Zero Sum Game in Commercial Real Estate: The Myth of Winning at All Costs

I’ve been reflecting lately on the term "zero sum game." It’s one of those phrases that gets thrown around often in business, particularly in negotiations. The idea is simple: in a zero-sum game, one party’s gain is another’s loss. If I win, you lose. If you win, I lose. The sum of our outcomes is zero. In this view, everything is a battle where only one can come out ahead.

 
This concept seems especially prevalent in commercial real estate transactions when the market is hedged in favor or a buyer or seller. Think about it—there’s a property on the table, and both buyer and seller have their own goals, often seemingly at odds. The seller wants the highest possible price; the buyer, the lowest. It’s easy to fall into the mindset that for one side to succeed, the other must suffer.
 
We’re often led to believe that every negotiation is a zero-sum game where our only option is to win, no matter the cost to the other party.
 
But is that really the case? Can a deal only close if someone loses?
I’ve found that in reality, this approach is not only limiting but often counterproductive.
 
Commercial real estate transactions are rarely a simple equation of plus one, minus one. The complexity of the deals, the relationships at play, and the long-term impacts on both parties are far too intricate to be boiled down to mere numbers on a scoreboard.
 
In my experience, the most successful transactions aren’t the ones where someone walks away feeling like they’ve “won” at the expense of the other. Instead, they’re the deals where both parties come away feeling satisfied, where both sides can say they’ve achieved something valuable. This is what we mean by a win-win situation.
 
A true win-win transaction takes into account the broader picture. It’s about finding common ground, identifying shared interests, and creating value for both parties. It might mean being flexible, thinking creatively, or looking beyond the immediate financials to consider the long-term relationships and potential future opportunities.
 
For example, a seller might accept a slightly lower offer if it means a quicker close or if the buyer is a local business that will positively impact the community—something that, in the long run, could enhance the value of other nearby properties the seller owns. A buyer might agree to pay a bit more if it means securing a property that perfectly suits their needs, saving them future relocation costs or renovations.
 
These are the kinds of
compromises that lead to deals where both sides feel they’ve won.
 
I’ve often seen negotiations where both parties dig in, each determined to get the upper hand. They see every concession as a loss, every gain as a victory. But this mindset overlooks the bigger picture. It ignores the fact that a deal where one party is left feeling resentful or cheated is less likely to hold up in the long run. Relationships sour, deals fall apart, or the animosity lingers, affecting future interactions.
 
On the other hand, when both parties feel like they’ve won something, the outcome is more sustainable. The buyer and seller leave the table not as adversaries, but as partners in a transaction that benefits them both. This isn’t just a feel-good sentiment—it’s good business.
 
So, where does the zero-sum game fit in commercial real estate? It doesn’t. Not if you’re in it for the long haul. Not if you’re looking to build lasting relationships, create value, and grow your business in a way that benefits everyone involved.
 
The next time you’re sitting at the negotiation table, try to move away from the mindset of “if I win, you lose.” Instead, ask yourself: What does winning really look like? How can we both walk away from this deal feeling like we’ve gained something of value? The answer might just lead to better deals, stronger relationships, and more sustainable success.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

What New England Can Teach Us About Commercial Real Estate

As someone who has spent considerable time exploring the winding roads, charming villages, and bustling cities of New England, I’ve come to appreciate that this region offers more than just scenic beauty and history. There’s a certain rhythm here, a way of doing things that’s deeply rooted in tradition yet surprisingly innovative. And as I reflect on my experiences, I can’t help but see parallels between the lessons New England offers and the world of commercial real estate.

Lesson 1: Value in Preservation
New England is a region that values its history. Whether you’re walking the cobblestone streets of Boston or admiring the colonial architecture in towns like Portsmouth, New Hampshire, you quickly realize that preservation isn’t just a buzzword here—it’s a way of life. The same can be said for commercial real estate. Often, the most valuable properties aren’t the new builds with all the latest amenities but the ones that have stood the test of time. Just as New Englanders know the value of a well-preserved historic home, real estate investors should recognize the potential in older buildings. With a little care and strategic renovation, these properties can become not only profitable but also integral parts of the community.

Lesson 2: Embrace Seasonality
One of the most charming, and sometimes challenging, aspects of New England is its distinct seasons. The region goes from vibrant fall foliage to harsh winter snow, followed by the gentle thaw of spring and the warmth of summer. This seasonality teaches resilience and adaptability—traits that are equally important in commercial real estate. Markets, like seasons, change. There will be highs and lows, periods of growth, and times of stagnation. The key is to embrace these cycles, prepare for them, and adjust your strategies accordingly. Just as New England businesses might shift their focus from skiing in the winter to coastal tourism in the summer, commercial real estate owners need to be nimble, adjusting their property management and marketing strategies to the ebbs and flows of the market.

