Andrew Zezas interviews Mel Epstein, Managing Director of M&C, on CFO Studio
Mel Epstein, Managing Director & CFO of M&C Group, discusses housing, taxes, the private equity sector, and regulation as it relates to corporate governance.
12 Reasons Why Tenants SHOULD Say “No!” to Lease Renegotiation Transactions
While some landlords say “No!” to tenant requests to renegotiate their leases, many tenants will have a similar reaction to landlord requests to renegotiate leases. In most cases, a tenant’s negative reaction is due to an imbalance in the perceived benefits the tenant would derive from a renegotiated lease versus the additional obligations the transaction would create.
Multiple reasons exist for a tenant to decline such a transaction, many of which are simply the flip side of the reasons landlords say “No!” 12 reasons why tenant should, and often do, say “No!” to lease renegotiation transactions include:
- Insufficient dollar amount of financial incentives offered by the landlord
- Structure of financial incentives or other transactional components do not support tenant’s business objective
- Delayed timing of financial incentives that results in diminished benefit and erodes NPV
- Too many restrictions placed on the financial benefits or other elements of the transaction by the landlord or lender
- Too long a lease term required by the landlord or its lender to justify other terms associated with the transaction
- Inflexibility on the part of the landlord in agreeing to non-financial or other business terms
- Lease document is too strenuous or one-sided, favoring the landlord
- Lack of faith by the tenant in the landlord’s ability to perform or deliver on commitments made, including the landlord’s ability to fund construction or service commitments
- Concern over lender’s willingness or ability to modify or decline renegotiated terms
- Tenant’s misinterpretation of current market conditions and achievable terms
- Unreasonable expectations of the outcome by the tenant
- Lack of qualified real estate advice and representation provided to the tenant
Other reasons may exist, as well, as to why tenants would decline the ability to reneogtiate their leases. This is not intended to be complete or all encompassing.
For tenants, it’s pretty simple; improve their terms, both financial and non-financial, to a point where it makes sense for them to extend their lease for a term that is commensurate with both the additional benefits they’ll derive therefrom and their own non-real estate business objectives. See! Wasn’t that simple?
About CFO Studio
CFO Studio spotlights New Jersey based senior finance executives, providing them with the opportunity to share their knowledge and communicate their perspectives on current economic, financial, operational, and business issues. By invitation only, CFO Studio promotes select finance executives, their ideas, experience, and insights, in a professional, tasteful, and low-key interview setting. Topics include current and future trends in accounting, banking, business, corporate strategy, employment, finance, IT, operations, real estate, risk management, the economy, and more. Watch interviews with noted area finance executives and learn how your peers are creating sustainable value for their companies! Join the conversation or just watch, listen, and succeed! We welcome your ideas for future interviews. If you would like to appear on CFO Studio, please email or call our CEO, Andrew Zezas, at 732 868 0000 x111. Visit www.CFOstudio.com
About Real Estate Strategies Corporation
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.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Follow CFO Studio at http://www.Twitter.com/CFOstudio.
Copyright Real Estate Strategies Corporation 2011. All Rights Reserved.
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Real Estate Brokers Are Not in the Tenant Credit Guarantee Business – Part Two
In last week’s post, I reviewed a number of issues concerning the transfer of cost and risk from one party to another in business transactions, specifically in commercial real estate deals. That post received a number of interesting comments. There’s more to this story.
When landlords find prospective tenants to be unacceptable risks, those landlords should consider the multiple risk mitigation alternatives available to them, including accepting the risks as they are, working with prospective tenants to minimize risk or to enhance the tenants’ creditworthiness, modifying the terms of the transactions to support acceptable risks, or electing not to complete those transactions because of the existing of too much risk.
