Galena, Kansas – population of 3,287, which is down from nearly 80,000 in the late 1800’s. The town, appropriately for the original Cars movie setting,  is on the eastern end of the famous Route 66 (You can also take a spin in the 1951 vehicle, the owners proclaim; it still runs!). Back at the diner, you can purchase sandwiches, clay models of Mater, and learn about the plans for a bed and breakfast (we’ll see about that).

Shoot! You're in Radiator Springs, the cutest little town in Carburetor County

Part of Mater’s charm is the personality of comedian Larry the Cable Guy (aka Daniel Whitney),  who speaks with a thick Redneck Southern accent. Larry’s character brings an often hilarious spin, explaining that his name is like “tuh-mater without the tuh,” telling the audience he’s “happier ‘n a tornado in a trailer park,” and proclaiming that

Shucks, you can call me Larry

he’s  the “world’s best backwards driver.” He attributes this skill to his rear-view mirrors and his own”guiding” philosophy: “Don’t need to know where I’m going, just need to know where I’ve been.”

“I knew it! I knowed I made a good choice!”

Mater’s philosophical musings may go a long way to describing the plight of those on the user side of commercial real estate these days. We certainly know where we have been – in one of the best markets for tenants in a generation. But if we keep our focus on the past, we too could end up being the world’s best backwards driver in terms of real estate deals.

As a very insightful article in the latest Real Estate Forum (@RealEstateForum)
entitled a Rebound By Chapters explains, the real estate recovery is happening at different paces in major metros. The piece, by John Jordan, quotes Cushman & Wakefield’s Ken McCarthy, stating that office leasing reached a six year high in the first quarter of 2011. CBRE Econometric Advisor’s Arthur Jones characterizes the current national office market as “weak but stabilized.” Dennis Friedrich of Brookfield, a publicly traded developer and owner with a portfolio of 78 million square feet, believes that the recovery is “sustainable and will lead to single and double digit rent growth in some US cities in the near future.”

Perhaps the biggest indicator of coming office recovery is the appetite that many major investors have. They are putting their money where their mouth is and now have an interest for office product once again. For example, Joe Oglesby of Wells Real Estate says in the article that his company is “planning to have a very active second half of 2011 in terms of buying buildings.” Pay attention when experts in a market start to acquire new assets.

“I tell you what, buddy; it just don’t get better than this.”

For nearly three years now, tenants have experienced a market in which they could take their time in decision making, and have their every demand met by landlords who were very desperate for their business. It’s been a very good time to be on the user side of things and many have deals have made corporate heros of executives who capitalized on depressed conditions.

We are certainly not suggesting that this environment will change immediately, but in certain cities and submarkets we are beginning to see the market tighten. Many make the mistake of thinking that markets have to actually be in recovery for real estate to cost to rise. What actually occurs is that an asset manager feels a sense of optimism (or feels less fearful as it were) based on what he or she perceives is happening. Then the order is issued to  the leasing brokers to be more conservative on the economics and offer lesser concession packages.

Our advice is to move ahead on projects on the board, and in the vernacular of the wise one, Mater, “Git-R-Done.” Lease early, lease often and with flexibility, and be prepared to accelerate the speed of decision making. If you decide to engage in a real estate project, a best practice is to get senior management or your board to approve a set of parameters and let you go get the deal teed up. If they want to look at it one more time before you sign the lease, so be it, but speed is your ally in a recovering real estate market.

The deal is more than the face rate, of course. Keep in mind that many real estate stats quote growth of “asking rental rates.” This is like suggesting a change in the automobile industry based on the sticker price on new vehicles. Clearly there are many factors to consider in a transaction as complicated as a major real estate deal. So while the rental rate may change upward, a good credit tenant that knows what it wants and is prepared to move ahead with reasonable speed can still make a very good deal in most every major market in the United States.

So, unlike our friendly character Mater, look forward not backwards and be aware of the perception as well as the reality of the real estate markets. It’ll make you look like a real estate hot rod!

Lightning McQueen: Will you stop that?
Mater: Stop what?
Lightning McQueen: That driving backwards. It’s creeping me out. You’re gonna wreck or something.
Mater: Wreck? Shoot! I’m the world’s best backwards driver! Just watch this right here, lover boy.

