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Keys to Unlocking Real Estate Value in Tigh Markets

By exploring all options and minimizing risks, tenants can obtain value - even in tight real estate markets.

Feb/Mar 07
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Tight markets are a good time to request a termination option. Landlords tend to be bullish on their ability to backfill the space at a higher rental rate. In some of the tightening real estate markets across the country, we have been able to negotiate the right to terminate a three-year lease at any time after the initial 18 months at no termination penalty to be exercised upon nine months' prior written notice to the landlord. If the landlord seeks a penalty, seek a fixed number based on unamortized costs or try to trade a longer length of notice for a lower penalty.

Due to the liquidity of the industrial real estate investment market, the most difficult option to secure is a fixed purchase option. Try (especially for single-tenant buildings) to get an ongoing right of first refusal to any bona fide offers the landlord receives to purchase the building. If the option is granted, you can do the math to see if this unilateral right makes sense for your company. If rejected, you may pursue a participation in the percentage of profit received by the landlord or a cap on any real estate tax increases resulting from the sale.

Shift Risk

Build on a win-win business relationship, be flexible, and then spend time seeking mutual ground on the allocation of risk between landlord and tenant. Risk negotiation falls under landlord or tenant obligations in the lease documentation. Use both your legal counsel and real estate advisor to address the shifting risk related to building integrity and capital improvements.

In an industrial triple net lease expect the landlord, at its sole cost and expense, to assume full responsibility for the foundation and structural portion of the exterior walls and roof. All other maintenance, repair, or replacements will be your responsibility as reimbursed to the landlord via operating expenses or one-time payments. Chip away at this language by adding floor slab to the definition of foundation, or roof membrane and skylights to further expand the meaning of roof. In a multitenant building, push back on any items shared by the other tenants, such as parking areas and building systems. Accept sole responsibility inside the four walls of your space but fall back to a pro-rata share of the building or complex, whichever is less. On existing buildings, press hard to shift the replacement costs and capital improvement items to the landlord. At a minimum, prorate such costs over their useful life to limit your financial exposure to the length of your tenancy.

You are paying premium rent in a tight market; be passionate about your ability to maintain flexibility and shift risk. Don't be afraid to adjust your negotiation strategy based on insight from your landlord or market dynamics. Remember the overriding reason to be in this market. Don't let the impulsive, transactional nature of real estate skew solid business decisions. Make professional arguments to achieve a win-win solution for all parties.

Kristian D. Bjorson is the managing principal of the Logistics Practice Group for The Staubach Company, a full-service, international real estate strategy and services firm that provides innovative solutions for companies seeking distribution, manufacturing, and industrial space. The above information highlights some of the services offered through a value-driven service strategy called REALogisticsSM which integrates front-end logistics consulting with real estate implementation services.

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