When landlords complete lease transactions, a large number of service providers may be involved on both the landlord’s side and that of the tenant. That list could include: lawyers, accountants, space planners, architects, engineers, asset managers, construction contractors, plumbers, electricians, HVAC installers, drywall contractors, carpenters, flooring installers, ceiling installers, elevator technicians, painters, other sub-contractors, property managers, asset managers, mortgage bankers and brokers, delivery contractors, administrative assistants, cleaning contractors, trash haulers, landscapers, snow plowers, and all others involved in completing a transaction or in maintaining the landlord’s property.
Like a tenant’s broker, none of the above service providers are responsible for assessing a tenant’s creditworthiness nor for the future performance of the tenant or the property. So, if a landlord wishes to shift the burden of its transaction costs and risks from itself to an entity other than the tenant, and since shifting that burden to the tenant broker would be unfair, then the cost and risk should be shifted to the entire list of service providers involved in any aspect of the property and its corresponding transactions. Adjusting the payment of other service providers based on the landlord’s interpretation of a tenant’s risk would actually be unfair, too. However, if a landlord’s policy was to compensate all of its service providers on a risk adjusted basis, then only in that instance might it be reasonable to compensate the tenant’s broker in that manner.
Interestingly and consequently, if a landlord did attempt to compensate its other service providers in the above fashion, that landlord would likely be out of business. (I have this vision of big burly union contractors showing up at the landlords office to collect their pay, when told they won’t get their money because the tenant didn’t pay its rent!) Under that scenario, most service providers would probably find work elsewhere, leaving the landlord with no services to receive or to offer, no ability to conduct business or lease any space, with ALL of the risk for EVERYTHING borne by the landlord, and no one to transfer that risk to.
So, what quid pro quo could a landlord provide to a tenant’s broker in exchange for accepting greater risk? Could the landlord offer:
- An insurance policy to protect the tenant broker’s compensation in the event of the tenant’s default?
- The opportunity to participate in the landlord’s future equity appreciation?
- Some other incentives?
But, the above might more closely align the broker and landlord, and could create a conflict-of-interest for the tenant / broker relationship. Now, that wouldn’t work. Resolving this issue using the above approaches could become very complicated…probably more so than is really necessary.
I’ve got a great idea for those landlords that seek to mitigate their cost and risk by shifting that burden to tenant brokers. Since commercial real estate brokers, especially those that represent tenants, are not in the tenant credit guaranty business, your best bet will simply be to follow the lead of the better quality landlords with which you compete.
Aportion the cost and risk of your transactions appropriately between yourself and your prospective tenants. Make as many deals as you can. Don’t unfairly shift your transactional burdens to anyone who shouldn’t participate in them, including tenant brokers and your other service providers. Life will be a lot simpler that way. Tenant brokers will be more comfortable dealing with you, and will likely bring you more tenants. Guess what? You will almost certainly receive more interest from tenants, because they’ll see you as fair and equitable…the way most tenants like their landlords!
Risk is a funny thing. When minimized by one party in a negotiation, risk never really goes away…it just goes somewhere else. Be sure to transfer risk in the right direction. And, remember that Real Estate Brokers Are Not in the Tenant Credit Guarantee Business!
Read Part One of this Post.
About CFO Studio
CFO Studio spotlights New Jersey based senior finance executives, providing them with the opportunity to share their knowledge and communicate their perspectives on current economic, financial, operational, and business issues. By invitation only, CFO Studio promotes select finance executives, their ideas, experience, and insights, in a professional, tasteful, and low-key interview setting. Topics include current and future trends in accounting, banking, business, corporate strategy, employment, finance, IT, operations, real estate, risk management, the economy, and more. Watch interviews with noted area finance executives and learn how your peers are creating sustainable value for their companies! Join the conversation or just watch, listen, and succeed! We welcome your ideas for future interviews. If you would like to appear on CFO Studio, please email or call our CEO, Andrew Zezas, at 732 868 0000 x111. Visit www.CFOstudio.com
About Real Estate Strategies Corporation
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.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Follow CFO Studio at http://www.Twitter.com/CFOstudio.
Copyright Real Estate Strategies Corporation 2011. All Rights Reserved.
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