worse , groomed to be selfish . The challenge is that the negotiation table has two sides ( and sometimes more ). We cannot get to where we are going without helping the other side get to where they need to be . So , how do we understand where our counterpart needs to be ? This isn ’ t a trick question — just ask . In the same way that we identify our priority deal points , encourage the other party to explain the deal points of significance for them . Once they have weighed in , we can find ways to work within the framework of achieving the other side ’ s goals , addressing their concerns , and finding solutions for their problems . Doing this will clarify the value of bargaining chips . In other words , what meaningless deal point can you give up — of which the same deal point is of value to your counterpart — to obtain a concession of value ?
Weighted average lease term ( WALT ), for example , could be critically important for an investor deploying capital into a multitenant office building . A lengthy WALT will positively impact property value for an investor intending to sell . This dynamic played out in a recent deal where we represented a landlord in negotiating a lease with a new tenant – one who was comparing the economics of this lease with options at other nearby office buildings .
A key metric for the tenant was total out-of-pocket dollars spent throughout the life of the lease , assuming the same rental period across the board for all buildings . However , the landlord ’ s intention was to sell this asset , and we were already preparing to market the asset for sale . A lengthy WALT and a strong rental rate were important to the landlord because both heavily affected the building valuation . To meet the landlord ’ s two primary objectives , the tenant agreed to a higher rental rate and an additional three years of lease term than originally proposed , but we structured the deal in a way that
Sale Price / sf of Comp Properties
$ 110.0
$ 102.5
$ 95.0
$ 87.5
$ 80.0
Dec . 2014 Feb . 2015
April 2015 June 2015
Aug . 2015 Oct . 2015
Feb . 2016 April 2016
Buyer ’ s Comp Set
Sale Date
Sale Price / sf 1 June 2015 $ 93.05 2 October 2015 $ 90.26 3 January 2016 $ 87.41 4 December 2016 $ 86.70 5 April 2016 $ 86.05 6 January 2017 $ 82.03
Average $ 87.58
included reduced annual rental increases , a base-year reset midway through the lease , and additional free rent on the front end that could be paid down in cash by the landlord . For the tenant , the economics of the deal achieved their goals when total out-of-pocket dollars were spread over the life of the deal . For the landlord , the WALT more than doubled , the Year 1 net operating income was maximized , and the building sold for a value that surpassed expectations . Voilà !
TOOL # 3 : GATHER AND LEVERAGE THE DATA In his book “ Moneyball ,” Michael Lewis quotes John Henry , renowned investment manager and owner of the Boston Red Sox , in reference to a comparison between professional baseball and the financial markets : “ People in both fields operate with beliefs and biases . To the extent you can eliminate both and replace them with data , you gain a clear advantage .” Since that book was published , data analytics has become a vital part of how almost every major professional sports team makes decisions . Data is equally important in commercial real estate negotiations . Most CRE professionals realize the importance of obtaining data , but few understand how to fully use it to achieve a successful outcome .
In a negotiation where we represented a buyer of a residential-style office building in a park with dozens of similar-sized office buildings , my team cherry-picked the comparable sales in the above chart and sent them to the seller ’ s representative , making a case for a purchase price around $ 90 per square foot . The full data points have been simplified for explanation .
June 2016 Aug . 2016
Oct . 2016 Dec . 2016
Seller ’ s Comp Set
Sale Date
Sale Price / sf 1 December 2014 $ 105.00 2 February 2015 $ 101.20 3 February 2015 $ 98.43 4 May 2015 $ 96.15 5 April 2015 $ 95.00 6 August 2015 $ 89.85
Average $ 97.61
The seller ’ s representative made the case that the purchase price should be closer to $ 100 per square foot — submitting the comparable sales above as justification .
At this point , our team was certainly tempted to accept the invitation from the seller ’ s broker to play the high-low game . Instead , we evaluated the seller ’ s comp set to determine how we could either work toward bridging the gap or defend our original position all while trying to achieve our client ’ s goals . As we dissected both data sets , we were able to see that many of the seller ’ s comparable sales had already been renovated , while the property being bought still needed cosmetic renovation . That was telling from a qualitative analysis , but the most convincing case came when we put both sets of sales comps on a line graph to show the trend in sale price per square foot over time .
The line graph ( see below left ) was very helpful for both the buyer and the seller to understand the current value of the property as the next data point in a trendline . Ultimately , they agreed on a purchase price that equated to $ 87 per square foot . Both sides had data , but it wasn ’ t until it was dissected and brought to life that anyone truly understood how it brought relevance to the negotiation .
NEGOTIATION : ART OR SCIENCE ? That question is often debated , but most agree the ability to negotiate is critical — both in business and everyday life . According to multiple surveys , more than half of people in business aren ’ t confident or comfortable in negotiations . Adding these practical tools to your belt will undoubtedly give you more confidence at the negotiation table and will result in successful outcomes for you and your clients . And repetition at the negotiating table will also bring confidence , which will lead to success . So , to that end , go negotiate .
Landon Williams , CCIM , SIOR Senior vice president of capital markets at
Cushman & Wakefield | Commercial Advisors Contact him at lwilliams @ commadv . com .
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 37