March 27, 2021
If you want to be an effective negotiator, you have to know what your audience is motivated by. The TRIC or T-R-I-C determines each deal: 1) Term Length, 2) Rental Rate, 3) Improvements, and 4) Credit of the tenant. Each of these facets of the lease change in proportion with each other. If a landlord gets the T, I, and C they want, they will flex on R. If the term is what the landlord wants, there are few tenant improvements needed with great credit history, the landlord will likely get more competitive on the rent. All of these factors fluctuate in proportion with each other, and all landlords will make different leasing decisions based on what they are motivated by. Take a look at our video called “The TRIC Of Lease Negotiation” where we go into more detail about this concept. Most landlords are motivated by one of the following three things: cash, return on investment, or net rental rate.
The first landlord is cash-driven. They may run a local business and have excess real estate as a by-product of their business, maybe they are a local landlord with a small bank account, or they may be simply very conservative and sensitive about spending money on their real estate. This type of landlord is going to be motivated by little to no tenant improvement work, working for as close to an “as-is” deal as they can get. These landlords also may not have their own property manager, and so they will be more motivated by tenants with good credit rather than maximizing on every penny of the lease because they will likely want to minimize the chance that they personally need to run around collecting rent checks. In some cases a landlord like this may execute a deal that does not maximize the return if there is no hassle and no cash needed to get the deal done and may compromise on rental rate and term length in order to do the deal.
2. Return on Investment (ROI).
The second landlord is return-driven. They could have a small or large portfolio, but either way have more access to cash and are able to complete tenant improvements. They tend to be more flexible than the first landlord in some areas and can contribute a tenant improvement allowance depending on what they need to do to get the tenant moved in. They are more focused on the return on investment and may be more willing to work with a tenant who is financially sound but perhaps needs some creativity to do the deal. This landlord has more of an appetite for flexibility on TI and Term but the numbers will all need to work. They would do a deal at a low rent if the numbers make sense or they would spend money, improve the space and charge a higher rent.
3. Net Rental Rate.
The third landlord is driven by maximizing the net rent. This landlord may manage a fund of some kind or is in the buy, invest, and flip business. They are motivated by maximizing the Net Operating Income which is simply Total Revenue - Operating Expenses. This means that term and net revenue are the most valuable factors to a lease and things that do not affect the base rent number are the most easily given up. For example, landlords like this would rather compromise by writing a larger check for tenant improvements at the beginning of the lease term than lowering the base rental rate. Another typical concession by a landlord like this would be a period of free rent at the beginning of the lease term in lieu of lower base rent so that when the building is fully leased they can flip the property at a multiple of value of the leases or for the purpose of refinancing.