Confessions of a
12 Insider Secrets To Save Money On Your Commercial Lease
Expiring lease? Don’t renew – renegotiate!
Options = flexibility. Negotiate to get as many options as possible.
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If you lease commercial space – office or warehouse – this must-read book can save your organization money, month after month
Confession 1: Friend or Foe?
I grew up in a time when kids were allowed to roam free after school and during the summers. It was great. Summers were spent with friends running through the woods, riding bikes, fishing, going to the pool, and playing ball games. We rarely wore shirts or shoes.
The only problem came when we played basketball or football. No shirts meant we couldn’t tell who was on which team. Who was friend or foe on the court or field? We had to find shirts for at least half of the kids, so we could play shirts and skins, right? Now it was easy to identify who was on each side – and who has your back.
In the world of real estate, it can be hard to tell who has your back. The information I share in the following confessions provides you with insider information on how commercial real estate works. By the end of this book, you’ll know who to trust, who has your back, and the red flags to watch for as you negotiate your lease.
Let’s start by addressing an incredibly important point when negotiating your lease – knowing if the person working for you will truly represent your best interests. If someone decides to sue you, would you say, “You know what? It’s expensive to fund a lawsuit. Why don’t we share an attorney?” That would be crazy. An attorney can’t represent both parties in a lawsuit.
Well, neither can a real estate broker. A broker has a legal responsibility to protect and promote the interests of the tenant or the landlord. By the way, when I refer to the landlord, it’s usually a company – not an individual – and the tenant may work with a team of people in that
A single broker cannot represent two parties in the same transaction. A broker can’t serve two masters. Of everything in this book, this is the most important “Confession of a Recovering Landlord” – my top insider secret.
It’s important to know who has your back when you enter any negotiation. Therefore, use an experienced, independent tenant rep who only represents you – and not the landlord – when negotiating your commercial lease.
This is the single most important piece of advice I can give someone contemplating a real estate transaction of any kind. It doesn’t matter if you’re buying a house, buying an investment property, signing a lease for your company to occupy a warehouse or office building, or buying a
building for your company to occupy. Only use a broker with no conflicts of interest who only represents you.
And I don’t mean just the individual broker. I mean his or her entire firm. If you plan to negotiate a lease, never use a company that represents both landlords and tenants. Lots of large commercial real estate companies try to be all things to all people. They provide a huge range of services. They may own the building, manage it, lease it, be the broker to list the building for sale with the prior owner, and represent tenants in the building. How can they possibly look out for your best interest as a tenant when they have so many conflicts of interest? Never work with one of those firms.
When I was a landlord for commercial office buildings, some of these firms tried to get me to use them to lease my buildings. They would tell me they would put a tenant rep on the leasing team, because “tenant reps know deals in the market before leasing agents do.”
Therefore, I would get an early preview before other landlords. That just told me about their ethics.
One company would list our buildings for sale with some of the investment sale brokers in the large companies. They would “conveniently” provide the rent roll (list of all tenants and the terms of their leases) to their leasing and management divisions, so those groups could solicit
business from potential buyers. They would also give the rent roll to the tenant rep division, so those agents could cold-call the tenants in the building and be armed with accurate information.
The big companies have an incredible number of conflicts of interest. So much so that they must disclose it in their annual reports if they are publicly traded. It all adds up to a really bad situation for their clients, whether tenants or landlords. Commercial real estate service providers should be required to pick a side and stick with it.
Brokers who list buildings for lease are called leasing agents. They represent the landlord. They are helpful, and most are great people. But make no mistake about it: They are legally and ethically bound to the landlord. By law, leasing agents must represent, promote, and protect the landlord’s interest. That’s what they should and must do. When you see the name of someone on a “for lease” sign in front of a building, just know
that person works for the landlord. When a potential tenant calls the leasing agent on the phone and says, “I’m interested in leasing space in your building,” the agent must communicate to the landlord any information the tenant shares – information that could swing the negotiation in the landlord’s favor.
If a tenant says, “I love this building. It’s perfect for me. I’m willing to pay thirty-two dollars per square foot to lease it, but I want to offer only twenty-nine dollars per square foot.”
The leasing agent is required to tell the landlord that the tenant is willing to pay $32 per SF. Guess what the counteroffer will be? Why, $32, of course – or possibly higher. The leasing agent is doing what the law requires her to do.
The company that owns the building – aka, the landlord – hires a leasing agent to fill the building, so the agent’s ability to lease space on terms acceptable to the landlord is the best way to keep the listing and possibly get more buildings to lease for that landlord. She should do
everything in her power to get the building leased and expand her relationship with the landlord.
