Landlords, Transactional Costs Can Destroy Your Bottom Line

I am representing a client who wants to sign a five year lease in a retail center. The total economic value of the lease, including base rent, triple nets, and tenant improvement allowance is around $150,000.

We spent a good month negotiating the LOI. We agree to terms, and of course, the landlord's attorney sends over a 60 page monstrosity of a lease. This takes 6 weeks of back and forth to get this lease to an acceptable level of balance between the landlord and tenant for me to even tell my client the lease is now sign-able. I know how much I am charging and don't know how much the landlord's counsel is charging, but, let's assume that between the two attorneys, a modest $6,000 in legal fees have been spent to negotiate the deal. The transactional costs for legal fees is at a minimum, 4%.

Perhaps, if the lease was reasonable to begin with, the tenant would have been more willing to spend little more on rent and the Landlord wouldn't have had to pay as much in legal fees. I'm sure the Landlord would love to have someone sign the lease as is, because what landlord wouldn't, but that hope costs money. My practice tip for Landlords, have two leases, one that will quickly get the deal done if the other side is represented by legal counsel and the other, the long legal monstrosity of a lease, that dramatically favors the landlord.

It took 2 and a half months to negotiate this deal. This represents an opportunity cost in terms of only lost rents and triple nets of almost $7,500 or about 4% of total economic value of the deal.

In total, between legal fees and opportunity costs, the transactional cost to negotiate is at least 8% of the economic value of the contemplated lease. That's $12,000.

Yes, it would be impossible to get these costs down to zero, but imagine if you could cut them to just 3%. That's well within the realm of possibility. It would juice your returns by an extra 5% or about 1% a year.

Being able to net an extra 1% in nets on a 20 million dollar shopping center would add, assuming a cap rate of 8%, $175,000 to the value of your shopping center, your office building, or whatever kind of commercial real estate you have.  At a 7% and a 6% cap rate, that would add, respectively, $200,000 and $233,333. This is not chump change.

Remember Landlords, time costs money and attorney's cost money. Quickly negotiating LOIs, having a "fair and balanced" lease, and getting the tenant into the space faster will only help your bottom line.

I hope the discussion above has made it clear why it is worth your wild to have a professional advocate on your behalf. As both a commercial real estate attorney and real estate sales agent, I can make sure your interests are protected on both the economic and legal sides of a deal.

If you have any questions or comments, send me an email to bdalton@tigusa.com. Also, if you know anyone looking to buy, sell or lease space in Dallas or the surrounding areas, I do appreciate referrals.