Strategy/Approach to Negotiating with Commercial Real Estate Developer

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FRefugee
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Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by FRefugee » Thu Dec 27, 2018 1:44 pm

Good afternoon, and thanks for any insight you might be able to provide on this question.

I'm in the Austin area and live downtown. My mom lives on the outskirts of town in an area that is experiencing astronomical growth and commercial development. The facts:

- her property is a shade under 2 acres;
- her neighbor's property (identical plat) sold to a commercial developer in June of 2018 for $855K; and
- this same developer has recently approached her to discuss her interest in selling the property.

The developer is going to be meeting with my mom and I in a couple of weeks. My questions are as follows:

1. Anyone been in a similar negotiation and have any macro/micro considerations to recommend that I keep front and center?
2. As far as taxes go, will she be taxed on the amount above that which she puts into another homestead within one year from date of purchase? If so, any suggestions as to how best minimize the tax impact?
3. This developer likely has had his eye on her property since the moment he purchased the adjacent lot. What do you all think his pain points are other than the obvious one of acquisition cost? I'm thinking he wants to get this deal done sooner rather than later in order to coordinate the development with the adjacent property and also get his/his investors' money into the pot before rates go any higher (assuming there will be some debt involved but hope to get a clearer picture of his firm's capital mix at the meeting). How confident should I be in the leverage of my mom's position in terms of negotiating a price?

My mom is in no hurry to move out. She moved into the house in 2015 and we've put about $20K of work into the home. It's a real nice piece of property and I have a hard time seeing a scenario in which waiting doesn't pay off.

Any general advice is greatly appreciated!
Geopolitical and demographic forces are so rooted in the unchangeable that political action often generates little but noise. -Zeihan

retire2022
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by retire2022 » Thu Dec 27, 2018 1:50 pm

Op

While I am not in your area, I am aware of 1031 exchange.

https://www.irs.gov/businesses/small-bu ... e-tax-tips

This will minimize taxes, the caveat is she need to convert this to rental property, for this to work.

I suggest you consider contacting a real estate attorney who has lots of experience with 1031 in Austin Texas and would not go into negotiation without an attorney.

If she does not want to liquidate, I assume she has an estate plan.

stan1
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by stan1 » Thu Dec 27, 2018 2:46 pm

How much did she pay for the property in 2015 and is there a house on the property that she is using as her primary residence or is it vacant land? If it is her primary residence she could exclude $250K of gain assuming she is single ($500K if married).

If there is a house on the land the developer may want to subdivide the land (keeping an existing house or razing it). You'd want to understand what the local zoning rules are about subdividing the property (if there are any).

I don't know if I would pay for an attorney. I'd start high and then see what they are willing to come down to. Your mom may no longer want to live there if her neighbor's two acre parcel has 4 or 6 houses packed on it.

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FRefugee
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by FRefugee » Thu Dec 27, 2018 4:33 pm

stan1 wrote:
Thu Dec 27, 2018 2:46 pm
How much did she pay for the property in 2015 and is there a house on the property that she is using as her primary residence or is it vacant land? If it is her primary residence she could exclude $250K of gain assuming she is single ($500K if married).

If there is a house on the land the developer may want to subdivide the land (keeping an existing house or razing it). You'd want to understand what the local zoning rules are about subdividing the property (if there are any).

I don't know if I would pay for an attorney. I'd start high and then see what they are willing to come down to. Your mom may no longer want to live there if her neighbor's two acre parcel has 4 or 6 houses packed on it.
Thanks a lot. She paid <$200K for the property, and has used the home as her primary residence since then. Converting to rental is not an option so that rules out 1031 Exchange. The parcel next door has been zoned commercial, and hers has already been cleared for commercial use by the county, so the house will certainly be razed to the ground (Is that redundant? I don't think objects can be razed anywhere else).

