The Landlord/Broker Dilemma and How it Affects the Tenant
Landlords are a different breed of person (or corporations, partnerships, whatever). They deserve to make money from their investment, but there is often that cloud hanging over the tenant/landlord relationship where the landlord shouts out lines from the old Frank Sinatra song, “My Way."
How does the commercial real estate broker fit into this equation? How are you as the tenant affected by the love/hate relationship most landlords have with their listing brokers or with the tenant's broker? Let's take a look at three types of landlords:
Landlord #1: Mr. You Pay The Rent and I Let You Stay.
Landlord #2: Mr. I Like You But Don't Step On My Toes.
Landlord #3: Mr. How Can I Best Serve My Clients?
First, we'll set the scene: Let's start with the property. We'll call it My Tower, located at 100 Named After Owner ("NAO") St., Big City, CA. My Tower needs tenants to pay rent, otherwise the landlord can't pay the mortgage, nor can he make money on his investment. In order to get tenants, he could simply put a sign out on NAO St. that will certainly attract passersby, but that’s about it. So, he decides to hire a listing broker who now gets to put his sign out on NAO St.
Here are some major questions you should have when that listing broker is hired:
How would each type of owner, address the landlord/broker dilemma?
How would that benefit you?
How can that hurt you?
How would Mr. You Pay The Rent and I Let You Stay handle the dilemma? Here's the guy who pretty much tells the broker to bring him the tenant then get "the hell out of the way.” Brokers are used to this attitude, and some brokers actually love these guys. The broker markets the property, then, once they find a potential tenant, negotiates six-seven basic deal points along parameters set by the landlord. Next, they turn over the transaction to the landlord, who takes over most negotiations and pays the broker’s fee. What a life for the broker—but what about you as the tenant?
If you're a follower of our site, you know that there is a lot more to a real estate plan than just finding space and signing a lease, and that the landlord is a real estate professional while you, most likely, are not.
If you don't expect much from your broker, you're not going to get much. If you are relying on the landlord's listing broker to help you, you might as well go deal with a car salesman—the type who tells you he'll go to his boss and get you a good deal. Forget problems during the lease or help in renewals—it's you and the landlord. Come renewal or option time, he will almost certainly refuse to talk to your broker (representative). It's not because he wants to save the money (although the thought probably does cross his mind). Without your broker to help you, he's got a considerable advantage. Get the picture? If the first thing out of the landlord's mouth is, "Tell your broker, we don't pay commissions on renewals," you can make any of these choices:
Tell him he must pay a market fee as if you were a "new" tenant and carefully point out you are not a real estate professional like him (that could stroke his ego).
Get ready to move to a building with a better landlord.
Get ready to be taken advantage of.
How would Mr. I Like You But Don't Step On My Toes deal with the dilemma? Here's the guy who understands the broker brings value to the table. After all, Mr. Landlord doesn't have the resources to contact vast numbers of potential tenants to fill his building. It's worth a few percentage points of the lease value to acquire a new tenant. He even recognizes the value of a broker representing a tenant. That is, at least, until the initial deal is closed. While Mr. I Like You But Don't Step On My Toes looks at the initial deal to be fair, he still has to protect his investment. That's OK. He'll give a little in lease negotiations. He’ll make sure TI's are done well (he wouldn't do anything to distract from his building); he'll even change your light bulbs without complaining. When if it comes time to renew, watch out. It's you and him, again (see above).
How would Mr. How Can I Best Serve My Clients deal with the dilemma? If you find one of these guys, you're in luck. They are truly a rare, but valuable find. They are businessmen and understand that in order for them to succeed with their goals (i.e. mainly making money from their investments), they have to be sure you, their clients, are happy. Deal negotiations will be fair, as will lease negotiations. Service during the lease term will be consistent. If there is a problem during the lease, this guy will often contact you, your broker, as well as his broker or property manager in order to resolve the matter. When options come up, he will discuss them with you and your broker. He understands the value not only that you place in your broker, but also the reality—that your broker can influence your future tenancy in his building. Yes, that means paying your broker standard fees as if you were a new tenant. Remember two things:
You are really paying that fee as part of the rent.
If you leave, he has to pay another broker a commission to get a new tenant anyway
Are we seeing the pattern here? Your broker should be a business partner rather than a tour guide. That sounds harsh, but it's true. No one likes to give money away and get nothing in return. Both landlords and tenants put little value in a broker's work because nothing is obviously given except for a view of "the market" and a few deal point suggestions based on the landlord's needs rather than yours as a tenant.
If you find a broker who will represent your interests without any conflict of interest (e.g. he or his firm representing landlords as well as tenants), don’t let him go. Make sure the landlord knows he is your business partner. When it comes to real estate matters, your broker should be there not to simply show you My Tower Building, but to help your firm develop a sound facility plan. You will be better served, and the landlord may even come to appreciate the relationship.
Simply put, unless the landlord recognizes that you have the right to representation, you’ll get the short end of the stick. We have this basic premise that if the landlord says "absolutely not" or "it will never happen," he's either trying to hide something or he means it will happen. Level the playing field. You deserve to get value for what you’re already paying for as part of the rent, don’t you?