A Tenant Rep Broker Might Add Value to Your Commercial Real Estate Lease.
Many business owners grapple with the question of hiring a broker or working on their own when it comes to executing a lease for commercial space, be it for office, retail, restaurant, warehouse or industrial use. Understanding the value a tenant rep can bring to the process, especially when it comes to negotiations with a landlord or listing agent, will help you determine if you should engage one.
The Starting Point for Most Prospective Tenants
Companies seeking small blocks of office space often begin by calling phone numbers listed on the exterior of buildings or searching websites online.
Susan Sonley, senior managing director with Kent Commercial, Inc., based in Rockville, Maryland, specializes in tenant representation services. During her decades in the industry, business owners have repeatedly told her stories about inquiring into available space in a building, based on a sign advertising ‘Space For Lease,’ only to learn that the building is full. Sonley noted, “the listing brokers leave them up as advertising even when buildings are full.”
Michael Karp, a managing director with Cushman & Wakefield in the San Francisco Bay Area, estimates that about 10% of tenants in his area search for space online. He noted that in his region, “We do have people that are in the tech sector that, I think, feel that the online information is adequate for their purposes.” He noted that the transaction is not completed exclusively online; eventually they interact with the listing agent to close the deal.
The Difference Between a Landlord Rep and a Tenant Rep
Commercial real estate leases are not offered at fixed prices. They are negotiated based largely on the supply of and demand for the type of space you are looking for in a market or submarket. If vacant space is abundant, the tenant will likely be able to press the landlord for lower rates and more concessions, such as months of free rent. If vacant space is limited, the tenant will have less bargaining power and likely pay higher rental rates and receive limited concessions as part of their lease.
These dynamics lead to a dance between the broker representing the landlord and the broker acting on behalf of the tenant. A landlord rep, also called the listing agent, is bound to represent the interests of the building owner/landlord. This professional advocates on behalf of the building owner, working so the tenant pays as much as possible in rent and the landlord puts forth as little as possible in expense coverage and concessions.
On the other side is the tenant rep. Their role is to advocate for the tenant and ensure that the rental rate, expenses and concessions agreed to with the landlord reflect current market conditions, so the tenant is not paying more than they need to pay to be in a particular building.
Keep in mind that when you call a broker inquiring about available space, you are typically talking with the listing broker that represents the owner’s interests.
Finding a Tenant Rep
Calling a commercial brokerage firm and asking to speak with a tenant rep is easy to do and does not cost any money. Discuss your space requirement, and if the conversation is meaningful and informative, plan to follow up. However, don’t be afraid to shop around. Call additional brokerage firms and have the same introductory conversation with various tenant rep brokers. Find one with whom you communicate well and begin your space search with them.
To conduct a more thorough, apples-to-apples comparison among brokers, consider issuing an RFP or RFQ (Request for Proposals or Qualifications). Include information such as general background about your company, a high-level description of your space requirements and an overall schedule, so brokers understand the scope and timing of your assignment.
Once you settle on a broker, they will likely want you to sign an exclusive agreement that says you agree to work with them alone on this search and they will earn a commission once all parties have executed the lease. This gives them confidence that you will not move to another broker or firm midway through the process, after they have invested time and resources in your project. Before you sign, be sure this individual has the capacity and experience to work on your space search.
Broker Interest and Size Requirements
Some space requirements are too small for brokers to spend their time on, so don’t be discouraged if they turn you down. Instead, know your options.
For all types of commercial space, characterization of space requirements as small or large vary greatly by market. In the office sector, for example, most real estate professionals in major U.S. markets have a cut off in the range of 1,000 to 2,500 square feet, while brokers in larger markets may have a threshold of 5,000 to 10,000 square feet.
Brokers are sometimes reluctant to take on a small assignment for a business because the amount of time required for it, typically equates to the time required for a large assignment that would yield a bigger commission. Sonley says that small requirements are also difficult to accommodate on the landlord side. “A landlord is going to be highly reluctant to modify a 1,000-square-foot space because the cost of construction outweighs any benefit to the landlord on a lease.”
But there are exceptions for small companies that show they are financially sound and growing. Sonley noted, “as a personal favor to somebody, I will work with a 1,000- to 1,500-square-foot search, but it’s important that the tenant has a reasonable growth plan.”
For very small office assignments, brokers recommend that businesses reach out to shared space operators of co-working or executive suite environments. Additionally, they recommend that you consider leasing space that is “move-in” ready directly from a landlord. Such spaces do not require major construction and are sometimes referred to as pre-built or speculative suites.
The Tenant Rep’s Value-Add
A tenant rep broker guides a tenant through the process they will undertake when searching for space, negotiating a lease, and if necessary, building out interior space. Over the course of this undertaking, the tenant rep brokers that LoopNet spoke with believe they add the most value for the tenant in the following ways:
Provide current market data. Dave Millard is a principal Avison Young, based in Tysons, Virginia. Having represented both landlords and tenants in lease negotiations throughout his 35-year career, he noted that good tenant reps continuously collect “lease comps,” which are essentially data points and terms pertaining to leases recently signed in a market or submarket. Unlike building sales, signed leases are not part of the municipal public record. Brokers have access to private databases that house some of this information and they also rely on their day-to-day interactions with other brokers and landlords to gather and understand the parameters of recently completed leases.
Millard noted that, “lease comps have a shelf life of no more than about nine months, and more likely three- to six- months, because the market changes. A good tenant rep should have access to the latest information that is not publicly available,” so they can work to ensure their client executes a market-rate lease and is not locked in to a lease that is more expensive than it should be, given current market conditions.