I'm interested to know if the developer would be willing to cut her a portion of the monthly lease proceeds upon project completion in exchange for a slight discount on the property. Minimizes the immediate impact of the taxes due and provides a nice little revenue stream for her later years. Will have to PV that out to see what amount makes sense given actuarial table, but could be something to consider.
Geopolitical and demographic forces are so rooted in the unchangeable that political action often generates little but noise. -Zeihan

stan1
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by stan1 » Thu Dec 27, 2018 6:44 pm

FRefugee wrote:
Thu Dec 27, 2018 4:33 pm

I'm interested to know if the developer would be willing to cut her a portion of the monthly lease proceeds upon project completion in exchange for a slight discount on the property. Minimizes the immediate impact of the taxes due and provides a nice little revenue stream for her later years. Will have to PV that out to see what amount makes sense given actuarial table, but could be something to consider.
You can ask for whatever you want, but I think they would say no to that. How old is she? Maybe buy an appropriate vetted annuity product instead.

If the lot next to hers is going to be developed commercially to be honest she should get out now and be lucky to get as much as the neighbor did. The developer will certainly say to her "you don't want to live next to McDonald's or a truck stop, do you? Get out now while I've got a deal for you."

riverguy
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by riverguy » Thu Dec 27, 2018 7:05 pm

$200k in 2015, sell for $855k in 2018. Pretty good return.

Why would you want to get involved in taking a portion of their lease proceeds? They aren't going to go for it and that just sounds messy. You get a significant portion of it covered by the personal residence exemption, long term cap gains and no income tax in Texas. Sometimes you just have to pay taxes...

We don't know the specifics of the plot of land and whats around it, but don't get too greedy and get built around and have your land end up becoming virtually worthless.

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snackdog
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by snackdog » Thu Dec 27, 2018 7:33 pm

Get a lawyer with good contacts and see if any other commercial types are interested. A bidding war could be beneficial to your mother. Also, the deal with both lots could be worth more than double with one lot, so your mom's lot could be worth more than the neighbors. What else is around the area which you could buy or the developer could be eyeing?

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FRefugee
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by FRefugee » Thu Dec 27, 2018 8:14 pm

snackdog wrote:
Thu Dec 27, 2018 7:33 pm
Get a lawyer with good contacts and see if any other commercial types are interested. A bidding war could be beneficial to your mother. Also, the deal with both lots could be worth more than double with one lot, so your mom's lot could be worth more than the neighbors. What else is around the area which you could buy or the developer could be eyeing?
I like the way you think and agree with you. This area is absolutely booming, both residentially and commercially. I don't think there's outsized risk in slow-playing this hand and involving other developers. Her property is well-situated in the sense that it's only 1/10th of a mile from the major intersection around which all of this commercial development is occurring.

We'll be looking south of town for her next (and likely final) home. Money goes further down that way. As far as what the developer could also be eyeing, there are residential lots of a similar size all the way down the road (3+ miles), but my mom's is the one closest to the intersection and adjacent to the lot they've already committed capital to developing (the Cats are on-site and septic work is underway).
Geopolitical and demographic forces are so rooted in the unchangeable that political action often generates little but noise. -Zeihan

DaBombCat
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by DaBombCat » Fri Dec 28, 2018 12:28 am

FRefugee wrote:
Thu Dec 27, 2018 4:33 pm
I'm interested to know if the developer would be willing to cut her a portion of the monthly lease proceeds upon project completion in exchange for a slight discount on the property. Minimizes the immediate impact of the taxes due and provides a nice little revenue stream for her later years. Will have to PV that out to see what amount makes sense given actuarial table, but could be something to consider.
It seems that trading a share of the development project with your mom in return for her land would have several advantages to the developer:
$900k that he doesn’t have to raise.
Saves developer $53k/year in interest expense plus $24k/yr in principle payments on current comm loan rates.
If your mom offers low or no upfront payment, he’d probably poop his pants.

It depends on the developer’s needs and your mom’s needs. But it appears that many investors would consider those terms to be very valuable. Best wishes on this negotiation!

dknightd
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by dknightd » Fri Dec 28, 2018 12:36 am

If I could get 300% appreciation in 3 years I'd sell and be happy

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CaliJim
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by CaliJim » Fri Dec 28, 2018 12:46 am

hang tough. slow play it.

The developer most likely wants the property very very badly.

Can you figure out what his economic model is for the property?

