Lease renegotiation transactions are not absolute. They can prove profitable for both tenant and landlord when orchestrated properly. They can also fail miserably when inappropriately executed. Neither landlord or tenant are obligated to enter into a renegotiated lease, and would only do so if such a transaction made sense.
Lease renegotiation transactions don’t always work, and in fact, sometimes can be seriously detrimental to landlord and /or tenant. Accordingly, landlords sometimes say “No!” when approached about renegotiating a tenant’s lease.
The reasons why a lease renegotiation might not come to fruition could be many. Here are just some of them, in no particular order of importance:
- When the tenant’s broker is not qualified to properly effect such a transaction
- When the landlord’s broker is either not qualified or does not grasp how to manage such a transaction to the landlord’s true benefit
- Tenants or brokers who take an overly aggressive approach to renegotiating the lease
- Landlords or tenants who conduct incomplete due diligence on their transactional opponent
- Poor communications on the part of landlords, tenants, or their brokers
- Over zealous or misinformed landlords, tenants, or brokers
- Emotional landlords, tenants, or brokers (It’s just business fellas!)
- Tenants who attempt to engage their landlords without the requisite knowledge, information, and / or transactional expertise
- Landlords, tenants, or brokers who don’t understand how current market conditions and possible future market trends may impact their transactional opponent or how it might impact the landlord / tenant relationship, if a lease is renegotiated or if it is not
- Tenants and brokers who don’t understand how landlords do business, their challenges, risks, and opportunities
- Landlords who incorrectly assume that they have such strong relationships with their tenants that for some magical reason those tenants will never vacate their building, or that the tenant is captive and has no viable alternatives available to it
- Landlords who don’t expect to retain ownership of their buildings over the long term, either because they plan to sell them or fear they may lose the buildings through foreclosure or some other legal or government action. Therefore, despite the possibility of improving the value of a property as a result of a renegotiated and extended lease, such a landlord would likely see no value in this type of transaction. This is especially likely given the requisite capital and the often cash flow reduction associated with a lease renegotiation
- Landlords whose buildings are so close to the edge that any renegotiation that produces lower cash flow in the short term, irrespective of the potential long term benefits, would push them over that edge and into the abyss
- Landlords who are too distracted by their focus on refinancing their properties and being forced to replace high loan-to-value debt with lower loan-to-value debt, and searching for ways to make-up those financial shortfalls
- Landlords who, in the current economic environment, are focused on their own survivability and risk fear of failure in that effort
Check back next week for the other half of this list…it’s just too long to include in a single post, at least that’s what my publisher says!
Read Part Two of this post.
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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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