Everyone knows that to get the best deal terms you need to create competition for your requirement. This applies whether you’re talking about cars, a business or your next office lease. To create competition, you need to have viable options. What happens, however, when you don’t really have other options?
There are many instances where a tenant may feel like it has no choice but to deal with a single party. This can arise when the tenant has a significant amount of money invested in its space that it cannot walk away from (i.e., a lab, a high-end office or a manufacturing facility), the location is critical to the tenant’s business (i.e., a warehouse strategically located near a major supplier or customer, a retailer who has created a loyal following or a law firm located right by the courthouse) or simply because the tenant has a lot of term left in its lease and needs to expand or contract. In each of these instances, the tenant may have the theoretical ability to change locations; however, when all is said and done, such a change would be prohibitively expensive or ultimately harm the business.
When options are limited or seemingly non-existent, what can a company do to ensure it still gets a fair economic deal on its lease?
The Bluff: Good in Poker, Often Bad in Business
“It is sound judgment to put on a bold face and play your hand for a hundred times what it is worth; forty-nine times out of fifty nobody dares to call it, and you roll in the chips.”
― Mark Twain
A lot of people revert to a favorite strategy of poker players—the bluff. Poker players who have nothing of value in their hands will bet aggressively in the hopes of convincing the other players that they actually have a great hand. Because we are conditioned to believe that people act in an economically rational manner, we tend to believe they have a good hand if they are throwing a lot of chips on the table. The risk reward of poker is that if someone calls your bluff, you’re probably going to lose your hand. If, however, you can scare them off with your aggressive betting, you may win the pot even though you had a terrible hand.
It’s important to note that in the game of cards, a bluff has value even if it is exposed. Thus, sometimes when a player wins a hand on a bluff, they will actually turn over the cards and show you that they had nothing. Why? Because they want to create uncertainty around the table as to their strategy. If you show people you’re willing to bluff, you might be able to keep them bidding in a future game where you have a sure-fire winner. Other players will refuse to show their bluff hand if the other players drop out of the game. Again, the player is trying to create uncertainty among her opponents— “did she have a winning hand or didn’t she”?
The beauty of poker is that you get lots of chances to play and, the fact that you bluffed once doesn’t mean you’re doing it every time. If you get caught bluffing on a given hand, it’s not fatal (unless of course you lose everything on that hand or have an obvious “tell” which signals to your opponent’s whenever you are bluffing).
Bluffing in business, however, can be fatal because you only get one shot to do your deal every five or ten years. If you give the landlord an ultimatum by threatening to move, the landlord doesn’t believe you and then you don’t actually move, the landlord will never again take your threat seriously. Further, if you have other leases with this landlord or their broker, your credibility in these other dealings may be questioned.
What happens in a lease negotiation when a tenant’s bluff is exposed? The tenant is now at the mercy of the landlord who knows the tenant has no other options. We have taken over several assignments over the years where a landlord has told us “Every five years these guys threaten to move, and they never do. We’re not buying it.” The negotiating strategy you deploy today will impact your leverage tomorrow.
The Better Approach
“Life is not always a matter of holding good cards, but sometimes, playing a poor hand well.”
― Jack London
Real estate is no different from other purchase decisions we make in life. We all have preferences for different goods or services, but we are not always willing to pay the required premium for our first choice. For example, let’s say you want to buy a nice sedan. While everyone may agree that a Mercedes is a nicer car than a Honda, we don’t all drive Mercedes because the premium is much too steep for most of us. Thus, more people buy Hondas given the savings or even a Lexus which, though not a Mercedes, is still more high end than a Honda. Options allow us to put things in context and assign relative values to each, so we can determine how much or how little we are willing to spend. If you could buy a Lexus for $40,000, what would you be willing to pay for the nicer Mercedes? Now what if you could get that same Lexus for $35,000? Would it change your price on the Mercedes?
The key to making good real estate deals is to create options even if they are not all equal. At some price and on some terms, a third choice can become a first choice and a first choice can fall to your second choice. Too often tenants and their brokers go into negotiations with a closed mind and, as discussed above, they assume the outcome before they even start. If you are convinced that no other space or location will work for you, you will either be at the mercy of the landlord or you will need to bluff your way into a better deal. Neither is a great position to be in when your business is at stake.
Tenants need to keep an open mind about possible alternatives which, at a given price, could be more attractive than the one the favored landlord is offering. Keep in mind – and this is VERY IMPORTANT– that, just as you feel you may lack alternatives for your requirement, the landlord is often equally aware that you are their best alternative for the space and are in big trouble if you don’t take it. Knowing you have other options under consideration will help moderate the landlord’s position as they don’t want to give you an ultimatum and lose you either.
Alternatives exist within a given location as well. Assuming you have no leverage or viable alternatives, there are ways to minimize your commitment to the space until facts and circumstances changes. Just as we all know it’s good to secure long term leases in a bad market when rents are low and limit terms in a strong market when rents are high, the same kinds of strategies apply when a party’s leverage is not optimized.
Bluffing is an effective and critical strategy when playing poker. It’s a lot riskier when you’re betting your business on it for real estate. The key to negotiating a good deal even when you believe you have no alternatives is to keep an open mind and evaluate all options. Real estate doesn’t have to be an all or nothing exercise especially when both sides to the negotiation are feeling the same stresses.
For more information contact Glenn Blumenfeld