What building permits he has pulled. Look at the his plans for the adjacent property if you can. Get friendly with a the county planners and building permit folks. Pump them for info. Figure out what exactly he wants to build on your mom's lot.

Don't counter any low ball offers with a 'meet in the middle' number. Don't be afraid to raise him. I think it is very very very very unlikely that he will walk away from the table.

Find another developer to be a spoiler in your negotiations. Competition helps a great deal!

(I overpaid a little bit for the lot I currently own and built a new house on because the 'old lady' who owned the place refused to be come down in price and every time we made an offer, she countered with a higher and higher number. When we went low, she went high. At the end, she brought in the possibility of a second, possibly 'ficticous', buyer, waiting in the wings. I eventually took the wind out of her sails by accepting her counter offer.)

Be a tough cookie. Raise the stakes. Smoke them out!

Hire a pro (realtor, lawyer) to negotiate for you.
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helloeveryone
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by helloeveryone » Fri Dec 28, 2018 10:34 am

FRefugee wrote:
Thu Dec 27, 2018 4:33 pm
stan1 wrote:
Thu Dec 27, 2018 2:46 pm
How much did she pay for the property in 2015 and is there a house on the property that she is using as her primary residence or is it vacant land? If it is her primary residence she could exclude $250K of gain assuming she is single ($500K if married).

If there is a house on the land the developer may want to subdivide the land (keeping an existing house or razing it). You'd want to understand what the local zoning rules are about subdividing the property (if there are any).

I don't know if I would pay for an attorney. I'd start high and then see what they are willing to come down to. Your mom may no longer want to live there if her neighbor's two acre parcel has 4 or 6 houses packed on it.
Thanks a lot. She paid <$200K for the property, and has used the home as her primary residence since then. Converting to rental is not an option so that rules out 1031 Exchange. The parcel next door has been zoned commercial, and hers has already been cleared for commercial use by the county, so the house will certainly be razed to the ground (Is that redundant? I don't think objects can be razed anywhere else).

I'm interested to know if the developer would be willing to cut her a portion of the monthly lease proceeds upon project completion in exchange for a slight discount on the property. Minimizes the immediate impact of the taxes due and provides a nice little revenue stream for her later years. Will have to PV that out to see what amount makes sense given actuarial table, but could be something to consider.
I would recommend and attorney. she stands to make a nice profit. A hourly based attorney may give you good insight and easily offset whatever attorney fees are if they help maximize profits.

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FRefugee
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by FRefugee » Fri Dec 28, 2018 10:37 am

CaliJim wrote:
Fri Dec 28, 2018 12:46 am
hang tough. slow play it.

The developer most likely wants the property very very badly.

Can you figure out what his economic model is for the property?

What building permits he has pulled. Look at the his plans for the adjacent property if you can. Get friendly with a the county planners and building permit folks. Pump them for info. Figure out what exactly he wants to build on your mom's lot.

Don't counter any low ball offers with a 'meet in the middle' number. Don't be afraid to raise him. I think it is very very very very unlikely that he will walk away from the table.

Find another developer to be a spoiler in your negotiations. Competition helps a great deal!

(I overpaid a little bit for the lot I currently own and built a new house on because the 'old lady' who owned the place refused to be come down in price and every time we made an offer, she countered with a higher and higher number. When we went low, she went high. At the end, she brought in the possibility of a second, possibly 'ficticous', buyer, waiting in the wings. I eventually took the wind out of her sails by accepting her counter offer.)

Be a tough cookie. Raise the stakes. Smoke them out!

Hire a pro (realtor, lawyer) to negotiate for you.
Thanks CaliJim! Very helpful advice and insight. Gametime! :sharebeer
Geopolitical and demographic forces are so rooted in the unchangeable that political action often generates little but noise. -Zeihan

J295
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by J295 » Fri Dec 28, 2018 10:59 am

I’m guessing in a community the size of Austin there are only a few lawyers who really knows the lay of the land in something like this. Sure, there will be a lot of real estate lawyers, but not that many with superior insights on how this process really works. The superior ones may have conflicts, but hopefully you can find one who can assist you. You will also need to have professional accounting advice.

