The Lease Renewal No One Tested Against the Market

Value left on the table is invisible until someone tests the number against the market. One example, anonymized.

An owner held a long-term industrial lease with one of the country's largest and most creditworthy corporations, a tenancy of more than sixteen years. As the lease approached expiration, he prepared to extend at the existing rate, a number that had not been reset to the market in years. He did not want it renegotiated. He wanted a second set of eyes on a deal he had already decided to accept.

I tested the proposed rate against current conditions for comparable industrial space in the submarket. Vacancy was historically low, demand from logistics and distribution tenants was strong, and the tenant, an investment-grade occupier with a sixteen-year history in the building, was an extraordinarily low-risk covenant.

The proposed rate was well below market and no longer defensible. The credit strength the owner was treating as a reason to discount was the reason to command a market rate. No market analysis had been done. The renewal was being offered as a courtesy rather than negotiated as a transaction.

With a market-supported position, the strength of the tenancy became the reason to hold the rate rather than give it away. The extension was restructured to a starting rate more than double the figure the owner had been prepared to accept, close to one and a half million dollars in additional value over the term.

The strongest tenant in the building is not a reason to discount. It is leverage. What was missing was not information. It was an independent read with no incentive to close the deal as it sat.

That read is the judgment I put my own capital behind now. I do not chase deals. When an under-priced one finds me, this is how I look at it.

Benoit Lapointe invests in healthcare and real estate. He is the principal of Meridian in Newport Beach. benoitlapointe.com