Save the tenant valuable time. Millard noted that saving time is especially critical for a small business where the owner is wearing multiple hats and focusing on daily operations. He said that small business owners do not have time to “get in a car, drive around, take down the phone number of every leasing sign [they see], then call each of those brokers.”
Knowing which blocks of space are available in a tenant’s targeted neighborhood and budget is a core area of knowledge for a good tenant rep. They can access information from databases and fill in blanks about the listings using their market knowledge and their professional relationships. From these sources, they provide a list of five to 10 viable options in the right locations and price points for the tenant. Additionally, once the search is narrowed to the final two to three spaces, they arrange for tours of the properties with the landlord or listing agent.
As Karp explained, a tenant rep “connects the users with the right spaces; without someone who’s dedicated to knowing where all those spaces are, its very time consuming for a business owner to figure this all out.” He emphasized that working with a tenant rep is even more beneficial in “product constrained” markets or markets where there is very little space available for lease. In those cases, he said “it’s very hard to get the right information and then find the right economic deal.”
Provide guidance around lease negotiation and execution. Millard noted that a tenant should always have a knowledgeable real estate attorney involved in the lease negotiation. He consistently encourages his clients to hire one and they are free to select whomever they like. However, he typically provides the names of at least three he has worked with and found knowledgeable and thorough so clients can consider them, if they wish.
Sonly added , “In every case, when I negotiate a lease, I go over the lease and red-line it with my own comments” about current market pricing. She noted that the lawyer will ensure that clauses are accurate and protect the tenant legally, but she focuses on things that affect the day-to-day costs for the tenant, like escalation clauses and expenses that the landlord may pass through to the tenant.
Sonley said that the more detail you include in the nonbinding letter of intent, the better. Details about tenant improvements and getting the architect to generate a plan the tenant is comfortable with should be featured. She said, “I try and put that in the letter of intent, and then, whatever that language is, pick it up and put it in the lease as an exhibit so there are no questions about what the landlord is paying.”
Continue to counsel the tenant after the lease is signed. Once the lease is signed, legally the broker’s job is done. However, typically they do not get paid until the tenant receives his occupancy certificate, so the broker has an incentive to at least keep a watchful eye on any construction or build-out that might need to take place.
Most brokers, however, do more than just monitor the process. In some cases, the broker remains directly involved. Sonley stated that she recently conducted a punch list walkthrough with a client. “I’m still involved because I think it’s important to stay involved and help your clients. I’ve been to every space meeting about what we were doing for the improvements, made suggestions and kept track of [them], and made sure everybody was doing what they were supposed to be doing.” Additionally, she provided guidance about how to hold a subcontractor accountable for seemingly minor damages incurred by its crew.
In other cases, the baton is passed to a member of the firm that specializes in design and construction. Karp says that is the typical process at a very large firms like his, especially when working on large and/or complex build-outs. He said, “We have an entire construction management department, oftentimes they’ll get involved upfront, because there are elaborate build-outs [to consider] that might include things with labs or HVAC or manufacturing processes.” He noted that construction management and project management professionals are often part of his team, “and that those groups are part and parcel of our representation agreements. Larger companies understand the value of that. That’s why they’re hiring us in the first place.”
He said he follows the construction activity to understand where they are in the process and sometimes, he can “add value if it relates to some sort of a permitting issue with the local municipality that we have worked with.”
How a Broker Gets Paid
Commissions to both the tenant rep and landlord rep are typically paid by landlords; technically, you are not “hiring” a broker because you are not paying them directly. You are engaging them to serve as a professional that represents your interests, but there is no cash outlay required from the tenant. Landlords are incentivized to pay commissions because they are seeking reliable and creditworthy tenants that will execute leases, thereby committing cash flow to their property instead of to their competitor’s.
Many business owners seeking space don’t realize that the landlord covers the tenant rep broker’s commission, and some believe they will get a better deal from the landlord if they represent themselves. Sonley noted, “what amazes me is that a lot of small tenants think that they can save money if they don’t involve a broker. If they involve a broker who’s paying attention to the deal, the [savings from the] deal terms will be far more significant than what they can negotiate on their own.”
She added that going it alone is “not a cost savings [to the tenant] because the landlord, in most cases, has factored in the fees that they would pay a tenant rep and landlord rep. And then either the landlord rep gets a higher piece of that, the landlord keeps some of it or the landlord keeps all of it, but they don’t necessarily pass that savings back down with the tenant.”
Some Building Owners Welcome Tenant Reps; Others Do Not
Karp stated, “Large real estate owners and REITs across the country, by and large, absolutely prefer to work with a broker. It makes their job a lot easier, generally.”
Millard concurred, adding, “The landlord wants to know that the tenant is informed because they want the deal to progress. They don’t want it to get held up because the uncertainty created by the lack of knowledge on the part of the tenant can hold up a deal.”
However, Karp noted that there are definitely landlords that would prefer to go it alone, saying, “there are a few [landlords] that prefer not to hire brokers on the listing-side and would just prefer to deal with the tenant directly on the [tenant side].” He also indicated that some owners prefer not to have a listing-side broker at all, but they are willing to pay a commission to a tenant rep broker.
Engaging a tenant rep broker is not mandatory, but it is certainly worth considering, given the complexity of the leasing process and the potential benefits their expertise can create. Millard concluded that would-be tenants should, “think about legal comments, think about architecture, think about choosing a contractor, all the stuff that happens after you come to agreement on the economics; a good tenant rep is going to be there holding his or her client’s hand all the way through to move in.”