Negotiation is at the heart of the real estate investing. Doing it well requires sound analysis and and an understanding of your counterparty’s motivations. Together, these elements bring out a calm, patient confidence that enables a company like Alliance out-maneuver, and find win-wins, with the other side in negotiations, even when negotiating with large corporations.
A few years ago, Alliance purchased a midwestern shipping facility operated by one of the world’s leading logistics companies. With an investment-grade tenant paying above market-rates, the property had a very attractive profile. But there was a catch. The tenant was demanding lower rent in upcoming renegotiations, and the seriousness of that demand depressed values when the prior owner sold to Alliance. With the lease term about to end, our investment opportunity was the risk/reward of the upcoming lease renewal negotiation.
Our research showed that there were few alternative properties in the area for the tenant, so moving to another facility was not an easy option for them. Alliance’s deep dive into the local market gave us confidence that the tenant would want to stay much more than they were letting on.
The second key to our successful negotiation was correctly understanding the counterparty’s motivations. In this case, mid-level managers were negotiating on behalf of their large corporate employer. Through my experience with other corporations I knew managers are rewarded when they can reduce costs, so they have a strong incentive to negotiate hard. And to have good ‘optics’ to their managers that they are negotiating hard.
This understanding of the counterparty’s situation gave us confidence to hold on the line on rent. We spent a full year negotiating the new lease, and we never gave in, despite considerable risk to Alliance if the deal fell through. As costly as it would have been for us, it would have been worse for the tenant, and that told us we could make a deal.
Negotiation requires give and take, and Alliance could not expect to have things all our way. In exchange for keeping the same (already high) rent, we agreed to address the tenant’s facility complaints, like fixing the gutters, paint, and parking lot. This created a win-win. The tenant’s negotiators could report success in winning needed capital improvements, funded by Alliance. Alliance was able to secure a long-term lease at the same favorable rate.
In the end, we created a gem of a resale property. An investment grade tenant, locked into a long term deal, at a high rental rate. Our capex costs and the time and effort we put into the negotiation were rewarded with a great increase in valuation. We sold soon after, at an IRR of 16%. This success reflected great research, execution, and a correct read of the counterparty — a deal I am truly proud of.