Great Tips to Consider when Negotiating during COVID
Successful organizations are proactive and contact landlords to renegotiate lease terms months, if not years in advance – to ensure that they have access to the latest market research on specific commercial rent fair market value, industry trends (such as Amazon impact on commercial retail), trends in financing and interest/CPI. ASC842/IFRS16/GASB87 Compliance/Lease Negotiation Tips – is a roadmap for locking in the best possible terms, so that you can focus your capital on building your business – not building your landlord’s bank account. This activity has never been more critical to corporate America as it is now, as the COVID-19 pandemic has ravaged existing rental cost structures, and has created a phenomenal opportunity for tenants to go back and renegotiate rental amounts, which off-set the shelter in place impact on building space required. Landlords are much more likely to negotiate on price if you can concede on lease duration, as this is a logical trade-off, where both parties get what they want.
Negotiation is one of the most important activities an organization deal with, as they carry a long term financial commitment, as well as provide the company with the security of a firm physical presence from which to conduct business operations (see Service Funnel compliance activities diagram below). In order to negotiate from a position of strength, there are some basic guidelines for achieving a favorable outcome in a negotiation, the Leaseology Negotiation Roadmap is outlined below:
- Golden Rule Before you ask for any concessions, you need to understand your performance against the existing contract. Are you current on rent? What is your rental payment history/have you been late before? Are there any complaints by commercial neighbors against your firm? Is the building being maintained in an appropriate manner? Is your business insurance current? The worst-case scenario for a tenant is to have an upset landlord, without having visibility into the why, so ensure that you have done the proper due diligence with your facilities, accounts payable, compliance, real estate, and accounting teams – to ensure you are not walking into a negatively charged discussion. Being blindsided by your landlord will cost you on desired concessions flexibility and on building price, and it may even remind the landlord of why they want you out, which would be the worst-case scenario – having to unexpectedly find a new building. Make sure you understand your status with the landlord prior, and if there are any issues – have a written improvement plan in place and provide the landlord a copy, before you begin any negotiations.
- Details Matter: Know the remaining terms of your lease(es). In other words, how much of the lease terms have been met? It’s important to know the rent paid and the remaining rent liability. The Covid-19 Pandemic has fundamentally changed the landscape on how negotiations happen, both from a timing, frequency, and even a renegotiation etiquette perspective. As Covid-19 impact remains unknown, so do the rules governing tenant and landlord. Landlords want the security of rental income and tenants to want a building that meets their needs at the best possible price. With the Covid induced market volatility, tenants are going back to landlords multiple times to renegotiate, which is a unique scenario for all. This is also a race to the bottom for both parties, as tenants want to lock in just before the rebound, while landlords want long term guaranteed income and to have 100% physical occupancy. These two conflicting objectives are the foundation for why renegotiations are so important for both sides.
- Know your lease options to sub-let vacant space or early terminate a lease. Many organizations look to consolidate office space and employees continue to work from home resulting in excess space. Remember, many organizations are in the same boat as you. Teaming with another organization to share space is advantageous for all parties. Landlords have never been more flexible, as they need to be creative to protect their occupancy/investments, while tenants need less space as few are going into an establishment for work. Sub-letting is an essential component to the renegotiating process, as it provides flexibility that can help each party get what is most important to their negotiating objectives. Expect this trend to amplify throughout the COVID transformation period and re-adjust once resources return to physical buildings for work.
- Know your Limitations: You must enter the negotiation with a firm understanding of what you can and can’t live without. Be prepared for the worst-case scenario, on every issue and wear your best poker face when negotiating, as any emotional leakage will weaken your position and create a barrier to getting all of what you want. Treat your counterpart as a counterpart – don’t talk down or up to – be even and always remember that the worst-case scenario – which is usually a lease termination is the risk associated with such a renegotiation, especially if there is any ill will or historical differences.
Deferment is a powerful strategy that provides flexibility in helping both sides ‘win’ a renegotiation, as both parties need to go back and present results/findings. The negotiator will be judged on their ability to achieve the business produced lease objectives – from the tenant side, it will be to get a reduction in rent – from the landlord side, it will be gross revenue. In both cases, Fair Market Value will favor one side, so the objective for the unfavored party is to minimize concessions and the vehicle for doing so is flexibility – massaging the terms so that you get most of what you want. A creative imagination is the greatest tool a successful negotiator has, so important to think through all the possibilities of each term, for maximum lease yield.
