Commercial Real Estate Negotiations

Commercial Real Estate Negotiations

What makes a great negotiation?  For some it’s when one party is the clear winner and the other party loses their shorts.  If the negotiation happens to be for a one-time purchase and you never transact with that company again, maybe this definition applies. Commercial real estate negotiations however are much different as the parties inevitably will interact again either on the same deal, a future deal or with a different but related party.  Take, for example a lease negotiation where the tenant’s

representatives pick apart every detail of the lease agreement, fiercely negotiate every nickel of the tenant improvement allowance and demand a low rent which when combined cause financial risk to the landlord.  After a year the landlord will likely reduce services, forgo maintenance or completely ignore favors requested by the tenant.  A bad lease can even jeopardize the landlord’s loan covenants or make it difficult to refinance the project.  When lease negotiations become fierce, I like to remind the parties that once a lease is executed, a tenant and landlord basically become business partners since they are dependent upon on another for their own business to be successful.

Even in a sale negotiation when two parties are less likely to work together in the future, there are plenty of circumstances when a buyer and seller need to further negotiate after a Letter of Intent or Purchase and Sale Agreement are executed.  The most common scenario is when the two parties don’t agree on deferred maintenance such as a roof or HVAC equipment.  If a buyer negotiated a rock bottom purchase price and they hire a mechanical contractor who reports the HVAC requires near term work or replacement, most sellers will have no desire to concede any price deductions.

A recent CCIM Ward Center course taught Real Estate Negotiations in Boise and was well attended by local CCIM members and candidates. Steve Cannariato facilitated the class which interestingly ranked the following top 5 traits of a great negotiator: 1) good judgement 2) market knowledge 3) sense of humor 4) ability to listen and 5) understanding the negotiation process.  These ranked above other surprising traits such as logic, sense of fairness, ability to work with others and developing a specific strategy for each negotiation.

The CCIM approach provides a framework for evaluating and capturing the interest of yours and the other parties’ interests. The Three Step Process is summarized as follows. Step 1) Stakeholder interest analysis – establish who is involved and what are their needs, provide initial assumptions as  open ended questions to set the stage, identify all the issues as completely as possible, determine the level of each issue as it pertains to each party. Step 2) Brainstorm actions – targeted brainstorming to find solutions that satisfy interests of stakeholders, evaluate the options, determine a proposal that takes into account the most critical issues of the stakeholders. 3) Risk Analysis & Consequences of No Deal - what is the projected outcome if no agreement is reached? what is the Best Alternative To a Negotiated Agreement (“BATNA”) and how likely is it to occur? what are the consequences of timing? It is important to establish a walk away point, which is often price but can be any number of goals.  Most successful real estate investors can quickly recollect a deal they negotiated and wanted but walked away from. There will always be other opportunities and if you save time and money on adversarial deals, you may not win the race but you will win the marathon. BATNA allows you to understand the alternatives before you enter negotiation and keeps perspective and emotions at bay.

The best negotiators I know are likeable, calm, prepared, good listeners and have the uncanny ability to make both sides believe a fair deal was negotiated - and usually it has.  Knowledge is power and negotiators with the most information and ask the right questions have the advantage.  I can’t stress enough that understanding the other party provides tremendous insight into how you can negotiate the best deals. Finding creative ways to satisfy the other party’s needs while also satisfying your needs or finding acceptable concessions is critical. The diagram below is an excellent summary of the boundaries we all work within during a negotiation.

It is fair to ask at the onset if you are dealing with the decision maker and if not, what is the process for final approval. If you know there are different people involved, CCIM offers use of a “Bogey” which is a non-essential issue you pretend is vitally important, also known as a “throwaway.”  By agreeing to concede the Bogey later in the negotiation, you can entice the other party to concede something important as well.  If the other party is pushing to make a certain concession but you know there will be more to come or if the parties reach an impasse on a particular issue, it’s best to say “I’ll consider it, now let’s move on.” Then evaluate all the demands as a package and respond in a tactical manner.  If there are items that are a hard no, it’s best to not let those linger with uncertainty.   

The CCIM course reviewed two types of negotiations: A) Integrative Negotiations are mutually collaborated and make the pie bigger than what they started with.  It’s a difficult process and may involve a creative solution, which is why not everyone is able to do it. Generally, the top brokers in our industry exemplify this negotiation and it is no accident they are perennial top producers. Win Win Negotiations are also Integrative with each party having an incentive to work towards a mutually accepted deal. An example is a developer who could become a preferred developer for a national retail chain. B) Distributive Negotiations are adversarial and typically one-time deals. Often no relationship is developed, and trickery or re-trading occurs. Thankfully this negotiation does not occur often in the Boise Valley because after all, it’s a small town and bad reputations spread fast.

To become a more effective commercial real estate negotiator, I urge you to register for the next CCIM Negotiations course which could be taught online or live.  And never forget the number one rule of negotiation: Everything is negotiable.