Category Archives: Rent

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.

Back to School! – Top Eleven Things to put in your CRE backpack

By Ken Ashley

(ATLANTA) August 8th, 2011

So my wife made the annual Pilgrimage to check off the supply list and make sure we have our own personal office supply store at home (God bless her). The children had a great time with the whole process. I can remember the time as a kid myself; the combination of excitement and trepidation as you faced the

Roughly what our house looks like with the kid's supplies spread out.

new school year. You miss the long lazy summers, but there is something fun about a challenge and meeting new friends. I don’t think I realized it then, but every kid, just like every executive feels the same emotions at the start of the new season.

As I watched the kids carefully arrange all their things for the new school year, I couldn’t resist thinking about packing a “real estate backpack” for the upcoming year. What are the things you, Mr. or Ms. Business Leader, need to succeed this semester and fly through finals?  I’m sure you are all excellent students – at the front of your class – but it’s a new school year, so lets recalibrate on your gear and how you will use it.

  1. Calculator – Have your staff double-check the rent bill and operating expense escalation at all your locations.  Even if your leases are relatively new, follow the advice of Ronald Reagan, “Trust But Verify.” Also, if you have internal billing, make sure that move/add changes/ are correct in the system and that all the departments are getting a charge for their ratable share. If you catch a good error, maybe the teacher will give you an apple.
  2. Ruler – Look at how you are using your space. Can you do more with less? Maybe a new furniture configuration is cheaper than leasing more space? Spend a few bucks and repaint the accent walls to pep things up. Have some fresh eyes take a look at things and ask “what if.” Sometimes you can get a stunningly great but simple idea, and it was right in front of you the whole time.
  3. Yellow Highlighters –  To help the troops focus on what is really important. There is much going on and it is easy to get distracted! Where is that plan again? What should be doing this week? What about right now? If there was ever a time in our careers to turn the news off for a minute and thing about what is important but not urgent its now. You can be the voice of calm and reason and help your folks work the plan, not fret about what is on
  4. Composition Book  (er, iPad; see number 10 below) – To list carefully to what the sales-guys, division level leadership and even front line folks forecast for the future. The more time you have to do your homework and adjust for future plans the better off you will be.
  5. Red Ball Point Pens – You can so easily cross out what doesn’t make sense in the business plan as it relates to real estate. Also, dreaming in class by your employees will get what we used to call a “Christmas Miracle” of red. Plus red is such a nice power color from a senior executive!
  6. Pencils and Erasers– Order pizza and pull the team together for some planning. Do you need to adjust course in the fourth

    I knew it! Thats the formula for success. If only I could read it.

    quarter? Times, they are a changin’, so ask early and often for revised input into needs for space growth or disposition. And don’t even get us started on the plentiful M&A opportunities on the horizon. Jack and Jill will need to be nimble in the coming months.

  7. Box of Kleenex and Hand Sanitizer – Well, you know flu season is coming. And you need to be strong and healthy to keep your grades up. As mom would say, wash you hands and take your vitamins. Take care of your body and it will take care of you. You get the idea. I’ll tell your mom you’re a great kid.
  8. New Glasses – Cause you gotta be able to see clearly to predict the future. Plus you need to be able to read the chalkboard, or is it the report card you need to focus on?
  9. Student Planner – Write it down so you can get your homework turned in on time, every time, or at least before Christmas. Let’s hope neither one of us knows what after school detention is like in corporate America. I know I don’t want to find out.
  10. A New Computer – Use all the tools you can to stay at the head of the class. You don’t need to be an early adopter, but a smart adopter of technology that helps you see things more clearly, communicate more succinctly and automate manual processes of any kind. Then you’ll have more time for football games, movies and living your life. Plan that hot date!
  11. Lunch Money – No, not to fend off the bully; that’s what your buddies are for. If you can keep extra money tucked in your budget you will surely feel better. With the coming volatility, you never know when you get a chance to have the cash for an unknown need and get a gold star!

