Creating Flexibility, Maximizing Leverage

CC Sabathia is the ace of a thin Yankee pitching staff.  Since coming to New York three years ago as a free agent, he has won 57 regular season games, pitched over 230 innings each year, and led the team to the 2009 World Series Championship.  Great stuff. Three years ago, Sabathia's agent, Brian Peters, did something very smart.  He convinced the Yankees to give him an opt-out clause which could be exercised after the third year of the contract (this year).  His reasoning was that the Sabathia family might not like New York and wanted the comfort of knowing that they could move if it wasn't working.  His current deal has four years remaining for a total of $92m. Coincidentally, Sabathia turned 31 years old this summer.  If you are an overweight left-handed pitcher and looking to maximize your earnings in your mid-late 30's, the best way to do that is with a long-term contract in your early 30's, at your prime.

So now the Yankees are faced with some serious questions.  What do they do if Sabathia opts out of his contract?  Do they give him another two or three years at $23m per year (his current contract amount)?  Do they let him leave and try to replace him?  Do they try to put a weight clause in his contract?

In my opinion, Sabathia has all of the leverage.  The Yankees do not have a viable fall back position.  There aren't any ace pitchers available via free agency this winter and the likelihood of trading for a true ace is pretty slim.  Had they been successful in signing Cliff Lee last year, things would be different.  However, without Sabathia, there is no ace, no anchor, and very little hope. 

Had Sabathia had a sub par season, he wouldn't dream about opting out of the contract.  Teammate Rafael Soriano has a similar clause that he will not be exercising given his performance this past season and the abundance of relievers hitting the free agent market this winter.

In real estate, termination and contraction options provide tenants with similar leverage.  In a down market, tenants can use these options to renegotiate the rent, give back excess space and basically right any wrongs within the lease.  In a tenant's market, landlords are much more willing to provide this flexibility to tenants to win the deal.

In 2009, in the early stages of the financial crisis, we approached landlords on behalf of some of our corporate accounts for a rent reduction in exchange for more term.  We didn't have termination or contraction options in many cases, but landlords were desperate for stability in an unstable environment and agreed to the restructured terms.

Because the deals we did two years ago all contained some sort of flexibility, we are going back to the same landlords and either lowering our rent again or giving back space.  Currently, we are in the midst transactions in Portland, Pittsburgh, Scottsdale and here in New Jersey, all where the tenant is getting a better deal due to the leverage created by lease flexibility.  Of course, if it was a landlord's market, we wouldn't be exercising these options, but rather enjoying the balance of the term at below market rents.

Our clients are having increasing difficulty with long term planning.  However, they want to take advantage of the current market conditions which in most markets is very favorable.  Termination and contraction options are what allows these companies to do just that while maintaining flexibility that is key moving forward in to further uncertain times. 

CC Sabathia will use his leverage to sign a new contact in the coming weeks, hopefully with the Yankees, that will likely increase the value of his current deal by over $40m. He can only do so because his agent negotiated the right deal going in.  A real estate deal is no different.