Sticky Business

warehouse commercial real estate transaction

Dear Business Owner,

Commercial Real Estate transactions often have a sticky moment to navigate. The outcome depends greatly on the mindset and communication skills of all involved parties: the landlord and landlord’s broker; along with the tenant and tenant’s rep. Let’s review a recently closed warehouse lease transaction to understand how the tenant justified paying rent at two locations and a reluctant business partner.

The Set Up

ISD’s CEO is on the other end of the phoneline and shares his company’s overnight success. “Andrea,” he says, “You know that government contract we’ve talked about for so long? It’s finally signed.  Our warehouse distribution partner is on board and now we need warehouse space.  Can you locate us a space while I finalize the partnership agreement?”

I offer up congratulations and ask him about his warehouse expectations.

There is a pause and his voice falls flat, “As you may remember, we have another year left on our existing corporate office lease. Ideally, we hoped to reduce the Scottsdale corporate office size when this contract came through. A portion of the office staff will transfer to the warehouse location. What do we do?  Once the partnership contract is signed, we need the warehouse.”

Unless an “early cancellation clause” is negotiated in the initial lease, a tenant is obligated to pay rent regardless. Even though ISD has the right to sublet the suite, most tenants don’t want a short-term sublet, sublets can be challenging to negotiate, and the subtenant must be approved by the landlord.  After a quick math calculation, I plant a seed that when the corporate office lease expires, ISD relocate the entire corporate office to the warehouse space.

We discussed the pros and cons of moving the corporate office to the warehouse space.  ISD seldom entertains clients in the office and it is a viable option. Financially, relocating the corporate office makes sense.  The current corporate office costs $6,000.00 a month and the warehouse space including 2,000 square feet of office will cost $5,500.00 a month plus electric. The monies saved on office rent versus warehouse rent will offset the nine-month rent overlap.

The Conflict

ISD needs the warehouse located near their primary clients. This narrows the search parameters to a small geographic area with minimal options.

In good humor I jest my long-term friend and client, “So, to clarify, you need me to find a needle in a haystack?”

“You locate the warehouse and I’ll get the signature,” he confirms with a broad smile.

Real Time Market Conditions

Despite favorable landlord market conditions and warehouse vacancy rates at a record low of 6-7 percent, through divine intervention and hard work, we discover the ideal space. Slightly larger than ISD needs, it has 2,000 SF of tastefully built out office space; a perfect suite for the corporate office.

ISD’s distribution and trucking partners support the warehouse decision. Time is of the essence. Vendor contract commitments need to be met.

Radio Silent

A week later, both landlord and tenant agree to the letter of intent outlining basic lease terms.  The landlord approves tenant financials, a lease is drafted, and ready for review within days.  The tenant is on track to move-in the warehouse at the beginning of the month.

Then, ISD goes radio silent. For over two weeks. The landlord expects lease comments from ISD to continue the negotiations, but messages are left unanswered.  This is not a good sign for anyone.

The Snag: Partnership Delays

The landlord wants lease comments from ISD, and ISD has withdrawn like a turtle into its shell.  This is not uncommon for business owners when juggling a multitude of variables. Previous experience implies ISD wants the warehouse, yet to keep the space from being leased to another user, I need ISD to talk to me about their delay. This arms me with a strategic response and keeps the deal moving forward.

Another week disappears, and the landlord’s rep, a respected broker, needs an answer. He discloses there is another interested tenant. Being out of touch with my client puts us at a disadvantage and I must tread lightly so I don’t unintentionally blow the deal. I tell the Landlord’s Rep the truth, ISD hasn’t returned my calls and I don’t know what’s up. “Will you give me until Monday to find out what the snag is?” The calculated risk, telling the truth, buys ISD another week.

Finally, ISD responds and apologizes for not calling. “Our partner has concerns with the agreement language.  We’re meeting next week to finalize the partnership. Can you delay the landlord?  Oh, and we need to change the move-in date from March to April.”

I inhale deeply, “I understand you want the partnership finalized before moving forward with the lease.  A legitimate way to stall is to send the landlord your lease comments and put the ball in their court. Inventory is tight right now and I’m told there’s another user sniffing around. I’d hate for you to lose the ideal warehouse.”

“Good idea; that should buy us the week we need.” The CEO states.

Payoff

Lease comments and a candid conversation with the landlord’s broker, along with the tenant’s strong financial standing, were enough to persuade the landlord to hold ISD’s deal until the following week.  ISD finalized the partnership agreement, signed the lease, and transitioned smoothly into the warehouse. Over the next three years their revenue will increase while their lease expenditures remain the same.

Name of the Game

The discussion for ISD’s warehouse space began November 2017 and ISD moved in six months later with only five months of overlap rent. Once the double rent burned off, IDS reduced their rent $500.00 per month and added additional profit centers.

$$$ Tip: Even under the most urgent requirement needs, it takes time for the process to unfold. Plan for adequate time.

Business Owner Tip:  Keep your tenant rep in the loop as to what is happening with your business. The tenant rep can usually keep the lease transaction moving forward, even when it slows to a turtle’s pace.

$$$ Tip: Candidly discuss your business ideas and concerns with your tenant rep and be open to thinking outside of the box.

Victory Points

  1. ISD conveyed their needs and obstacles upfront.
  2. An honest, open line of communication was kept between all parties while the internal partnership agreement remained in limbo.
  3. There was a respectful broker relationship prior to negotiating the transaction.

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