Should I Hire a Real Estate Advisor When Renewing My Lease?

The easiest answer to this question is, “Why WOULDN’T you?”.  Yes, self-serving, I know, but most of the messes I’m hired to untangle are usually the result of an unrepresented tenant.

A lawyer who represents himself has a fool for a client.

Conventional wisdom would lead one to think, “well if my landlord doesn’t pay a commission to a broker, I’ll get a better deal,” however this simply isn’t true.  Any professionally owned and operated commercial building has already underwritten leasing commissions into their pro forma projections, and in fact, most lenders won’t even facilitate debt on a building if the borrower hasn’t already accounted for leasing commissions within their financial assumptions.  Lenders and owners know that commercial spaces do not lease themselves, and brokerage commissions, like tenant improvements, are simply part of the transaction’s leasing costs.

In commercial leasing transactions there are two parts to the commission, and the landlord is typically responsible for paying it:  the landlord’s representative gets one side, and the tenant’s broker is paid the other.  So what happens if the tenant decides not to access their side of the commission and forgo professional representation?  The tenant gets a lower rental rate, right?  Absolutely not.  Typically, the landlord’s broker will just take both sides of the commission.  And when the broker doesn’t collect it personally, I know of at least one major landlord in San Francisco that puts all of the tenants’ unclaimed commissions into a pool, and then uses it to throw a holiday party each year.

But wait, my landlord said that if I don’t use a broker for my renewal, they’ll take $0.05 per square foot off my rent.

That’s the oldest trick in the book that most tenants fall victim to.  About 6 years ago I was working with a major Bay Area tenant on a renewal, and that’s exactly what happened.  Prior to my engagement the landlord delivered the message above to my client, and then quickly followed up with a lease amendment to finalize the renewal.  Fortunately, I was hired before it was too late, and after a careful review of their existing Master Lease and First Amendment, it was clear that the minor rental reduction was substantially eclipsed by the hundreds of thousands of dollars in added expenses my client would have been exposed to had they gone unrepresented (the Restoration Clause was the biggie, followed by increases in OpEx over their old Base Year).

I have a great relationship with my landlord and I don’t want to ruin it by bringing in a broker.

A good broker understands how important a healthy tenant-landlord relationship is, and will strive to help you preserve and maintain it.  It’s easier for your broker to ask the hard questions, and can potentially take a few “arrows to the chest” so as to preserve your relationship and act as a buffer.  Actually, many times the landlord is more receptive to a broker’s proposal, as opposed to a tenant’s, since they know the broker is coming from a better informed place.

Regardless of how friendly you are with your landlord, you still deserve professional representation and should be suspicious of anyone who persuades you from utilizing an advocate who will level the playing field.

We have no intention to move, so there’s really no reason to look at other spaces.

Having only one option is negotiation suicide.  Your broker takes your real estate requirement and makes it accessible to competing landlords, so that a renewal at your current location isn’t your ONLY option.  Without creating a competitive environment amongst landlords and providing viable, alternative options, you simply just won’t get as good of a deal.

Finally, it’s important that you view your broker as a friend, ally, and invaluable teammate who has your best interests at stake.  Your broker will level the playing field and ensure that you access the very best concessions, inducements, terms and rates the market currently has to offer. Your landlord is engaged in the business of commercial real estate every single day, and it’s only fair that you have someone in your corner that is equally as active and informed.  There’s a lot of work involved with this process, which means there are plenty of opportunities for costly mistakes and potential exposure to liabilities. Your broker will handle the bulk of the work efficiently and professionally on your behalf so that you can focus on operating your core business.

See also:  When is the best time to renew an office lease?

Why I Exclusively Represent Office Tenants, and NOT Landlords

As a commercial real estate advisor who has built an entire career upon advocating on behalf of tenants, exclusively, the million dollar question I’m always asked is, “Why did you stop representing landlords when the money is so good doing both?”.

The easy answer is that I always felt like I was somehow representing the “bad guy” by representing landlords, and that I get much more satisfaction out of helping out the underdog, who is almost always the tenant.  Now, that’s not to say that all landlords are bad, but tenants are often the “Little Guy” at the negotiation table and need a strong ally in the ring with them.  While a commercial office tenant may only address their real estate needs once every 3 to 10 years, a landlord will conduct many, many more transactions in that same time and is tasked with maximizing shareholder/investor value – naturally, this typically runs counter to the economic goals of the tenant.

The second and longer answer, is that try and spin it as you might, there is an enormous amount of conflict when dual-agency exists – whereby the broker simultaneously represents both the landlord AND the tenant.  The only way to truly offer my clients the very best in service is to choose a side, and completely remove that bias altogether.

I think the best way to get my point across here is with a few examples:

Let’s say I’ve been hired by “ABC Tenant” to locate and negotiate terms for their new office relocation, however I also just happen to represent quite a few key landlords downtown.  Now consider this:  there is pressure from the landlord to tour the tenant through the buildings they own and to try and make a deal, even if it’s not the best fit for my client.  If the buildings I list don’t make the tour, I can forget about holding on to that listing for too long.

There’s also pressure from within the broker’s own firm, as the firm (and the broker) will earn a larger commission if the deal stays “in house”.  Again, the needs of the brokerage and broker are being placed above that of the clients’.  If the real estate broker is going to make more money if you lease space in a building that they list, rather than sign a deal at a competitor’s building, do you think that might affect the advice they give you?

Another valid scenario is explained in the following.  Let’s say I tour ABC Tenant through a building I do not currently list, but would like to win that landlord assignment in the future.  Well, I’ll probably do one transaction in the next 3-5 years with the tenant, but if I win the landlord assignment I could easily increase my volume twenty-fold.   How hard do you think I’m going to negotiate against that landlord and am I really going to go to bat for my tenant if I’m trying to create favor with the landlord?

There are plenty of hardworking, honest real estate brokers who offer dual representation and I am sure they outnumber the bad apples, however I firmly believe that the only way to truly offer conflict-free tenant representation is to completely remove any opportunity for bias from the equation; and the only way to do that is to simply NOT represent landlords, and focus solely on fighting hard for tenants.