Extra Credit – Put all your gear in a “Shiny New Backpack” (with a flash drive or a cool new cloud back up) to take your show on the road to all your locations and

Mason's the Super Hero here!

even your investors or board of directors. Feel free to pick out a super cool bag with your favorite superhero on the back for extra, extra credit. Then set the morning alarm, firm the resolve, and focus on the positives in the months ahead. I know you can do it!

Have a great year, class!


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.

Can We Talk?

By Ken Ashley

(ATLANTA) January 21, 2010

The words make your heart beat, don’t they? Whether from a coworker, friend or spouse, when someone asks for time to communicate seriously, you pay attention.

Blah Blah Blah RENT Blah Blah Blah

But in the tenant and landlord relationship how do you have a serious conversation? Like most everything this is governed by the lease. Many miss some subtle but very important communications tools in the so called “Notices” section of the lease. It all seems so, well, so standard and boring. But stick with me as we share a few important tips on the lease communication front.

Men Are From Mars….

It is well documented and understood that you must get your contracts in writing in order to ratify an agreement. In the commercial real estate world we spend many hours negotiating every possible contingency in a real estate lease. We memorialize the landlord’s obligation to deliver the building and services and the tenant’s obligation to pay rent and use the space in a certain manner. After all that negotiating, friendly communication on any related subject is easy, but when it comes time  to have a serious conversation about your lease agreement, be very careful.

Many notices provisions allow the landlord to presume that the notice is sent just because they send it. For example, in many leases because the landlord drops a notice in the mail, it is presumed that the notice is delivered three days later. When a landlord sends you an official notice, it is usually not because he or she wants to invite you to the tenant picnic. This is serious business and you want to have time to respond to whatever the issue is or you risk being declared in default. So don’t allow a presumption of delivery in the notice provision. Instead, the standard ought to be actual receipt as evidenced by certified mail or “nationally recognized overnight carrier” such as UPS or FedX.

We Gave The Letter To The Copier Repair Man

While we are in the mode of having serious conversations, you wouldn’t tell your kid sister to tell your spouse about a really important issue, or else. The same philosophy applies when the landlord tries to insert the concept of a presumption of hand delivery.

It seems so logical; the landlord can bring a notice to your space (rarely is this reciprocal). They drop it off with the receptionists with a serious knowing look. But lets play this out a little. What if they give it to an intern on his way to lunch? What if they give it to the exterminator? What if they give it to an employee you just fired? Do you think you have a good chance of receiving this erstwhile important communication?

The first line remedy is of course to use certified mail or that overnight carrier we mentioned earlier. A back up position is to require the notice be delivered to an officer of the company.

Hello Lord?

When it is time for you as the tenant to ask the landlord for something specific (God forbid), then make sure that the ownership has an affirmative obligation to respond. For example, if you wish to sublease your space and want to submit a proposed company for a subtenancy, then make sure that the sublease clause explains when you will hear back from the landlord with a yes or no.

Other examples include obtaining approvals in the event of a merger with another company or a sale of part or all of your company to another entity (yes, we know that you should negotiate “permitted transfers” in advance, but that’s a subject for another post).

We also see tenants experience frustration when trying to make changes to the space after you move in. Usually this is governed by the alterations paragraph which tells you when you need landlord approval to change your space. Negotiate a realistic timeline for you and ownership to work through issues and be clear about what type of information property management will need to see in order to approve your alterations.


Life isn’t perfect, and even with the best lease and the clearest language the contractual relationship we call a lease requires real people to act like real adults. If you took one of those pre-marriage classes you know alot of communication in a relationships should be common sense. But people have bad days, bad weeks and occasionally bad years.

If you have a market lease, then the landlord won’t have unreasonable leverage over your tenancy. The rest can be summed up by the golden rule and not the one about gold coins. And if at the end of the term your landlord doesn’t deliver excellent customer service, then you can in fact exercise the other golden rule and take your coins on down the road.