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Negotiating : Understanding Incentives

April 30th, 2012 Posted in articles, best practices
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This is a ‘best practice’ article in many ways, but delves into something I’ve discussed before – negotiating.  One of the most important aspcets of negotiating is understanding the motivations & incentives of the parties involved.  As an example, let’s talk about leasing & the commercial real estate market.  There are basically 3 parties (sometimes 4); involved in negotiating a lease.

The Landlords

The landlord’s motivation is simple – he’s there to rent his space for the most amount possible.  Now, depending on the landlord; he might value this amount in the short-term (i.e. the most money he can get per month) or long-term (taking into account ‘down-time’ when the space is empty and the most over the terms of the lease).  He might also value his time and peace-of-mind (i.e. long term tenants who are quiet) quite highly.

So, time, money & peace-of-mind are his 3 major motivations.

The Lessee

The Lessee wants a good space, he wants a location that he can likely grow into (if they’re thinking of growth) and the least onerous terms possible including the lowest rent.   Depending on the lessee; they might also value peace-of-mind and certainly want to mitigate potential risk factors as much as possible.

His incentive is his bottom-line and any risk mitigation possible

The Realtor’s

The realtor works for the landlord generally, posting his listing in an attempt to find a lessee for the landlord.  His motivation is the sale.  There’s also a secondary motivation – a desire for continuing business from the landlord and to a much lesser extent, the lessee.  How much they value each of the above is dependent on the realtor obviously; but here’s where incentives come into play in a large part.

The realtor is paid by the landlord as a percentage (%) of the final lease.  As such, he is incentivised is to get the highest possible lease rate for the landlord; especially when you consider that the landlord likely has multiple locations to lease.

At the Table

At the table, as a lessee you need to realise that while the Realtor might sound like he’s working for you; his greatest incentive is to get the highest lease amount possible.  Close behind that is keeping the landlord happy (not necessarily the same thing).  He is not greatly incentivised to make you happy . Understanding these motivations allow you to approach the negotiation in the right frame of mind, allowing you to get a better deal.

This is true in any negotiation of course, especially when there are multiple parties involved and there often are.  It’s also why creating the proper incentives for salespeople is important.

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