Client: United Parcel Service
 If feasible, United Parcel Service wanted to renew its 23,500 square foot Pacific Region office lease in Laguna Hills, California. Like UPS, some of our clients have no compelling reason to relocate. Perhaps their space is not as efficient, nor as functional as it could be, but it is still workable. The space could work acceptably, if only the overall economic terms and conditions were sufficiently attractive.
With proper positioning in a smart negotiation, a renewing tenant "should" usually be able to obtain reasonable terms and conditions from its existing Landlord versus competing properties. Why? Because the current Landlord has almost no investment in tenant improvements and leasing commissions as compared against the owners of competing buildings. Most of the time, however, these savings are not passed through to the Tenant. Instead, the existing Landlord often attempts to put them into his or her own pocket.
In the case of UPS in Laguna Hills, the Landlord proposed a direct rate that the Tenant believed was way too high. As a result, UPS decided to hire MacLaurin Williams to create leverage in the local Orange County, California market.
 Here is a typical example of how most Landlords respond to tenants that desire to renew their leases. In Table 1 below, under "NEW TENANT," you can see that the Landlord paid $10.00 per square foot for tenant improvements, $1.00 per square foot for a moving allowance and $5.00 per square foot for leasing commissions. Table 1 below shows that the Landlord's triple net ("NNN") cash flow for a NEW TENANT was $1,974,000.
TABLE 1
| LANDLORD'S RENEWAL CASH FLOW |
| |
RENEWING TENANT |
NEW TENANT |
| NNN Rental Rate/SF: $20.00 |
| Year 1 |
$20.00 |
$20.00 |
| Year 2 |
$20.00 |
$20.00 |
| Year 3 |
$20.00 |
$20.00 |
| Year 4 |
$20.00 |
$20.00 |
| Year 5 |
$20.00 |
$20.00 |
| Total Rate/SF: |
$100.00 |
$100.00 |
| |
| Less: |
| (Improvements/SF) |
- |
($10.00) |
| (Moving Allowance/SF) |
- |
($1.00) |
| (Commissions/SF) |
- |
($5.00) |
| Net Cash Flow/SF: |
$100.00 |
$84.00 |
| Rentable Square Feet: |
X 23.500 |
X 23.500 |
| |
$2,350,000 |
$1,974,000 |
| Extra Landlord Profit |
$376,000 |
|
On the other hand, the RENEWING TENANT in the example required no improvements, no moving allowance and, without a tenant representative, no commissions. In this case, the same $20.00 per square foot NNN lease rate would provide the Landlord with a 19% bigger yield of $2,350,000, as shown in Table 1 above. Should the tenant, who has been faithfully paying rent to the Landlord for the last ten (10) years, get renewal terms that are that significantly worse than a new tenant to the building?
Well, UPS' Landlord was seeking to score an even bigger windfall prior to MacLaurin Williams' involvement. We entered the negotiations on UPS' behalf and discovered that the Landlord was quietly seeking to sell his building. Since UPS was the largest tenant in the project, this put abnormal pressure on the Landlord to renew UPS' lease successfully.
We used four (4) real proposals from competing properties to argue the "fair market rate" with the Landlord.
As a result, we were able to reduce the rental rate by 30% and save United Parcel Service $750,000 during the new
five-year term versus the Landlord's starting point.
|
