Tuesday, December 29, 2015

BATNA + CRE (Acronym Overload!)

In case you were wondering, this is not an anagram contest!  BAT CRANE is not an answer!

First, some definitions:

BATNA = Best Alternative To a Negotiated Agreement

CRE = Commercial Real Estate

+ = Plus (Sorry, we couldn’t help ourselves…)

BATNA was introduced in Getting to Yes: Negotiating Without Giving In, a book still used in business schools and negotiation classes around the world.

So, what exactly is BATNA? 

BATNA is basically where you stand if you fail to reach an agreement.  Each person's BATNA is unique and varies depending on the situation.

If you are negotiating with a new supplier and fail to reach an agreement, maybe you continue using your existing supplier or find a third one.

If you own stock in Company XYZ and wish to sell it for $30,000 in order to pay all cash for a new car, your BATNA could be any of the following if you fail to sell the stock for $30,000:

  1. You sell $30,000 of Company ABC, another stock you own.
  2. You do not sell any stock and lease the car instead.
  3. You dip into your retirement savings to pay for the car.
  4. You decide to wait another 6 months before you purchase the car.
  5. You buy a less expensive car.

As landlords of commercial real estate, our most common example of this principle is what happens if we cannot come to terms on a lease agreement with a prospective tenant.

Most of the time, this means our vacant space remains vacant. 

Pretty simple, right?

So the question often becomes: Is a vacancy worthwhile?

Sometimes, the answer is easy.

If you are offering an office space for $5,000/month (and let’s assume it is actually worth $5,000/month), and an offer comes in at $2,000/month, you are better served to keep the vacant space and hold out for a tenant who will pay you the true market value.

An example not involving a vacancy is if you have a tenant in your space paying you $5,000/month with its lease term about to expire.  Your existing tenant wants to renew at $5,000/month and another prospect wants the exact same space.  You would obviously want a premium for the space to allow the new tenant to move in so if that tenant does not agree to, say $5,100/month, your best alternative is your existing tenant at $5,000/month.

In the previous example, you have a clear line for how to negotiate.  If the new tenant will not pay anything over $5,000/month, you should walk away from the deal.

However, as is usually the case, the real life scenarios are often much more complicated.

There are literally dozens and dozens of factors in every lease agreement and many are intensely negotiated.

The most important factor that is always negotiated, though, is the price.  And we have heard stories of miniscule amounts that are quibbled over that make the parties go their separate ways.

This is rarely the best case scenario. 

As a landlord, if your BATNA is a vacancy for an indefinite amount of time, how is this good for your business (which involves, you know, actually collecting rent!)?

And as a tenant, if your BATNA is to seek another space, which may or may not fit your budget and which takes even more time away from what you do best (actually running your company!), how is this good for your business?

Before you draw your final line in the sand, take the following into consideration:

Landlord Questions

  • Do you have any other pending offers or interested parties?
  • Have you received any offers since your space became vacant that you have already turned down (i.e., are you offering your space for the market value)?
  • How much does you vacancy cost each month (utilities, janitorial, maintenance, taxes, insurance, marketing)?
  • How is your local commercial real estate market performing?
  • Is your prospect agreeing to everything other than the price? (If the prospect will use your lease form and will go along with all other terms/conditions, the price might not be as big of a deal.)
  • Is this a credit tenant?
  • Is this tenant a good fit for your building or business park?

Tenant Questions

  • Can you remain at your current location or will you be forced out?
  • How much will you pay in holdover rent if you have to remain in your existing location for a few months?
  • When does your current lease expire?
  • Are there any other vacant buildings in the market?
  • How much is the space worth to you? (Note, this is different from the market value of the space – if the space is in your ideal location, it should be worth more to you than the market might dictate.)
  • How long will it take you to find another alternative?
  • And if you find another alternative, what is the market rate for it?

All of these questions must be asked. 

Sometimes, it is worthwhile to take less (or pay more) than what is expected to satisfy the other party. 

As landlords, we are pro-agreement.  (Obviously!)

But sometimes, that means we must take less than what we think a space is worth.

We always try to obtain the market value for our spaces.

It is important to remember though, that the market value is what someone is willing to pay.

That does not mean you should accept a ridiculous offer, but it does mean you need to think twice about saying no.

Please feel free to leave comments.  We promise to read them all.  You can also email us with any questions at leasing@seawaybusinesspark.com.  As a reminder, we provide office space for rent and office/warehouse space for rent in Gulfport, Mississippi.  Please keep us in mind if you are looking for a space in our area.  If you want more information about our available office space or warehouse space, visit our website at www.seawaybusinesspark.com or give us a call at (228) 575-7731.

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