Nobody Loves Me But My Mother (And She Could Be Jiving Too)

By Ken Ashley

ATLANTA (April 4th, 2011)

This great BB King song must be emblematic of how some down on their luck developers feel at this point in the market. Tenants are demanding rent reduction

That Man has the Blues!

and more services; the tax man wants to be paid; the lender is holding on the other line and oh, by the way, you need to cash a check to feed the kids. Developers take big risks and sometimes those risks don’t pay off.

We empathize with some landlord friends who are currently losing at the real estate game. The economy is recovering, but life in ownership is still hard in very real and personal ways, and we know this economy can be humbling to even the biggest ego. Most landlords in 2011 would tell you that debt is like a chocolate cake: delicious in small slices, but really bad for you if you have too much.

We are becoming a whole generation of “recession babies” who view debt as anathema and important to eliminate as quickly as possible. Certainly millions of Americans are cutting up credit cards and paying with Ben Franklins instead.

Want at Toaster With That CMBS Loan?

But wait, the Wall Street Journal and other publications are suggesting that the debt markets are coming back. In this blog article in the Wall Street Journal

Want Some Bread?



(CMBS Industry Ready to Exhale) Eliot Brown suggests that softening  of requirements on banks will allow them to more quickly issue Commercial Mortgage Backed Securities again. I feel a collective eye roll as you say, “Here we go again.”

Of course, debt is a tool like any other, and it is really the oxygen that allows commercial real estate to move ahead. In this brilliant post from March 30th by Dr. Sam Chandan –  The Return of the Rise of CMBS –  which ran in the New York Post, Sam explains that “This marked (positive) shift in borrowers’ access to credit has facilitated a critical mass of trades, supporting a degree of price discovery that was absent just a year ago; it has also allowed mortgage rates to remain near their cyclical lows even as long-dated treasury prices have fallen and yields have risen.”

The lesson as I see it is simply “in all things, moderation.” Thanks again, Ben Franklin.

Don’t You Be A Loser at Leasing

While it has become a national sport to shake our heads and wag our fingers at those developers that foolishly took all that risk, there most certainly is a parallel in the tenant universe. Our friends in the technology community used to call it “leasing ahead of the curve.” Some would call it leasing on a credit card. We call it not smart.

Leasing significant space in a vague anticipation of future growth can be expensive, but oh so tempting. Other tenants in the building are expanding and you might get boxed out! We need a solid path for growth, the managers proclaim. And if we sell that order of the BR549’s to the Chinese, we will need to hire gaggles of people quickly!

The “get them while they are hot” philosophy should be treated with great care in an environment in which lease obligations are firm commitments for years to come. The sad fact is that real estate is likely your second largest cost. Your largest cost – payroll – can be reduced relatively quickly through terminations, although this is not pleasant. Real estate is a commitment with no easy exit as we discussed in this post from late last year.

Let’s Keep Mom Happy

So, no matter the promises of future sales, business is booming and you need to hire more folks. This nonsense of working 90 hour weeks can’t last. How do you not “overspend” or overcommit in real

Smiles All Around!

estate? Through a beautiful thing called an option. Our advice to many clients now is to “go long and option up.” Translation: lock in low rates that are prevalent in the market and preserve both your growth and contraction ability through options in the lease. Ask your real estate broker about this, and talk to the lawyers, but exploring a soft instead of a firm commitment for space can many times be a career saving approach.

Another way to handle this issue is to partner with an architecture firm and develop a firm understanding of your space usage. The document the architect produces is called a program, and it will be the basis for calculating how much space you really need in the future. When the sales guys show up with the signed order and a big smile, you can then feel good about expanding based on a detailed and empirical look at your space needs as opposed to guessing on butts in chairs. No jiving with a program.

Expansion, like debt, is certainly not in and of itself a bad thing. Just don’t eat too much chocolate cake or you will be singing the blues. Moderation makes Mom happy, you know.


By Ken Ashley

(ATLANTA) March 7th, 2011

No matter what market conditions are, we frequently get questions about what is “fair” for a term or length of lease commitment. If corporate users

"Like sands through the hourglass, so are the days of our lives."

could get landlords to commit to a scenario where they could unilaterally terminate every year, every month or even every day, then that would be just dandy. Wouldn’t that flexibility make the corporate real estate game easy? This would be the equivalent of writing in pencil; you could erase your mistakes and start over.

As a corporate officer or real estate director, you know well that the more flexibility a company can gain in its real estate portfolio, the better. It’s hard enough to forecast the future without having to worry about a super long-term lease (witness the Middle East unrest of recent weeks).