Lesson 3: Community is King
In New England, community isn’t just an idea; it’s a lived experience. Town meetings, local businesses, and neighborhood gatherings are the lifeblood of this region. It’s a place where people know their neighbors and where local businesses are fiercely supported. In commercial real estate, fostering a sense of community can be just as crucial. Whether you’re managing a mixed-use development or a single office building, creating spaces where people want to gather—where they feel a sense of belonging—can dramatically increase the value of your property. Think of your tenants as community members, not just rent checks. When you invest in their success, you’re also investing in the long-term success of your property.

Lesson 4: Respect for the Land
New Englanders have a deep respect for their natural surroundings, whether it’s the rugged coastline of Maine or the rolling hills of Vermont. This respect translates into a thoughtful approach to land use—something that’s increasingly important in commercial real estate. Sustainable practices, from energy-efficient buildings to green spaces, aren’t just trends; they’re becoming necessities. Properties that align with these values are more attractive to tenants, investors, and regulators alike. Just as New England’s landscapes have been carefully maintained for centuries, so too should our commercial properties be developed with an eye toward long-term sustainability.

Lesson 5: Innovation Rooted in Tradition
Finally, New England is a region that innovates while honoring its roots. From the tech hubs of Cambridge to the traditional craftsmanship in Vermont, there’s a unique blend of old and new here. In commercial real estate, this balance is crucial. While it’s important to stay ahead of the curve with the latest technologies and trends, there’s also value in holding onto the tried-and-true practices that have proven successful over time. Whether it’s a new smart building or a classic brick-and-mortar storefront, the key is to integrate innovation in a way that respects the property’s history and purpose.
In the end, what New England teaches us about commercial real estate is that success isn’t just about the latest trends or the most modern designs. It’s about understanding the value of history, the importance of community, and the need for resilience and adaptability. It’s about respecting the land, embracing change, and finding that delicate balance between innovation and tradition. So, the next time you’re faced with a real estate decision, take a page from New England’s book—you might just find the inspiration you need to succeed.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.

Owner Mistakes Part 2

Last week’s column struck some nerves as I discussed the two most common mistakes I’ve seen owner occupants make with their commercial real estate. To refresh, not charging the operating entity a market rent and an absence of agreements between the ownership and occupant were the two mistakes discussed. 
 
Consistent among the emails I received were questions as to how. How should I go about determining a market rent and what form should the agreement take? 
 
What follows are some suggestions on how to accomplish both. 
 
Determining Market Rent
Let’s tackle the market rent question first. The key to setting a market rent is to think like an impartial third party. Imagine you don’t own the building, and you’re simply looking at it as an investment. What would you expect to pay if you were leasing the space from someone else? This mental shift can help you approach the task with objectivity.
 
A great place to start is by doing a bit of local research. Look at similar properties in your area that are available for lease. You can gather information from commercial real estate listings, or better yet, have a conversation with a local commercial real estate broker who specializes in your property type. Brokers live and breathe this data, and they can provide valuable insight into current market conditions and comparable rents.
 
Once you’ve gathered a range of rents for comparable properties, it’s time to adjust for any differences. Consider factors like the location, size, condition, and any special features your property might have that others do not. The goal is to arrive at a rent that is fair and reasonable for both the operating entity and the ownership entity.
 
Drafting the Agreement
Now, onto the agreement. This part can seem daunting, but it’s critical for protecting both parties involved—yes, even when both parties are you! The agreement should clearly outline the terms of the lease, including the amount of rent, payment schedule, length of the lease, and any responsibilities each party has regarding maintenance, repairs, and improvements.
 
While it’s tempting to simply draft something up on your own, I’d strongly recommend engaging a real estate attorney to help with this step. They can ensure the agreement is not only legally binding but also covers all the bases you might not have considered. Think of it as an investment in avoiding future headaches.
 
Putting It All Together
Once you’ve established a fair market rent and formalized the lease agreement, you’ll be in a much stronger position. Not only will your financial records reflect a more accurate picture of your business’s performance, but you’ll also have peace of mind knowing that both the ownership and the operating entity are protected by a clear, mutually beneficial agreement.
It might seem like extra work, but these steps are essential to ensuring your commercial real estate works for you, not against you. So, take the time to do it right—your future self will thank you.

Owner Occupants Mistakes - Two Biggest

Owning the building where your business operates is indeed a smart move, and many entrepreneurs find it to be a beautiful arrangement.
 
Typically, the process involves creating an entity like a limited liability company (LLC) to take title to the real estate. Then, the business operation “rents” the address from the LLC, often as a separate corporation. This setup offers some distinct advantages: tax benefits, depreciation, interest deductions, and the ability to build equity. However, many owner-occupants make critical errors that can undermine these benefits. Let’s delve into two of the most significant mistakes:
 
Not Paying Market Rent
When acquiring a building, businesses often finance the purchase, frequently through the Small Business Administration, which allows financing up to 90% of the purchase price. With only 10% equity needed for the buy, the resulting debt service typically dictates the rent the business pays to the LLC. This means the rent is often set based on debt service requirements rather than market rates. While this might seem convenient, it can lead to significant financial discrepancies over time.
Consider this: as the debt decreases, the rent often remains static, potentially falling below market value. This discrepancy can create substantial financial issues. For instance, if the rent is significantly below market rate, the business’s profits appear artificially inflated. This can complicate matters if the owner decides to sell the company. Potential buyers might see an inflated profit margin that isn’t realistic once market rent is factored in.
 
