How Reliable are Lease Comps?

In office lease negotiations, like most other negotiations, there’s the “sticker price” and the final deal terms. As to the latter, landlords and office brokers frequently talk about comparable lease transactions, a/k/a, “Lease Comps”. Many tenants confuse the reliability of Lease Comps with those of property sales. While Lease Comps have some validity, they need to be taken with a grain of salt.

There are two primary reasons why Lease Comps are not very reliable. First, unlike property sales which are made public through recording, most leases are never made public. On the rare occasion where a lease is recorded (typically to preserve the priority of the lease) the lease will not contain any financial terms. Second, in most leases the parties (including the brokers) are contractually prohibited from disclosing any lease terms. Additionally, the brokers are usually bound to non-disclosure through their commission agreements.

To get the best deal, an informed tenant should not succumb to taking the Lease Comp “short cut”. Many landlords and some office brokers would rather have the tenant base their real estate decision on another tenant’s deal. Landlords, particularly on renewals, would rather base a renewal on a Lease Comp instead of competing with the market.

Here’s what’s wrong with that short-cut approach. Fundamentally, the lease terms that may have been good for another tenant may not be good for you. Tenants can’t be sure of the facts and circumstances surrounding the other tenant’s lease deal to know why or how a certain term was chosen. Some of this uncertainty stems from the fact that landlords frequently use concessions (e.g., free rent, allowances, etc…) as means of concealing their true effective rate. Moreover, the economics of a lease are complex and involve many variables beyond the rental rate. For example, a lease may involve a higher rent structure while also providing a large construction allowance, significant free rent or termination rights. Among these variables is the credit of the tenant where a strong credit tenants can drive a better deal than lesser credit tenants. Finally, keep in mind that the other tenant may have been in a weaker position and didn’t have as much bargaining power.

Whether a tenant is exploring renewal or relocation, to get the best deal they should auction their tenancy among competing landlords. The real estate market is dynamic and office leasing transactions are complex. After you’ve leveraged the marketplace and pitted owner against owner, take a look at those Lease Comps. You’ll probably be suprised!

Don Wenig
Blackacre Advisors LLC

DISCLAIMER.   Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).

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