Why the Seller Needs Tenant-Side Representation

Owners naturally think of a sale-leaseback as a sale. The first question is what the building is worth, and the first number anyone quotes is a price. But the seller's role in the sale ends at closing. From that afternoon on, the company is a tenant, and its relationship with the property is defined entirely by a lease.

That lease decides what the company pays each year, how the payment grows, who fixes what, whether the company can expand or alter the building, whether it can hand the lease to a buyer of the business, and what happens when the term ends. A seller who puts all of its negotiating effort into price has negotiated the short half of the transaction.

This is the starting point for how TAG approaches the work. In a sale-leaseback the seller becomes the tenant, so the party that needs protection over time is the occupier.

An investor values the property largely on the income the lease will produce and how secure that income is. Higher rent, a longer term, steeper increases, and a lease that puts every cost on the tenant all make the income more valuable to the investor, and so support a higher price.

Each of those terms is also a cost or a constraint for the tenant. That means the seller is constantly choosing between cash now and cost later, and a representative whose instinct is to maximize the sale price will tend to trade away lease terms to get there.

An illustration, hypothetical and for explanation only: suppose a buyer offers to raise its price if the tenant accepts responsibility for replacing the roof. The price improvement is visible and immediate. The roof obligation is invisible until the year the roof fails, at which point the tenant pays for a capital asset it does not own. Whether that trade is worth making depends on the roof's age, the length of the lease and the size of the price increase. Someone has to do that arithmetic from the tenant's point of view.

A useful test for any proposed term: who benefits in the first year, and who pays in the tenth?

Many commercial real estate firms earn most of their revenue from property owners and investors. They list buildings, lease them up for landlords and sell them for institutional clients. Those firms can be skilled, and some are a good fit for a seller. The point is to know where an advisor's habits and relationships sit.

• An investor's acquisition team, and any broker it has engaged, work for the buyer and future landlord.
• A listing broker hired by you works for you as seller, but may have little experience representing tenants in lease negotiations.
• A broker who represents both sides must manage duties to two parties whose interests diverge on nearly every lease term.
• A tenant representative works for occupiers as a matter of practice, and spends its time negotiating against landlord lease forms.

Ask each advisor directly how much of its work is done for tenants and how much for landlords and investors, and whether it has ongoing business with any of the likely buyers. An advisor that expects future assignments from an investor has a relationship to protect on the other side of your table.

Tenant representatives see how leases behave after signing, because their clients call when something goes wrong. That experience shapes what gets negotiated before closing.

• Rent is compared with what the building would lease for on the open market, so the company does not fund a higher price with rent it will struggle to carry.
• Escalations are modeled across the full term to show the rent in the final years, not only the first.
• Repair and replacement duties are divided with attention to the age of the roof, structure and systems.
• Assignment and change-of-control language is written with a future sale of the business in mind.
• Alteration and expansion rights reflect how the operation is likely to change.
• Renewal options are drafted so they can actually be exercised, with a clear method for setting rent.
• Surrender obligations are limited so the company is not required to rebuild the building at the end.

None of these points is exotic. They are the ordinary content of tenant representation, applied to a transaction in which the tenant happens to be the former owner.

Tenant-side skill alone is not enough. The advisor must also be able to value the property, reach investors and manage a sale. What you are looking for is one team that treats the purchase agreement and the lease as a single negotiation and can tell you, for each trade, what it is worth on both sides.

• ✓Does the advisor represent only us in this transaction, and is that stated in the engagement agreement?
• ✓What share of the advisor's work is for tenants and buyers of space, as opposed to landlords and investors?
• ✓Will the same people negotiate the price and the lease, or is the lease left to the attorneys after the price is agreed?
• ✓Can the advisor show how a proposed rent compares with market rent for our building?
• ✓How does the advisor model the total cost of the lease over its full term?
• ✓Does the advisor have current business with any investor likely to bid?
• ✓Will the advisor stay involved through due diligence, when buyers ask for changes?

TAG is a tenant-rep and buyer-rep brokerage. We do not represent landlords in leasing their buildings, which lets us sit on the occupier's side of a sale-leaseback without a competing loyalty, and negotiate the sale price and the lease as one package with your attorney and CPA.