ASC842/IFRS16/GASB87 compliance/Lease Negotiation Tips
Why is renegotiating such a big deal for compliance? Lease accounting is the practice of capturing lease specific contents for the purpose of managing an asset – either equipment or real estate. By the very nature of this activity, it’s all about the asset. The asset is why we go through the compliance hurdle to begin with, to make sure we are performing against the lease as outlined in our agreement.
Why?
If you look at the service funnel, it is comprised of 7 unique requirements, which in unison make up a compliant and protected asset, as each of the requirements has a specific purpose in protected the compliancy and identifying the business obligation in order to meet service levels and lease commitments.
Why? A compliant asset provides the following business benefit:
- Immediate Lease Compliance: This means the asset has been through an audit, to confirm lease specifics, to ensure what was purchase/negotiated – is reflected in the lease. It is the time to flush out data entry errors, inaccurate assumptions or typos – in regards to terms or performance obligations.
- Critical Date Notifications: How can you maintain perfect credit without understanding your payment amounts/increases or dates? Perfect credit keeps the cost of money at the lowest possible level, which is every controller’s objective.
- Lease Administration: Are there any new statutes that impact your lease (es)? This is a pure risk item if you don’t have the proper controls, or are doing business with a firm like Leaseology that embeds this capability in its services offering.
- Disclosures Reporting: This is the meat of the ASC842/IFRS16 and GASB87 compliance mandate – new, required, monthly reporting that is highly manual and a challenge to keep current.
- Technical Accounting: To stay on top of your enterprise lease accounting requirements, you must understand the EBITDA impact of your compliance reporting initiative as well as ensure that you are properly accounting for your lease in the most financially effective manner. Technical accountants are rare, but worth their weight in gold. Ensure that you have technical accountants reviewing your leases and disclosure statements.
- Lease Negotiation: This is why we have lease accounting – to protect our assets, future costs and achieve compliance.
- Document Management: This is the best-kept benefit of a successful Lease Accounting/Management program – having all of your leases in one physical environment, a true repository for your business, will help uncover evergreen leases, where companies continue with automated payments, long after and the asset has expired/been paid off – simply out of lack of asset visibility.
In response to the ASC842/IFRS16/GASB87 compliance mandate, due at the end of 2021, customers do not have the time to develop RFP’s, research solution
The bulk of the post compliant lease accounting work effort lies in the ongoing maintenance of disclosure reporting. To quote a 10B global accounting firm on Disclosure Statement objectives:
FASB Accounting Standards Codification (ASC) 842-20-50-1 and 842-30-50-1 provide that “the objective of the disclosure requirements is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.” The standard further indicates that “a lessee [lessor] shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. A lessee [lessor] shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or by aggregating items that have different characteristics.”
What is the biggest negotiation hurdle in achieving ASC842/IFRS16/GASB87 compliance:
You can’t negotiate what you can’t see, or are unaware of – this stems from the biggest renegotiation hurdle: the lack of a centralized Document Management platform. Having a lease management service helps you to avoid costly mistakes on payments and renegotiation opportunities.
ASC842/IFRS16/GASB87 compliance/conception to disposition Key Takeaways
- Creating a comprehensive compliance program is a massive undertaking and is not of core business value and dilutes business focus – This is where you want a partner that provides a comprehensive service, so you can
- Companies need a partner to lead the compliance effort, migration, and system selection – as the complexity and unique blend of skills does not align from a resource perspective
- Automation is needed for keeping up with the pace of change, as well as for the ongoing SEC reporting/disclosure statement updates and security requirements.
- Experts are required to help guide customers stemming from this new business capability/challenge
Leaseology understands what internal lease accounting teams are up against when it comes to ASC842/IFRS16/GASB87 compliance and has built an end-to-end solution that allows customers to divert resources, remove cost, increase accuracy/locate cost savings opportunities – all while achieving compliance via an outsourced lease management process. Although these responsibilities are not always handled by finance/accounting – they are corporate burdens and obstacles to profitability. Let the experts help you as at the core of the Leaseology service offering, our combination of industry expertise in lease accounting, compliance, reporting, and automation can help you meet your compliance timelines – allowing your team to focus on growing your business.
Let the experts help you, Leaseology has a subscription model that achieves compliance and removes risk, schedule a free assessment of your most complex leases now – clock ticking.
Ken Royce * Leaseology Inc * Board of Directors
ABOUT Leaseology Inc|
Leaseology, Inc is a North America-based business advisory services firm committed to accelerated marketplace adoption of digital technology, financial management innovation, and business operations practice excellence. These core competencies apply to real estate and equipment portfolios.