While I understand the enthusiasm for an aggressive attitude, I generally keep in mind the saying that pigs get to eat and hogs get slaughtered.

A situation like this can work out wonderfully for the property owner, or can come crashing down if it doesn’t get accomplished because of unreasonable expectations. Slow play… Might be a wonderful strategy ..... unless the developer gets into a financial bind, the economy rapidly changes like it did in 2008 -09 and impacts development, etc. i’m not suggesting a strategy one way or the other, just noting that a balanced professional perspective will likely be very helpful as you navigate this.

Best of luck. From what you described, it sounds like it has the potential to be a very nice financial opportunity for your mother.

Murgatroyd
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by Murgatroyd » Fri Dec 28, 2018 11:08 am

Pull a D&B on the developer and an do an exhaustive search on his business practices.

stan1
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by stan1 » Fri Dec 28, 2018 11:12 am

OK, looks like you've decided what you want to do. I'd just keep your mom's needs in mind. Maybe she has $1M in a 401K to fall back on, maybe her kids will bring her into their home if she needs nursing home care, or maybe the $500K plus or minus gain on this sale after taxes will give her peace of mind for the rest of her life that her needs are met.

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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by Saving$ » Sat Dec 29, 2018 10:04 pm

Do NOT mention any complicated issues such as a lower selling price for a share of the deal, etc.

Just meet with the developer and let developer talk - you may find out some good info on what his/her pressure points are. Let the developer make the first purchase price offer, knowing it will be a lowball offer. Don't react to the price in any way. Find out what their timeline is, and ask questions you probably know the answer to, but ask anyway - does the house need to be fixed up before the sale, etc. etc. Find out if there is any advantage to a quick closing - ie does the developer want to fold the construction on the lot next door and future construction on your mothers lot into one project for economies of scale? The ability to do that might compel them to pay a bit more for the lot.

After the meeting determine if there is another developer who is interested. If so, you can go back to this one and negotiate hard.

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CaliJim
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by CaliJim » Mon Dec 31, 2018 12:23 pm

helloeveryone wrote:
Fri Dec 28, 2018 10:34 am
FRefugee wrote:
Thu Dec 27, 2018 4:33 pm
stan1 wrote:
Thu Dec 27, 2018 2:46 pm
How much did she pay for the property in 2015 and is there a house on the property that she is using as her primary residence or is it vacant land? If it is her primary residence she could exclude $250K of gain assuming she is single ($500K if married).

If there is a house on the land the developer may want to subdivide the land (keeping an existing house or razing it). You'd want to understand what the local zoning rules are about subdividing the property (if there are any).

I don't know if I would pay for an attorney. I'd start high and then see what they are willing to come down to. Your mom may no longer want to live there if her neighbor's two acre parcel has 4 or 6 houses packed on it.
Thanks a lot. She paid <$200K for the property, and has used the home as her primary residence since then. Converting to rental is not an option so that rules out 1031 Exchange. The parcel next door has been zoned commercial, and hers has already been cleared for commercial use by the county, so the house will certainly be razed to the ground (Is that redundant? I don't think objects can be razed anywhere else).

I'm interested to know if the developer would be willing to cut her a portion of the monthly lease proceeds upon project completion in exchange for a slight discount on the property. Minimizes the immediate impact of the taxes due and provides a nice little revenue stream for her later years. Will have to PV that out to see what amount makes sense given actuarial table, but could be something to consider.
I would recommend and attorney. she stands to make a nice profit. A hourly based attorney may give you good insight and easily offset whatever attorney fees are if they help maximize profits.
+1
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CaliJim
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by CaliJim » Mon Dec 31, 2018 12:24 pm

J295 wrote:
Fri Dec 28, 2018 10:59 am
I’m guessing in a community the size of Austin there are only a few lawyers who really knows the lay of the land in something like this. Sure, there will be a lot of real estate lawyers, but not that many with superior insights on how this process really works. The superior ones may have conflicts, but hopefully you can find one who can assist you. You will also need to have professional accounting advice.

While I understand the enthusiasm for an aggressive attitude, I generally keep in mind the saying that pigs get to eat and hogs get slaughtered.

