Good Landlord, Good Business
I want to continue the story we started last week about the property we just sold at a whopping 34% IRR. We didn’t just buy a great property at a discounted price. We solved problems and negotiated wisely. A great example of how good management produces value.
Solving Problems
This property was part of a commercial park in the Midwest. It was home to a specialty medical practice in the Midwest and it had a problem. The parking slanted toward the building and had insufficient drainage. Too much rainfall flooded parking spots and could even threaten the building.
This was a problem for the whole condo park, but our specialty medical tenant was particularly sensitive to the issue. Unfortunately, the condo association refused to fund a rebuild of the parking lot. A prosperous tenant stays long and complains less, while an unhappy tenant is always thinking about a better deal elsewhere. So Alliance chose to fix the parking lot problem ourselves.
By stepping up and solving the parking lot issue, we contributed to a healthy business community for the whole office park and raised our property value. It was win-win, and the right thing to do. It was also right that the other businesses who benefited from these repairs should contribute, and Alliance negotiated to be reimbursed by the condo board for 30% of the costs plus some significant goodwill.
Our tenant was thriving and wanted to expand into an adjacent non-Alliance property but the neighbors were opposed. This expansion involved installing noisy new equipment, permanently. Fortunately, the condo association had friendly feelings for Alliance. We proposed building a new brick wall to block the noise and the neighbors agreed to go along. Problem solved, tenant happy, and Alliance had solidified a strong working relationship with the condo association.
Negotiating Well
Business was good at the medical practice, and our team was confident the tenant would exercise an option to extend their lease. So, we were surprised when the months counted down, the lease expired, and they never extended. We gave them a few months of grace period, but we still never heard from them. When we reached out, the tenant was surprised. They had downsized and reorganized their back office operations and nobody was aware of their lease status.
This news put Alliance in a very strong position. The tenant was heavily invested in the location, had no contingency plans to move, and had no lease or legal right to remain in place unless we agreed. Alliance held all the cards and could effectively take their entire business hostage. Of course, that’s not how we operate.
Instead of pressing our formidable advantage and squeezing, Alliance focused on what matters most to us — long-term occupancy. We asked for a 15 year deal. The tenant only wanted 10 years. Despite our leverage, we agreed to a compromise. The tenant would have a one-time option to terminate the deal early at the 10 year mark. In exchange, they would pay 15% more rent than in the previous agreement, with an additional increase of 3% per year.
Conclusion
We absolutely could have gotten more money, but the new lease was a huge win for Alliance and a reward for our good management. The higher rents and long term lease added directly to the healthy price we got when we sold. And, we got there without alienating anybody. We solved problems and negotiated toughly but fairly. Instead of taking all we could get, we looked out for our investors and our tenants. Everybody wins – in my view, a classic Alliance investment.