Don’t be so naive to think that just anyone in your company can handle your office or facility lease negotiations. It’s not like leasing an apartment, but more like playing poker against Doyle Brunson (2-time World Series Champ/Hall of Fame). Just like your landlord, Doyle would be plenty nice to you and let you go on believing you belong at the table, but at the end of the day, he’ll have your money…and you’re none the wiser.
In commercial real estate, an institutional landlord’s core competency is to maximize the investment returns on their properties. That’s all they do, every day…and they’re really good at it. Not to mention, they hire teams of professionals to help them fill space at the best possible rates, under the most beneficial terms. A landlord’s entourage includes an army of attorneys, architects, property managers, and real estate brokers – all charged with representing the interests of the landlord.
This representation can include the obvious stuff like the landlord’s broker marketing available space to new tenants, or his real estate attorney crafting language in a lease document. It can also involve not-so-obvious stuff like when the property manager pops in to say hello or strikes up a conversation in the hallway. Yes, he wants to know how the AC is holding up, but he’s really gauging your likelihood of relocation, or whether you’re starting to look around at options. Again, like in poker, they’re thinking of this stuff all the time, and the little things add up to big leverage.
Larger sized space users dealing with 7 and 8-figure lease obligations understand full well the business risks involved with playing at such an immense disadvantage. With so much at stake, these firms choose to either make real estate a core competency with an in-house real estate department, or outsource this expertise through dedicated corporate real estate firms. Either way, in capturing co-broke commissions, there’s enough money to go around to pay for this expertise, often with surplus to hire in-house legal, architectural, and construction management services. It’s a no-brainer for these guys.
Smaller and mid-sized firms are the ones who often miss the boat when it comes to managing facility related expenses, quite literally leaving money and business flexibility on the table. They only think of their lease when expirations come up, and even then wait way too long. Landlords slow play the deal and tenants find themselves captive, without options. Imagine that, Doyle had the cards all along…he’s so lucky.
Unlike poker, there’s money literally set aside for the benefit of tenants…if only they choose to use it wisely.
In most markets, 6 – 8 % of a commercial tenant’s total lease obligation is committed to brokerage commissions by landlords. This is not an arbitrary number, but a market driven expense for the landlord to best attract vetted, viable candidates to lease space.
This money is split between the landlord’s broker and tenant’s broker, paid out whether the tenant has representation or not. Roughly half the commission goes to the landlord’s broker for their role in marketing the space and getting the deal done. The other half is allocated to the tenant’s broker for introducing a bona fide candidate tenant to the landlord’s space (even in renewals). The landlord is happy to pay this fee to keep his building occupied.
Sticking with our poker analogy, real estate offers tenants the chance to bring some paid expertise to represent their interests on their side of the table. Unless you know how the game is played, nobody on the landlord’s team will ever tell you this.
Think of Phil Hellmuth (another World Series Champ) sitting down next to you at the poker table helping you play your hand. Doyle won’t be pulling the same tricks with Phil that he would without Phil being there. It’s the same in real estate…and it’s already paid for.
If you hire a good firm, this means you get full scale deal coordination, negotiation and strategic insights (stuff you’ll never think of), evaluation of all alternatives, integration of real estate into overall strategic planning, and a host of other services getting you to the finish line. If tenants are clever, there’s often money to spare which can be allocated to legal, space planning and/or construction services.
Naturally, as deal sizes reduce, there’s less money to go around on both the landlord’s side and the tenant’s side. You may not be able to get Phil Hellmuth, but then again, you’re probably not playing against Doyle Brunson either. In any deal above just a couple thousand square feet, you should be able to interview and find a suitable tenant representation broker to guide you through the process and ensure best possible economic terms in your next lease. The system allows for you to have representation, choose wisely.
If you don’t properly evaluate your alternatives, you won’t even know what a “good deal” is. A pair of 7’s might be a good hand in some games, but certainly not in others. In real estate, you have to work hard to see the other players’ cards.
The part where our poker comparison falls apart is when the deal is done. In poker, it’s obvious that you lost when all the chips are with the other guy. Commercial lease transactions are far more sinister. The devil is in the details in terms of what the market will bear…rent escalations, pass through operating expenses, maintenance obligations, holdover/assignment/subletting provisions, insurance requirements, legal terms, and and endless array of clauses often egregiously in favor of the landlord. Worse, opposing brokers and landlords allow you to go on thinking you’ve gotten a great deal under fair terms. Except perhaps later in hindsight, you won’t ever know you’ve been had.
As originally posted by Casey Bourque on LinkedIn