Tag Archives: negotiate

Don’t Let Your Lease Kill the Sale of Your Business

Post By : admin 3 October 2018 Leave a comment

As an asset manager, in the late 90s, working for a large owner of office buildings, I got a phone call from a guy who said he was buying one of the companies in a Dallas building we owned. He said his company planned to close on the sale the next day and he wanted the landlord to consent to the assignment of the lease to him. After checking the lease, I told him that he should have come to us much sooner because the landlord had up to 30 days to approve or reject the assignment. But that wasn’t the bad news. The bad news was that the landlord had a right of recapture – the right to terminate the lease if the tenant requested an assignment or sublease. The tenant was paying rent of only $14.50 per square foot (SF), but the market rent had increased to $20.00/SF since the lease was signed. So, you guessed it, the landlord decided to exercise its recapture right. The buyer of the business was a savvy guy and recognized that the landlord was recapturing the space, so it could lease the space for a lot more money and, thus, increase the value of the building.

He asked at what rental rate the landlord would allow the company to remain in the building. I told him $18.50. That additional $4.00/SF for the remainder of the lease term would cost an extra $60,000. He then went back to the seller of the business and gave him a choice – reduce the sales price by $60,000 or the business sale was dead. The deal went through.

What can you do to make sure your landlord doesn’t have the power to affect the sale of your business? Negotiate the assignment and sublease clause in your lease properly. Here are a few things to negotiate or consider.

1. Remove Recaputure – at the time you negotiate a lease, make sure there is no landlord right to recapture or terminate. This may be difficult if you are a small tenant in a big building.
2. Add Conditions – at the very least, limit the landlord’s right to recapture only in the case that you no longer need the space and sublease it. Prohibit recapture in the case of an assignment associated with a business sale. In some cases, you can negotiate under what conditions you can assign the lease – a related entity, an entity with higher net worth, etc.
3. Be reasonable – make sure the lease adds that the landlord’s approval “shall not be unreasonably withheld or delayed.”
4. Tenant remains fully liable even if the lease is assigned or subleased. If selling the business, you may be able to waive this liability if the landlord gets something new that it wants – more leased space or a longer lease term.
5. A transfer of stock qualifies as an assignment in most leases where the tenant is not publicly traded.
6. Explain why – it always helps when the landlord understands the reasons for something you request. Explain the structure of the transaction and why it is good for them.
7. Give notice early but avoid false alarms. Let the landlord know as soon as you have high confidence the sale will go through. But don’t go to them every time you have a tire-kicker.
8. Consent – ask for the landlord’s preferred consent form and ask about their approval process. Landlords rarely will sign a consent form created by you or your broker. Get their form and have it signed by the primary tenant and the subtenant when the sublease is signed. This will speed things up.
9. Be aware of the rights of other tenants. Some tenants may have an exclusive use clause. This means the landlord gave them the right to be the only bank, or mortgage company or whatever in the building. This is more common in retail properties but will occasionally be a factor in an office building.
10. When possible, have the acquiring company sign a new lease. To sign a new lease for the same space, the landlord must terminate the current lease. That’s usually the goal of the seller. But the landlord must be getting something it wants in return which usually means stronger credit, more space leased or longer lease term.
11. Expect Fees – most leases now give the landlord a right to charge to review a sublease or assignment. In many cases, they can charge attorney fees on top of their fees. All this is negotiable when creating a new lease though.
12. Indemnity – if the landlord doesn’t allow you to be removed from future liability, make sure your business sale documents include a buyer’s indemnity of the seller. Of course, if they can’t pay the rent, the indemnity probably isn’t worth much either.
Business sales often occur with no notice to the landlord. What happens then? This is probably a technical default on the lease and the landlord may be able to exercise its rights including terminating the lease. However, that rarely happens as long as the rent is being paid on time. I don’t advocate this approach, of course, because it’s an unresolved, outstanding risk to the business.

