Best Practices: The Art Of CRE Negotiation
The Best Practices series asks CRE leaders around the country about how to best execute a single aspect of their business.
Negotiation is a cornerstone of the commercial real estate business, whether the deal involves a sale, a lease, the terms of a loan or how much tenant improvement money to give.
What are the best practices when it comes to getting what you want and need at the CRE negotiating table?
We put that question to executives at six CRE companies with a variety of specialties.
Atkins Cos. principal Chick Atkins
In one sense, negotiating a real estate transaction, whether a purchase or sale of a property or a new lease or lease renewal, is no different than any of life’s other negotiations, such as with your spouse over organizing responsibilities and activities with the kids on the weekend. Both sides of a negotiation want to feel heard and that their needs are valued and respected, and that their negotiating partner is acting fairly and honestly.
One of the most important principles is to communicate through actions and words that you understand and appreciate that the other party has their own objectives. It's also important to keep in mind that the goal is to achieve a win-win conclusion, as opposed to an "I win, you lose" outcome.
I’ve been a developer, owner and manager of real estate for 40 years, and all the experience I’ve gained across hundreds of transactions during that time can help in any given situation.
Rule No. 2 is to know your objectives, meaning never lose sight of the main priorities of the negotiation. Understand what's most important to your side and gain an understanding of what's most important to the other side. These components may be different — price may be foremost to a tenant or seller, while length of lease and stability may be most important to a landlord or owner.
Lastly, it's key to know the true deal breakers for your partner in a transaction. It may be repeated several times during the negotiation process that such-and-such a demand is a deal breaker, but you should understand what is truly unacceptable.
Atkins Cos. is a New Jersey-based real estate company active in the development and management of commercial and residential properties.
Alfred Sanzari Enterprises Director of Leasing and Marketing Jerry Barta
Unlike sales deals where once a transaction is finalized, both parties part ways before the ink dries, leasing is truly a marriage of two companies. If executed properly, a leasing agreement opens the door to a long-term, mutually beneficial relationship with the potential for both parties to be together for the next 10 years or even longer.
The precursor to any successful leasing agreement, like any successful marriage, is the negotiation or “courtship” stage. During this initial stage, it's imperative to explore and understand each party’s needs and wants, and develop a rapport of trust in each other, to negotiate a successful, fair agreement and a solid foundation for the ensuing collaborative partnership.
With more than 25 years of leasing experience and having completed hundreds of transactions, I know that countless variables preclude any transaction from being a carbon copy of another. The common threads that run through any successful lease deal, however, are complete transparency, collaboration, and frequent and open communication between the landlord and the tenant.
A tenant’s primary focus is on ensuring that it secures a space that meets the company’s needs and allows it to conduct its business successfully, with the real estate operating in the background. A landlord has its own parochial needs as well. Invariably, needs change, issues arise and the unexpected happens.
With a solid foundation in place, however, with transparent and open dialogue, the odds of long-term tenant retention and a “renewal of vows” increases significantly, creating the “happily ever after” that both landlord and tenant hoped for at the outset.
Alfred Sanzari Enterprises is a family-owned and operated commercial and residential real estate firm based in New Jersey, with specialties in construction, leasing, finance and property management.
Levin Johnston Executive Managing Director Adam Levin
Being a good negotiator starts with the ability to take a macro view of what each party is seeking. From there, the best negotiators will strategically work to bring both parties to the middle, while still achieving the investment objectives set by the party they represent.
This is how we approach our work in the San Francisco Bay area. We do this by looking at the whole picture — the client’s existing portfolio, the deal on the table, overall market fundamentals and so forth. From there, we can more thoroughly advise when to push, and when to remain steadfast.
The key to this approach is our focus on relationships. Negotiating doesn't happen in front of a computer. Rather, we have long-term personal relationships with our clients, giving us the ability to meet with them face-to-face, understand their goals and negotiate deals that are accretive to their investment objectives.
Levin Johnston of Marcus & Millichap is a Palo Alto, California-based real estate investment brokerage, with a concentration of deals in the Bay Area multifamily market.
DAUM Commercial Real Estate Services Executive Vice President and Regional Manager Steve Pearson
The key to being a successful negotiator and achieving the best possible results for your clients, your team and yourself is to approach each transaction with the goal of making it a true win-win. In our experience, this is achieved through first understanding and prioritizing the needs, capacity and urgency of each party and identifying where there might be opportunities for additional value creation on both sides of a deal.
Typically, communicating and leveraging added value or compromises requires not only an extensive knowledge of the market, but also a creative, forward-thinking mindset and strong storytelling skills. In today’s supply-constrained market, we often have to negotiate with our own clients to an extent, suggesting locations or other property specifications that may differ a bit from what they originally had in mind.
For example, several of the manufacturing and distribution tenants we’ve worked with have ended up signing leases or purchasing properties outside of the cities or submarkets where they've based their businesses for years. Drawing from experience through several market cycles, and using our extensive market data, we’ve identified alternate emerging submarkets to better fit their current business needs, often at more competitive rates and closer to more affordable housing for their employees.
DAUM Commercial Real Estate Services, based in Los Angeles, works in brokerage, national tenant representation, consulting, leasing, sales and property management.
Avanath Capital Management President John Williams
There are several factors that go into negotiating well. Key factors involve taking a creative approach and stepping outside of the box. We did this when we recently negotiated a $248M recapitalization of an affordable housing portfolio with UBS, something not typically done within the space.
Another major component is focusing on how the deal benefits the other party. Many times negotiators get wrapped up in how the deal will benefit them and their investors rather than focusing on the other party. When you're constantly highlighting what makes the deal good for the other party, they're more inclined to come to terms that make sense for both parties because they are able to truly see the value.
For example, affordable housing is much more common in countries outside the U.S., such as in Europe. So when negotiating the recapitalization, we focused on the benefits of affordable housing as a stable asset class. We also focused on the fact that this would be an easy transition into U.S. real estate, as these investors were already familiar with affordable housing, which some investors view as a more complicated asset class.
Irvine, California-based Avanath acquires, owns, renovates and operates affordable, workforce and value-oriented apartment communities across the U.S.
Aries Capital Chairman and CEO Neil Freeman
The key to success in loan negotiations is to focus on what matters most for both sides. Lenders want a clear exit strategy and borrowers want financing that solves a problem or fuels growth, without inhibiting their future plans.
Before we bring a deal to a lender, we do our own due diligence and underwriting to outline possible capital structures such as fixed-rate permanent or a shorter-term bridge, that meet the borrower’s goals and are realistic for the property. We leverage our experience on past deals that had similar components to choose the right loan and target the right capital sources. This is a critical step, as it shows lenders the deal is a real deal that is worth their time and effort, and gives both us and the borrower increased credibility during loan negotiations.
We also uncover any issues that could derail the deal, and proactively bring solutions to the lender. These can include strategies to compensate the lender for risk, such as a change in interest rate or term, requiring extra reserves, sourcing additional equity or cross-collateralizing the property with another asset. If addressed early, most pain points can be cured, while eleventh-hour surprises will at a minimum stall and most likely kill the deal.
Aries Capital, based in Chicago, is a commercial real estate mortgage and investment banking firm.
UPDATE, SEPT. 6, 12:30 P.M. ET: Neil Freeman's response was added after the others were published.