I’ve seen this firsthand with a company that owned its building since 2001. They enjoyed under-market rent for over 20 years. When it came time to sell the business, the profit appeared much higher than it actually was, creating a challenging situation for both valuation and sale. Keeping rent aligned with current market rates is essential to avoid these pitfalls and ensure the financial health of both the business and the real estate entity. 
 
Regularly reviewing and adjusting the rent to reflect current market conditions is crucial for maintaining an accurate financial picture.
 
Not Having an Agreement Between Owner and Tenant
Another common mistake is overlooking the necessity of a formal rental agreement between the real estate entity and the operating business. Many owner-occupants assume that since they control both entities, a formal agreement is unnecessary. They think, "I own the company and the building, so why do I need a contract?" This mindset can lead to severe complications, especially during unexpected events like death, divorce, or a sale.
 
I recall a particularly extreme case involving a manufacturing company. The owner, who also owned the building, passed away suddenly. Unbeknownst to the company, the owner had altered the building’s ownership, distributing it among several heirs. None of these heirs wanted to continue the business, and without a lease agreement in place, the business was evicted so the building could be sold. This resulted in a costly and disruptive relocation for the company.
 
Having a written agreement between the owner and tenant entities is crucial to avoid such scenarios. It ensures that both parties are clear on their obligations and protects the business from unforeseen events. 
 
This agreement should outline the terms of the lease, rent amount, duration, and any other pertinent details. It’s a simple step that can prevent significant headaches down the line.
 
Owning the building where your business operates can be incredibly advantageous, offering tax benefits and the ability to build equity.
 
However, it’s essential to avoid these two common mistakes: not paying market rent and not having a formal agreement between the owner and tenant. By addressing these areas, owner-occupants can better safeguard their investments and ensure smoother operations, regardless of future uncertainties. Regularly reviewing rental rates and maintaining clear agreements will help keep both the business and real estate entity on solid financial footing.
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com. 

What Colorado Can Teach Us About Commercial Real Estate

We just spent a marvelous week in the Rocky Mountain area of Colorado. Vail, Colorado was our homebase from which we ventured out onto a number of remarkable excursions. We floated the Colorado river, we rode horseback through rolling hills to observe grazing elk, soaring eagles, and beautiful wildflowers . We fished for the bounties of the Eagle and Colorado rivers. Finally, we practiced goat yoga in the shadows of Vail Mountain. We adopted the phrase baaaa-maste. Sorry! 
 
So you may be wondering, what any of this has to do with commercial real estate? Bear with me and allow me to draw a few parallels.
 
Strategic Location: 
Just as Vail is strategically located to offer access to various outdoor activities, commercial real estate must consider location as a critical factor. Properties situated in prime locations with easy access to amenities, transportation, and attractions are more likely to thrive.
 
Experiential Value: 
The unique experiences we had in Colorado, from floating the river to goat yoga, underscore the importance of offering memorable experiences in commercial real estate. Retail properties that provide unique and engaging experiences can differentiate themselves in a competitive market and attract loyal customers. Think Bass Pro and REI as examples. You go to experience - not just buy. 
 
Collaboration and Partnerships: Many of our activities were facilitated by local guides and businesses working together. Similarly, commercial real estate can benefit from strategic partnerships and collaborations with local businesses and organizations to create a vibrant and interconnected community. 
 
Connection to Nature: 
Our adventures emphasized the value of connecting with nature. Commercial real estate can integrate green spaces, rooftop gardens, and natural elements to create a calming and attractive environment for tenants and visitors. Most class A office developments - such as Boardwalk in Irvine - understand this. 
 
Seasonal Flexibility: 
Colorado's attractions vary by season, from skiing in winter to myriad summer activities. Commercial real estate properties can also adapt to seasonal changes by offering different services or promotions throughout the year, ensuring continuous engagement and relevance.
 
Cultural Integration: The rich cultural backdrop of Colorado, with its mix of Western heritage and contemporary influences, adds depth to the experience. In commercial real estate, integrating local culture and history into the design and branding of a property can create a unique identity that resonates with the community and visitors alike. The District in Tustin has done a good job integrating local history into its buildings. 
 
Industry Creation and Innovation: The development of the ski industry in Colorado transformed the region into a world-renowned destination. This innovation parallels the rise of new industries, like Silicon Valley tech, which created a whole genre of commercial real estate - the Research and Development buildings of the mid 1980s. Embracing and supporting emerging industries can lead to the creation of dynamic, economically robust communities that attract investment and talent. The boom in logistics spaces with high cube warehouses, enhanced fire suppression and room for trucks to maneuver is a recent example.  
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.