maurice martin : : freelance journalist & playwright

By Maurice Martin

From the December 13, 2002 issue of the Washington Business Journal.

Back in the freewheeling days of the dot-com boom, local companies — particularly technology companies — gobbled up office space to accommodate the ever-expanding army of employees they saw in their futures.

Now, the same real estate brokers who helped those companies acquire that space are getting calls for a different kind of help. Companies are downsizing — or worse yet, sliding toward bankruptcy — and the extra space is a financial liability. They're asking brokers to negotiate deals with landlords, either to shed excess space or to get out of leases.

"It's not sexy work," says Dan Gonzalez, senior vice president of the mid-Atlantic region for USI Real Estate Advisors in Vienna (http://www.usirealestate.com). "These negotiations require patience and discretion. Nobody wants the world to know they're facing financial difficulties."

Even so, the brokers who take on this kind of tenant representation — sometimes called "disposition consulting" — see it as a chance to do something positive for both tenets and landlords.

"There are opportunities there to create win-win situations," says Mark Cummings, principle of MEC Realty Associates in Fairfax (http://www.mecrealty.com).

Telltale telecom
Gonzalez saw requests for disposition consulting begin to rise in late 2000 and early 2001— roughly the time Northern Virginia telecommunications companies started having problems. Currently, disposition consulting constitutes about 20 to 25 percent of his business.

Cummings estimates that 50 percent of his business now comes from disposition consulting (though he prefers the term "rightsizing").

Mike Grogan, president of the D.C. office of the Washington Realty Group (http://www.wrginc.com), estimates demand for this type of service has more than tripled since 1999 and makes up 10 to 20 percent of his business. Rather than call it "disposition consulting," Grogan uses "lease work out" or "lease buy out."

Not all brokers have had the same experience.

Jack Alexander, president of AMR Commercial in Bethesda (http://www.amrcommercial.com), says he has not seen an increase in disposition consulting and it's less than 10 percent of his business.

The brokers receiving requests for disposition consulting are the ones who were, in the late 1990s, "filling orders for pie-in-the-sky business plans from 25-year-olds in short pants," Alexander says.

He says his firm's clients "never got caught up in the rapid growth craze" and he's not sorry to miss out on the disposition work. "Those clients won't pay anyway."

Paying to get out
Tom Sandlin, who shares with Gonzalez the title of senior vice president of the mid-Atlantic region for USI Real Estate, agrees that payment can be a concern with disposition work.

"You have to tell the client exactly what your fees will be," he says. "Ask them, 'Can you live with this?'"

USI prices its disposition work in several ways: as a percentage of money the clients save, on an hourly basis, and by predetermined payments conditioned on reaching certain milestones.

The scope of the work can be quite large. USI helped one client get rid of $250 million in lease liability during the third and fourth quarters of 2001 (not all of that space was in the D.C. area), Gonzalez says.

If a company needs to shed space, it often needs to do so for urgent financial reasons. Disposition consulting "is time-sensitive work, so we drop everything," Gonzalez says. "If we don't get it done today, bad things can happen," especially to smaller companies.

Many landlords, not wanting to give up a lease during a weak real estate market, choose to play hardball and stand firm, Grogan says. But the landlord who plays it too tough may find the overhead of unwanted space helps drive the tenant under.

"If the [tenant] company ends up in bankruptcy court, the landlord has to get in line with other creditors," Cummings says. "It's up to the judge at that point. The middle ground is good for everybody."

Gonzalez goes into negotiations with a landlord armed with the tenant's financial information. "You have to be blunt," he says. " It doesn't help to be cryptic."

On the other hand, a hostile attitude isn't productive. "The landlord should be viewed as an investor in the [tenant] company."

The traditional outcome is a subleasing arrangement. However, Gonzalez says that lease termination through buyout is becoming more common.

The road to wellville
Area brokers have somewhat different views on what's ahead in the demand for disposition consulting. "It will reach a fever pitch over the next six months," Grogan says. "After that, it depends on which way the economy goes."

Sandlin is more optimistic: "It has probably peaked already. We may be slightly past the peak. I hope we are."

Cummings thinks "we're close to the bottom" of the commercial real estate slump. "As that market turns around, I expect to see fewer companies focused on disposition."

In the meantime, he says, tenants looking for new space are in luck. "The values they're finding are unparalleled in recent history."

Disposition consulting won't go away completely when the industry rebounds. Even in a good economy, companies need to get out of a lease for various reasons, such as mergers, acquisitions and relocations.

Grogan notes, "In 1999, we did lease workouts because buildings couldn't accommodate tenant growth."