Some tenants believe that, with a little effort, they can explore the market and bypass the need to work with a broker. This, of course, speaks to the perceived value of a broker's efforts but also plays into the hidden agenda of many tenants, a belief that a better deal will be available without the broker's participation. This phenomenon is precisely why landlords and their listing agent still put prominent signs on their property advertising that the building is for lease. Let me be very explicit when I tell you that, almost without fail, a landlord will achieve an economic advantage over the tenant who does not engage a competent broker to Acton his behalf.
The tenant's broker should be looked upon as a business partner rather than a tour guide. Tenants shouldn't place much value on a broker whose involvement is little more than a view of "the market" and a few deal point suggestions. In our experience, most landlords prefer the type of broker who will just introduce the tenant and then step out of the way. The landlord takes over most all negotiations and, at least in this case, happily pays the broker's fee when the deal is completed.
What a deal for the broker...but what about the tenant? If this strategy succeeds, the landlord gets the opportunity to negotiate directly with the tenant on an uneven playing field, which is mostly to his advantage. After all, it's typically the real estate professional (i.e. landlord) versus the real estate neophyte (i.e. tenant).
Why Choose an Exclusive Broker
Until the late 80's, only residential agents had the advantage of a Multiple Listing Service ("MLS"), essentially a database of available properties. Commercial real estate brokers didn't have such a tool, market knowledge was very proprietary and tenants often felt it necessary to engage multiple brokers in their quest to locate space. The broker brought value to the transaction by virtue of his market knowledge and thus, an ability to bring landlords and tenants together. However, the transactions themselves were, for the most part, quite straightforward and didn't require a great deal of expertise.
With advances in technology and the trend toward institutional landlords, (i.e. insurance companies, pension funds, REIT's, etc.), the broker's role has changed dramatically. In today's market, all of the brokers located in a metropolitan area will have access to the same, high quality database and if space is available, most any broker can now find it. The transactions themselves, though, have become very complicated and fraught with traps and pitfalls just waiting to snare the unwary.
Landlords, who at one time were predominately local investors, are now large, sophisticated corporate entities intent on finding ways to protect and enhance the return on their real estate investments. Most tenants, on the other hand, continue to be locally owned or regional companies and are at a very real deficit when it comes to expertise in a real estate transaction. Brokers, while still needed for their market knowledge and ability to bring landlords and tenants together, now have the opportunity to bring true value to the transaction by providing tenants with the transactional expertise they otherwise lack.
Again, if the tenant simply desires a tour guide, they can pick just about any broker or investigate the market on their own. On the other hand, if a tenant desires an advocate who will put its interest ahead of some other agenda (that commission thing), the simple fact is that the broker needs to know that he has and exclusive relationship and that his efforts will be rewarded.
If the tenant's broker is under an exclusive representation agreement, he can also "advertise" the tenant's requirement. Although 90% of the availabilities in most larger markets, will be listed on the computer database, advertising a tenant's requirement to the entire real estate community can save time and bring focus to the search. This also leads to the tenant having better access to new or sublease listings that might not appear on the computer database. Without an agreement, no broker would expose his "client" to other, competing brokers.
There is one last point to mention. Tenants who don't expect much from their brokers don't end up getting much in return. Tenants who have high expectations act honorably and express loyalty, get significantly better results!
Understanding Broker Representation Agreements
Few, if any, residential agents would list and market a house for sale without having the exclusive right to be the owner's broker. That means that whether the owner finds a buyer, another broker finds the buyer, or he/she finds a buyer, the broker handles the transaction and is paid a commission. If another agent is involved, that commission is usually split in some manner. This procedure is commonly accepted and rarely questioned. In commercial real estate leasing, the same scenario occurs. A building owner hires a broker to list the property for lease. Any offer that comes in must go through that broker. Sort of like a commissioned salesman who is given a protected territory. No matter how the leads or sales are generated, the salesman gets paid if the deal closes.
Who really pays the commission on commercial real estate??
The money comes from someplace! Brokers, like sales people in just about any type of business you can name, are paid a commission for the services they provide to the principals in the transaction. The question we are often asked is "Who actually pays the commission?" While the answer at first blush would appear to be the landlord, it's really a little bit more complex.
First, tenants need to understand that when a building is either built or purchased, the owner will have developed a "pr"-forma". "This is, for all practical purposes, a budget projecting anticipated revenues and expenses. Profit and loss if you will. One of the line items of expense is the cost of marketing the building, including commissions paid to brokers. The complicating factor is that the commissions then become a component to the expense numbers used to calculate the rental rate necessary to produce a satisfactory return on investment for the building owner. In effect, the building owner pays the commission on the front end and then recovers it from the tenant, as a component of the rent paid over the term of the lease.
If the tenant chooses not to use a broker, will the landlord reduce the rent??
Many tenants think that they will get a better rate but this turns out to be quite illusory for a number of reasons. The first and most compelling reason is that the landlord probably has a listing broker to whom he is obligated to pay all or most of the commission, even if no commission is paid to the tenant's broker. Secondly, rent is a function of the marketplace and the landlord will always strive to achieve the maximum market rent because it forms the basis of his investment.