YOU’RE BEING BLUFFED IN YOUR LEASE NEGOTIATIONS AND IN POKER

YOU’RE BEING BLUFFED IN YOUR LEASE NEGOTIATIONS AND IN POKER

This strategy applies as much to negotiations as it does to playing poker. In every deal there comes a time when you just do not have the needed leverage, although you feel confident you could overpower the opponent and win anyway. Other times you may feel you are being pushed around—or, bluffed—by the other side of table. There are many times in Commercial Real Estate leasing where the landlord tells the tenant they have another tenant who is negotiating for the space. On a renewal, they may say there is a tenant who wants to take your entire floor. Are you being bluffed.

On the other side, there are times when we need to tell the existing landlord that we are moving in order to get the best renewal lease transaction.

Without a clear read or understanding on the situation, either play you initiate could be negative. I started playing poker about six months ago with some golf friends at my country club. Quickly I realized it had a strange similarity to the negotiations and the deal making process that I had done for so many years in real estate. Intellectually speaking, it certainly was not just a card game. Poker had captured my attention, so I began to study the game. Mainly because I did not want to continue to hand over good money to my friends!  Rooted in Nash’s game theory, bluffing in poker is all about the predictability of others at the table and their assumptions of my actions. Before long, I could analyze the betting pattern, the position at the table, and cards already showing and determine within a defined range what cards the other players had. I focused on the likelihood of the other player’s hand. My own cards held much less importance to me. What I projected that shaped what others at the table think I had mattered, but only in comparison to the range hands my opponent would fold, call, bet or raise.

For example, in a six-player game with the blinds (what a player must bet in the first and second position after the dealer) at $2 small blind and $4 big blind, a player to my right bets $12 after the first two cards and the other 4 players decide not to play. There are only two players and I’m in the big blind and have $4 on the table. It is $8 for me to call and see 3 more cards of the 5 left to be dealt. Historically, I know my opponent Mike is very aggressive with his betting and bluffing. I think his range of hands he could be pretty good, AK, AQ, AJ, A10 or a small pocket pair. The reason I know this is because of his historical betting pattern. If he had AA’s or KK’s he would have bet $24 or $36 or he would make the same sized bet if he was bluffing. The question I ask myself is what are the mathematical probabilities of him having a great really hand? An ace within the next three cards are less than 16% (48 cards divided by 3 aces). Without having looked at my cards, I raised his bet three times to $36. The money on the table was now $78 and he slowly added the necessary money to call my bet. I knew he thought I had a large pair with my raise, which is exactly what I wanted him to think.  Anything other than an ace, I would be betting again. The next three cards were Q, 9 and 8 and he decided not to bet and let me be the first to take action. I’d bet 50% of the money on the table or $39, with the knowledge he only had a 16% chance to have a queen. Here is how the math works. In business, we make bets similar to this all the time. If I purchase the inventory for $36K the know odds tell me I could sell the product for $65K. I was trading a bet of $39 with the odds telling me statistically I should win $65.50. The odds were in my favor. He folded and asks to see my cards. I looked down at my 7 and 3 and said, “Not this time.”  In poker as in deal making knowing the range of leverage of an opposition in a real estate negotiation and their perception of your leverage will bring clarity to the stance you can take.  Bluffing is dangerous without the proper odds. Knowing the average rents in the building and market concessions can shape your position. If the monthly average revenue for a 100,000 square foot is $200,000 or $2.00, offering a, ‘take it or leave it offer’ at $1.25 is a bad bet. The odds of the landlord accepting the offer are minimal. When there is knowledge of the landlord’s range of hands being a low of $1.85 to a high of $2.15, with adequate $78 x 16% chance of him having Q’s = 12.50 Odds $78 x 84% chance he did not = $65.50 Odds leverage there are good odds a $1.75 is achievable in a pure bluff. Of course, there are many more components of a commercial real estate deal, but I expect this provides a reasonable example.  On the flip side, when a landlord claims to have multiple tenants interested in your targeted space the real estate market may expose their position. The suitability of the space for other tenants given the wide spectrum of space availability can provide further clarity. The passive or aggressive nature of the landlord is another (poker term) ‘tell’. Taking multiple factors into consideration to establish from their perspective the value they have placed on having you as a tenant, you are then ready to decide if winning this point is worth 50% of your poker chips.

If you find yourself entering a negotiation with your commercial landlord on any level, please contact me.

Forrest Blake | Senior Vice President

SVN | Commercial – DTLA

800 South Figueroa Street, Suite 925, Los Angeles, CA 90017

Phone 213.618.4196 | Mobile 310.850.2381

forrest.blake@svn.com | www.svn.com

CalDRE# 01054174

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