A situation like this can work out wonderfully for the property owner, or can come crashing down if it doesn’t get accomplished because of unreasonable expectations. Slow play… Might be a wonderful strategy ..... unless the developer gets into a financial bind, the economy rapidly changes like it did in 2008 -09 and impacts development, etc. i’m not suggesting a strategy one way or the other, just noting that a balanced professional perspective will likely be very helpful as you navigate this.

Best of luck. From what you described, it sounds like it has the potential to be a very nice financial opportunity for your mother.
+1
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CaliJim
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by CaliJim » Mon Dec 31, 2018 12:24 pm

Saving$ wrote:
Sat Dec 29, 2018 10:04 pm
Do NOT mention any complicated issues such as a lower selling price for a share of the deal, etc.

Just meet with the developer and let developer talk - you may find out some good info on what his/her pressure points are. Let the developer make the first purchase price offer, knowing it will be a lowball offer. Don't react to the price in any way. Find out what their timeline is, and ask questions you probably know the answer to, but ask anyway - does the house need to be fixed up before the sale, etc. etc. Find out if there is any advantage to a quick closing - ie does the developer want to fold the construction on the lot next door and future construction on your mothers lot into one project for economies of scale? The ability to do that might compel them to pay a bit more for the lot.

After the meeting determine if there is another developer who is interested. If so, you can go back to this one and negotiate hard.
yes... let them make the first offer. rule #1 of negotiating!
good practical advice
+1
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HEDGEFUNDIE
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by HEDGEFUNDIE » Tue Jan 01, 2019 1:14 am

CaliJim wrote:
Mon Dec 31, 2018 12:24 pm
Saving$ wrote:
Sat Dec 29, 2018 10:04 pm
Do NOT mention any complicated issues such as a lower selling price for a share of the deal, etc.

Just meet with the developer and let developer talk - you may find out some good info on what his/her pressure points are. Let the developer make the first purchase price offer, knowing it will be a lowball offer. Don't react to the price in any way. Find out what their timeline is, and ask questions you probably know the answer to, but ask anyway - does the house need to be fixed up before the sale, etc. etc. Find out if there is any advantage to a quick closing - ie does the developer want to fold the construction on the lot next door and future construction on your mothers lot into one project for economies of scale? The ability to do that might compel them to pay a bit more for the lot.

After the meeting determine if there is another developer who is interested. If so, you can go back to this one and negotiate hard.
yes... let them make the first offer. rule #1 of negotiating!
good practical advice
+1
Just the opposite, actually.

https://www.pon.harvard.edu/daily/dealm ... otiations/
The negotiators who made the first offer felt more anxiety than those who did not – and, as a result, were less satisfied with their outcomes. Yet, backing up prior bargaining studies, those who made first offers did better in economic terms than those who did not.

The implication?

Advantages of Using Anchoring in Negotiation

If you value only the economic outcome of your deal, make the first offer in order to anchor the negotiation in your favor. But if you value satisfaction with the negotiation process more than the outcome itself, you may want to avoid the stress and anxiety of making the first offer.
This is what they teach in Negotiations courses at the top MBA programs.

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CaliJim
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by CaliJim » Tue Jan 01, 2019 1:31 pm

I guess my mba program was not top tier! lol
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HEDGEFUNDIE
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Re: Strategy/Approach to Negotiating with Commercial Real Estate Developer

Post by HEDGEFUNDIE » Tue Jan 01, 2019 1:49 pm

Speaking of negotiations theory, what the OP suggested with a cut of the future lease, while unconventional, can be leveraged during the negotiation to his benefit.

Instead of negotiating on a single issue, OP could present a “multiple equivalent simultaneous offer”. In other words, two or more offers that vary along a few issues but are economically equivalent:

1. A lower purchase price but a cut of any future lease
2. A higher purchase price, no cut of future lease

Presenting both offers simultaneously has the effect of decreasing the other side’s focus on any particular issue, especially an issue that you may care more about. It also enables you give more on something you don’t care about to get something in return that you do.

Even if the lease share is a nonstarter, the mere act of you introducing the idea gives more credence to offer #2, when just presenting offer #2 on its own may not get a great reception.

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