In a recent industrial lease transaction, how the deal came to a close was not only unusual, but very telling about the direction of the current economy. A privately held company negotiated with a commercial landlord to occupy a full building in a prominent and well-located industrial park in central New Jersey. The landlord had an excellent reputation for quality designed and solidly constructed buildings, for maintaining high service levels, and for sticking to his word. However, the landlord’s buildings were also known to be priced higher than his competition.
The landlord, a very astute and respected business man, had recently gotten very aggressive in lowering rents in an effort to attract more tenants and fill his buildings’ vacancies. Nonetheless, his rents were still higher than many of his competitors.
In this particular negotiation, the landlord offered extremely flexible terms and an annual rental rate that was one of the lowest he had offered in the last eight years. After weeks of back and forth, the tenant’s CEO informed the landlord that the company would not accept his terms, and that the company decided to lease a building of similar quality located twenty minutes further south. The CEO said that the building they had chosen was less expensive, and that given current economic challenges, the spread between rents for the two buildings was significant enough that he could not pass up the additional savings. He told the landlord that his company made its decision a week earlier and that its lawyers were already deep into lease document negotiations. The CEO was a candid guy, so the landlord took him at face value and correctly assumed this was not a negotiating ploy.
Disappointed for having worked so hard to land the tenant, the landlord knew he couldn’t win them all. The landlord confirmed for the CEO that he had truly offered all he could, and wished the tenant well. The CEO stated that even if the landlord had offered more, he did not expect the central New Jersey building to be able to match the lower rents at the selected building. So, they parted, saying they each hoped to do business together again some.
That weekend, the CEO was driving through central New Jersey with his wife on his way to a social function. Since his wife had heard so much from him about the intense building negotiations, the CEO decided to drive her past the two buildings, both the one to which the company planned to relocate and the central New Jersey building he’d decided not to lease.
After driving around the central New Jersey building and sitting in front for a few moments, the wife, who rarely involved herself in her husband’s business affairs, told her CEO husband that he was nuts for passing-up the central New Jersey building. She told him that she thought he’d made a mistake, and that the building offered an image that was far more impressive than anything else she’d seen. From what the CEO told her, the central New Jersey building offered a giant leap in functional design, in comparison to the company’s current facility and the one the CEO selected. She said that the building he had chosen could not compare, that his company would have benefited considerably more by moving its employees and operations to the central New Jersey building, and that the company would likely have become more profitable and able to significantly elevate its own image had it chosen the central New Jersey building. Wow!
The CEO’s wife was right, and he was convinced! First thing Monday morning, the CEO called the central New Jersey landlord and agreed to close the deal, despite the additional rental cost for the central New Jersey building. The CEO realized that given the terms offered by the landlord, he would basically get a BMW quality building for the price of a Chevy. He knew that, despite the continued economic doom and gloom heralded by the media, a good deal would still be a good deal. Moreover, the CEO, obviously an intelligent business man, recognized that the lowest cost deal, even if it is less than the cost of a Chevy, while often attractive, is not always the best deal. He understood that value could be derived, and success could be achieved, in multiple ways, other than through mere cost reduction.
When companies begin to return to rational thought, as in the case above, a circumstance that has lately been repeated again and again, you can be assured that such activities are the true signs that the recovery is gaining traction. And, when your wife tells you that your company would be better off by taking a particular action, you may want to listen closely.
What unusual circumstances have surrounded your projects?
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Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
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