Real Estate Reality

Jennifer A. Morrell

August 6, 2008

A s business owners feel the pinch of inflated costs across all aspects of their companies, there could be a faint silver lining to these daunting clouds.

Office space in Atlanta is in excess – and that could be good news for those wishing to lease or purchase property. As Baron McMillen, president of Trinity Real Estate Resources Inc., explains, “Corporate America doesn’t want to go in and expand their existing leases, and they’re taking longer to decide if they should renew at all. When they do make a decision, they usually want less space or shorter terms, which affects building owners. They’re seeing less activity from corporations and local users as well.”

Take a look around Midtown and Buckhead, and you’ll see crane after crane lined up aside half-built buildings. Lots of buildings are on the drawing board or are being constructed, adding to Atlanta’s existing oversupply. In the downtown area, unoccupied space is available in surplus in existing older buildings.

What does all of this commercial new construction mean? It’s a tenant’s market. If existing tenants have good credit and are in good standing with their landlords, now is the perfect time to request an early renewal and/or other concessions.

Offering to renew a lease early assures the landlord that he has a commitment for a longer time, so he might be convinced that rent relief with a reduced rate is fair. An example of another incentive might be a landlord offering a higher tenant improvement allowance.

“Whether you’re looking to lease 2,000 square feet or 200,000 square feet, every landlord wants to maintain an existing tenant base and keep occupancy up,” McMillen says. “And it’s all the same, whether you want to re-negotiate with your current landlord or move across street and negotiate with a potential landlord.” The same rules apply. (To find out the most effective ways to negotiate your lease, click here.) 

Politics Of Purchasing
“There are some fantastic buildings out there,” McMillen says. “But lending criteria is tight right now, and there is a large gap between what buyers are willing to pay and what sellers want for their properties.”

It’s a catch-22. You can find a great bargain on a property at a reduced price, but if you already own a property, you may have to lower your asking price to sell it. If a business owner is at the end of a lease term, it might be time to look for a value deal on property to purchase. Also consider that lenders are asking investors to put in more of their own money. Where the ratio used to be 80:20 (lender to investor), it can now be more like 70:30 or 60:40.

Small business owner Shelly Justice bought a freestanding building in Midtown last August where she located her company, Convention Models & Talent Inc. The building wasn’t fully leased when CMT moved in, so when Justice realized the building was for sale, she negotiated to purchase it. Although two other tenants were already in the building, enough space was available for Justice to move in as the building’s anchor tenant.

“The economy was starting to soften,” says Justice, “so I went in and talked to the owner about using us as the anchor tenant. We negotiated what we were willing to pay as the anchor tenant and were able to participate in the equity of the building.”

The initial asking price of the building was $1,325,000. Justice says she purchased the building for $1,225,000, and then fully renovated the building, adding $200,000 to its value. Since the building’s property value increased, the rental rates increased as well. Paying the increased rate based on a higher property value was built into the tenants’ contract agreements, so there was no back-and-forth about the increase.

Another proactive step Justice took was to complete a cost segregation study at the advice of her broker. This accelerated the depreciation of the asset and, thus, increased the cash flow.  

As icing on the cake, Justice also negotiated an interest rate with her bank at the last minute that saved her money.  She was able to get a much lower fee with Wachovia through the bank’s Owner Occupied Real Estate Program. Her original rate was set at 7.25 percent with a 1 percent fee. However, Justice was able to lock in a rate of 6.75 percent with a lower fee. She was also able to use the appraisal she already had paid for with another bank.

So in addition to being brave enough to ask for what you want, you also need to do your homework and align yourself with a broker and lender who will help you make the best decisions. There’s more than enough office space available. What you pay for it is up to you.

Thinking about renegotiating your lease? Find out the five key lease negotiation points every tenant should know.

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Jennifer Morrell is an Atlanta-based contributing writer with more than 14 years of publishing experience. She attended The University of Georgia's Grady College of Journalism, earning a degree in magazines. Areas of expertise include real estate and development, sports, health and wellness and relationships. Jennifer lives in the Atlanta area with her 2-year-old daughter, Macy.

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