As always, you should seriously consider your future business goals and objectives before you sign a lease and make sure the lease document is compatible with those goals. It’s easier to negotiate these issues when the landlord is trying to get you in their building than when they already have you and you want to sell and leave.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

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Your Building May be Growing – Rentable Square Feet Get an Update

Post By : admin 3 October 2017 Leave a comment

Your building may be growing. That sounds like a ridiculous idea, right? But it may be true. Not physically, of course, but in the way the size is determined.

We have blogged in the past about buildings are measured and the difference between the useable square footage (SF) of a building and the rentable. Here’s a link to our blog post from December 2015. In that post we demonstrate how the common areas of a building are allocated to each tenant based on their share of the building. This commons areas include restrooms, elevator lobbies, electrical rooms, and others. Once the share of the common areas for each tenant is added to the useable area they get to use exclusively, you arrive at the rentable SF. And it’s the rentable SF that is used to calculate rent.

The industry group that determines the methodology of measuring building is called the Building Owners and Managers Association or BOMA. Their main purpose is to create a uniform basis for measuring new and old buildings so that they can be compared with greater accuracy. Periodically, they update the standards and 2017 is a year in which they have done just that.

The architectural firm Gensler just put out a short article about the 2017 update.

Landlords have been adding new amenities to make their buildings more attractive to prospective tenants. These include things like rooftop terraces, tenant lounges, bicycle storage, fitness centers, etc. Some of these amenities are considered common area and should, therefore, be allocated to tenants.

That’s how the building may grow. It’s not really growing, but the common area may increase due to these amenities which increase the allocation to each tenant. Thus, your rentable area may increase.

Many landlords won’t go to the expense of remeasuring their building. Others will already have the data with which to do the calculations. But it’s unlikely that they will try to change the size of your space in the middle of a tenant’s lease term. Typically, they will wait until your lease is up for renewal or you want to expand. Then they will change the size.

This is a legitimate thing for a landlord to do, however. I’m not throwing them under the bus here. Something that is truly an amenity shared by all tenants for which the landlord is not charging a separate fee is fair game for being included in the common area calculations.

Just know that this may occur and be prepared with a corporate real estate advisor like REATA to negotiate your next extension, expansion or relocation.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

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Dual Agency – New Court Ruling

Post By : admin 17 March 2017 Leave a comment

If you know me, you know that I am always talking about conflicts of interest and how the commercial real estate (CRE) industry is unfairly slanted in favor of the landlord. One of the big reasons for that is that companies that lease space usually only sign a lease or lease renewal once every 5 years on average while the landlords are professional CRE owners and may sign hundreds or thousands of leases in a year.

Another example of the imbalance is allowing brokerage companies to represent both the landlord and tenant in transactions. This concept, often referred to as “dual agency” or “acting as an intermediary,” muddies the negotiation process and creates less than transparent negotiations for both sides. If a CRE brokerage company represents the tenant and the building owner, for which side is it really negotiating hard. Possibly neither.

At REATA, we champion the idea that CRE service providers should represent the tenant or the landlord, but never both. You just can’t serve two masters. Sure, it makes a lot more money for the CRE firm, but where does it leave the clients – especially the tenant.

In late 2016, the courts in California finally took note and attempted to create more transparency around the issue. In the Horiike v. Coldwell Banker Residential Brokerage Co lawsuit, the state looked into the unfair practices within the industry. And now, the California State Supreme Court has upheld a ruling that dual agents have an inherent conflict of interest. This ruling has spurred the state government to take a closer look at dual agency and modify real estate laws surrounding this issue.
This is obviously a step in the right direction to protect the rights of tenants and make it more clear who CRE firms really represent. It will take some time for the impact of California’s decision to roll out across the country, but it’s good to see the balance of power shifting.

Sadly, I had lunch with an agent from one of the largest full service CRE firms in the world recently. I asked him about the California ruling and how his firm was addressing it. He didn’t seem to know anything about it although he wouldn’t admit it. He said this issue was way overblown and it was never a real problem.
It will take a very long time to pull all the heads out of the sand.

Bob Gibbons is a Real Estate Advisor & Tenant Advocate with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.

Categories: Uncategorized