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.
Kris Bjorson, International Director and Head of Retail/e-commerce Distribution, Jones Lang LaSalle (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.
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
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.
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.
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