Tempting tenants

Experts differ as to whether buying out leases is a sign of a maturing or difficult market but admit with one voice that they are on the increase. The spectacular deal between the Von der Heyden Group, GE Capital Golub and PricewaterhouseCoopers in Warsaw, is the highest profile agreement of this type yet in Poland.

Many developers must have envied GE Capital Golub when they advertised on their construction site billboard, that PricewaterhouseCoopers would be making International Business Centre their new headquarters with 8,000 sqm. However, before they could do this, the developer had to pay millions of dollars, (the exact amount isn't being divulged), to buy out PwC's lease from the Von der Heyden Group. How many firms would go this far to attract a tenant to their building?
"Not many at the moment but developers are analysing the profitability of buy-outs, which is bound to lead to more of them," says Jerzy Wysocki, Head of the Commercial Agency, Knight Frank Nieruchomści.

Giving in to temptation
Jerzy Wysocki and Jerzy Muszynski, Head of Analysis and Evaluation at Unikat Nieruchomosci, both support the view that buying out leases is a symptom of difficult market conditions.
"This is the next stage of developers' plans to encourage potential tenants to lease from them. It all started with the reduction of basic rents and deposits, then it was time to tempt firms with free of charge space arrangements and rent exemptions, the periods of which became longer as time went by," says Wysocki.
"Nowadays, tenants must be fought over and, particularly at a time of economic downturn, all means are good as long as they bring results," says Muszynski.
Sven Von der Heyden, President of the Von der Heyden Group who decided to "let" PricewaterhouseCoopers "go" from their building on ul. Nowogrodzka, and move to International Business Centre, disagrees and claims that buying out leases is a sign of a mature and sophisticated market. Mieczysław Godzisz, however, Hines Polska Country Manager, stresses that the maturation of the real estate market coincided with a slump in the market, which has forced developers to be more creative, as well as realize that they're there to serve their clients' needs. Buying out a lease is just one of the ways of winning over tenants.

Buying prestige
Michał Melaniuk, Director of Marketing and Leasing at Capital Golub Europe in Poland, maintains that in order to reach a buy-out agreement, all parties, and particularly the 'buying out' developer and the targeted tenant, must have no doubts about the deal. "Working from three different locations, PricewaterhouseCoopers were very determined to consolidate all their offices under one roof," says Melaniuk. He doesn't let on however, why his company decided to strike a deal with the Von der Heyden Group.
It is not difficult to guess the main reasons though. To begin with, signing such a major contract before completing the construction of IBC must have sent the right signals to the crediting bank and secondly, prestigious tenants, such as PwC, increase the chances of attracting other clients. "Buying out leases is profitable only with large, strategic tenants. New buildings have to create an excellent marketing image," says Jerzy Muszynski.

The "surrender" payment
Sven Von der Heyden admits that "money was certainly the biggest issue. Once we had agreed a figure, it was up to the lawyers to kill the cat and get it on paper", and explains how they calculated the "surrender" payment for PwC's move from ul. Nowogrodzka five years before the lease's expiry date: "The landlord has to calculate the difference between the market rent of his building, for the remaining lease term of the tenant who desires to leave, and then come up with total aggregate differential."
The agreement between the three parties was signed at the beginning of last year, and PwC are to move to International Business Centre as soon as next month, leaving behind 4,000 sqm of vacant space in the building on ul. Nowogrodzka.
"It was Golub who contacted us and we established a good trianglular relationship with PwC, which was imperative to make this deal happen," says Von der Heyden.

Pride spoils cooperation
Neither the Von der Heyden Group nor GE Capital Golub employed a consultancy firm while negotiating the deal. "Everything was based purely on our company's experience in the USA," says Melaniuk. Sven Von der Heyden, tells us that he consulted Knight Frank Nieruchomosci only when establishing the compensation payment on the basis of market rents. "I am pretty sure that all market participants are professional enough to assist their clients in such operations, be it the tenant or landlord. However, one has to be very flexible in one's approach. I see too many deals in Poland going sour because of a particular party's pride."

Not everyone wants to buy out
It might seem that buying out leases is an attractive option for a developer involved in a new project or just after its completion.
"It's difficult to say whether only owners of new buildings will sign such deals, because what does "new" mean anyway?" asks Godzisz. "As far as I'm concerned, owners of office buildings which haven't been entirely leased out, such as Reform Plaza and Warsaw Trade Tower, might also decide to do this. I believe that buying out is a result of market pressures, rather than the inclination of developers or investors. In our case, [the company is constructing the Metropolitan office building on pl. Piludskiego in Warsaw], attracting a tenant by buying out their current lease has never been a consideration. What we offer is a reasonable market rate for excellent offices and this gives us good grounds to think that we have a high quality product that will be accepted on satisfactory conditions. We're positive that costly moves such as buying out leases will not be necessary."
Sven Von der Heyden, whose group is about to complete construction of an office building on ul. Mysia in Warsaw, won't however rule out the buying out method of tempting tenants and adds mysteriously: "God will lead the way...".