Wednesday, May 18, 2011

Business Tenant Representation –the cost and pain from not having a good tenant rep broker

Lots of brokers talk about representing tenants in leasing space, but do they really?  Well, there are three main things that should get your attention – value for your money (yes, it truly is your money even if brokers tell you it’s free because the landlord is writing the check), accountability in the relationship, and, ultimately, the end results.

A little background may be helpful…  Landlords hire a listing broker to market their space and agree to pay a percentage or a $ amount per foot to the brokers for leasing their space.  The listing broker agrees to share the fee with another broker who brings a tenant to the table or is working with the tenant.

However, think about that for a minute – do you include sales costs when you calculate your costs when going after a large sale?  Of course you would – and so do landlords.  The money paid by you for rent going forward absolutely includes the costs the landlord pays for this process, which by design is to lease their space – not to ensure you as a tenant are getting the right deal for your business. It’s nice from a cash flow perspective to be able to use someone that is being paid directly by the landlord, but since you are paying it over time you’d be well served to think of it as your money and get that value of service out of the process.

So what’s the value to you for this money?  Reflect on the amounts – it’s common in downtown office space in today’s environment for the broker representing the tenant to get 5% of the total lease amount or over $5/sq.ft.  If you’re leasing 5,000 square feet, your broker is probably getting north of $25,000.  If you were hiring a consultant to provide you with $25,000 of professional service – an attorney or accountant, for example - what level of clarity in scope of work, documentation and understanding of process and project would you expect?  You should expect this level of professionalism from a broker who represents you in a lease negotiation as well. The stakes are high if the broker doesn't have your back in the process.

Many brokers who want to represent you won’t clarify the relationship and scope of work for two reasons.  One, they aren’t usually held accountable for clarifying their relationship or scope of work.  The second is that they have a conflict of interest they’d rather not discuss.  They work for firms with signs up on buildings – meaning the firm represents landlords.  If they represent landlords and they want to represent you and the landlord and you have many polar opposing objectives in the negotiations – well, you see the problem.

To represent you fully, true tenant rep brokers – and there are a few to choose from – need to only represent and negotiate for tenants.  

So at this point you may be saying, “Kevin, who really cares?  I mean, isn’t all that matters that we reach a mutual agreement?” To answer that I’ll share some quick issues I’ve helped people with after they used the wrong broker to help them …
  • Dramatic expense increases due to the poor wording of how operating costs are calculated and passed through
  • Trouble with closing business expansion equity deals due to bad language around “assignment” of the lease, giving the landlord the ability to terminate a least due to partial ownership changes
  • Derailed sale of businesses due to related issues around assignment and subletting
  • Expensive problems relative to timing on renewals, expansions or early terminations and related unequal language around the process of determining “fair” market value
  • Not including all costs in alternative to alternative net present value comparisons, proving for substantial unexpected costs only clear after the lease was already agreed to
It’s better of course to hire a better broker in the first place. 

These issues are really important, often critical to a business.  A broker who really has the tenant’s interest at heart will not shirk the negotiation duties around these issues, or gloss over them because they are inconvenient and with some landlords can be very contentious.  Experience and skill applied to a well understood set of tenant’s needs in  a context of truly representing the tenant will produce the best outcome.

So, ensure you don’t pay dearly by hiring the wrong broker.  When selecting someone, discuss the issues and process to a standard or level that you would your legal or accounting service providers.  Hold the person and team accountable for professionally  representing you, treat them as the consultant and adviser they should be for you given the money they’ll get for representing you in the deal.  Ensure they really do take care of you through the process.

Kevin Grossman has been helping businesses make sound business space decisions since the 80’s.  His “real estate department for hire” approach ensures clients are asked the questions, really listened to and then receive the service to make and implement the best overall decisions for their company.  Kevin can be reached at 206.730.5567 or via email at

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