So what are the major reasons that landlords insist on such long term commitments from their tenants – AKA customers? We see situations where corporate users have never had to think like a landlord. They don’t understand the risk, the capital, return metrics or the vagaries of the financing markets for holders of real assets. Real estate is a great mystery that goes unsolved and uninvestigated.

Many tenants simply assume that a landlord is out to get them. While this certainly could be the case, many if not most landlords are fair capitalists like you and me. They allocate capital, take market risk and hope for a market return.

I know we can all agree that profit is a good thing. However, looking at this from the tenant’s perspective, it’s like that piece of cake at a friend’s birthday party: it must be kept reasonable and proportionate.

Walk a Mile in My Shoes

One of the basic principles of negotiation is to understand the concerns and motivations of your opponent. If you can “think like a landlord” and look at your tenancy as he or she would, you will be able to not only plan your approach, but swat away bogus arguments like a pro. Fundamentally, your tenancy, and the resulting cash flow, is an asset that provides value. In order to win the prize, the landlord must have a building (think of this like a factory), then pay to put raw materials into that physical plant in order to make deals happen. In sum, they are running a business, but the decision making approach is driven by, among other things, the form of ownership and capital structure.

For example, an asset manager for a life insurance company is likely looking for long term value appreciation and is not overly worried about short term cash flow. In many cases, life insurance companies pay all cash for even the largest asset. The decision makers are salaried and usually long tenured professionals. They take a careful and deeply analytical look at deals. They are risk averse on the credit front and will wait for a company that fits their profile of perceived strength before they will commit.

Publicly traded real estate investment trusts (REIT’s) are driven by Funds from Operations (FFO) which is a figure used by to define the cash flow from their operations. It is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis. In other words, they are effectively focused on net profit on a per share basis.

A Man in Full

Perhaps the most stereotypical landlord is the one describe in the famous Tom Wolfe book A Man in Full. This landlord is a merchant builder and a gun slinger. He (yes, usually a man, at least up to now) will take massive risk, borrow horrid amounts of money, and in general do anything legal to make a real estate deal work out.

I respect individuals like this and some of them become very, very wealthy. I also treat them with great caution because their risk tolerance would have most people crying out in pain like little babies. The focus for entrepreneurial, highly leveraged landlords is cash flow early and cash flow often. They will say what it takes to get you to agree to a deal. As Ronald Reagan used to say, “Trust, but verify.”

What Would You Like in Your Margarita?

While we are primarily discussing term of commitment in this post (we will cover tenant improvement dollars in another post), a tenant real estate transaction is a recipe that is run through a financial blender with an answer spit out on the other side. Once again the answer depends on what kind of company you are negotiating with – IRR, Cash Flow or impact on Asset Value are a few metrics that landlords use to evaluate your transaction.

So, lease term is a major factor in how “sweet” the deal is for several reasons. A longer commitment will give the landlord a bigger period of time to amortize cash put into the deal and therefore allows ownership to achieve its objectives while keeping the lease rate low. In addition, it allows the investors to take margin over a longer period of time instead of having to cram all the profit in a shorter period of time. Term also creates tremendous value, because investors – whether in real estate or on Wall Street – look at defined cash flow with great interest.

The deal can be analyzed by MBA’s with computer models and they can tell you what flavor your Margarita will be at the end of the term. Those MBA’s may say the same thing, but insurance company asset managers hear something different than The Man in Full developer with a big hat and more of a taste for Scotch.

Rules of Term

It sometimes helps to think of your company’s tenancy in terms of where you lay your head at night:

·     A hotel room at $350 for 31 days is $10,850

·     A corporate apartment might easily be 50% of this amount at $5,425 a month

·     Your 30 year mortgage might be 50% again or $2,712.5 a month

Flexibility cost money on a per day basis, but allows you to change plans quickly. Commitment can be expensive, but if you are in an environment where  your managers have the experience and maturity to make longer term forecast, then a longer lease term, like a 30 year mortgage, is the less expensive option.

Finally, we did not discuss here but are acutely aware of market pressure when setting all terms, from length of commitment to rate and cash in the deal. But start with the basic understanding of what the landlord is thinking. Look at it through the lens of the market, and layer in your own situation. Then we bet, with a good advisor, the situation will be come clear, or at least easier to swallow. Enjoy your drink and tip your waiters.