Furthermore, she only makes money when leases get signed, so she wants to do as many leases as possible.
Here is a major challenge, however: If leasing agents have multiple listings for different landlords in the same area, which landlord do they put first?
One of our clients was considering extending his lease for his company’s office space, but he wanted to consider other nearby properties as well. The leasing agent for his current building represented a number of these properties, but he wouldn’t show us office space in any other buildings. Why? Because he’d then have to tell the current landlord that he had done so.
That created a conflict of interest for the agent. His unwillingness to show us other buildings forced us to consider buildings for which he wasn’t the leasing agent. We looked into several nearby buildings with other leasing agents, and our client decided to move to one that offered space better suited to his business needs. The first agent missed out on the commission, and all the landlords he represented missed out on a great tenant.
As a tenant, you have to ask yourself, “Who is working for me?” That’s a very different question than, “Who is just trying to collect a commission check?” It’s imperative that you know you’re working with a tenant advisor dedicated exclusively to your interests.
If a broker is not working for you exclusively, you must assume he or she is working for the landlord. In fact, that’s how the law works. More on that in a minute. Let’s say you decide to work with a broker who you think is representing you exclusively. She shows you a bunch of buildings, and you put five on your short list. But two are her listings (she’s the landlord’s leasing agent). Which properties do you think she will most likely recommend? The two she gets all the commission on as the leasing agent – or one of the three in which she gets only part of the commission as a broker? Can you trust her recommendations? I wouldn’t.
If brokers try to “represent” you as the tenant and the landlord, it puts them into what’s known as an intermediary or dual agency situation. The laws in most states allow brokers to do this, but when they do they can’t really “represent” either party. That’s why I put “represent” in
quotes. They make it look like they “represent” both parties, but that’s impossible. Intermediaries are reduced to what I call glorified paper pushers.
The intermediary facilitates the transaction but can’t advise either party, because he must be completely fair to both sides. So, for example, the intermediary can’t tell the landlord the tenant will pay up to $32 per SF, because that would unfairly benefit the landlord. Nor can he tell
the tenant the landlord will accept $29.
The best the intermediary can do is say, “I’ll tell the landlord you’re offering $29 per square foot,” and then deliver the landlord’s counteroffer of $32 per SF. The outcome is a tennis match of bouncing offers with neither party getting any expert advice.
Other names for this arrangement are disclosed dual agency, designated dual agency, and transaction agency. They are different terms for the same thing – a very bad idea where both “clients” lose.
So, how can you be sure a broker is only working on your behalf? There are two steps.
First, get a disclosure statement. Most states require this. In Texas, it’s called the Information About Brokerage Services form. All licensed brokers and agents in Texas are required by law to give this form to any unlicensed person with whom they discuss a real estate transaction regardless of whom they represent. The form is intended to force a conversation about who represents whom.
As an aside, I’m a licensed real estate broker in Texas, so you’ll hear this state mentioned frequently. However, the twelve “Confessions” and supporting advice apply to commercial real estate transactions in every state of the nation.
Second, you must have a written, signed representation agreement giving your agent authorization to work on your behalf. In Texas, if you don’t have a signed agreement with a tenant rep, she is required by law to represent the landlord even if the landlord already has their own leasing agent. The same is true if you are buying a building. The broker “representing” you can only do so legally if you have signed a representation agreement.
If you call the phone number on a building’s leasing sign, that leasing rep is required, by law, to give you the Information About Brokerage Services form. (Remember, this form may go by another name in your state.) Any broker who acts as your tenant rep must give you the form
as well. If a broker doesn’t offer this form to you, that’s a red flag. Ask for it. Always force brokers to disclose whom they represent.
Not only do you want to work with a tenant rep who exclusively represents you, you want to work with only one. Why, you might be thinking, wouldn’t you want to work with two or three tenant reps? Won’t this guarantee that you’ll see all the options for the office or industrial space you need?
Actually, it does just the opposite. If you use three brokers, they will likely all present you with the same options, because they all subscribe to the same commercial property database called CoStar. It’s the primary listing service that commercial brokers use. There are others, but CoStar is the dominant service. If your broker doesn’t subscribe to it, he or she probably isn’t a serious commercial broker. Using multiple brokers means you just waste your time having to discuss the same properties repeatedly.
Here’s the more important, cold, hard truth: If you don’t agree to work with a tenant advisor on an exclusive basis, you won’t get a good one. The ones willing to work on a nonexclusive basis won’t work hard for you. Oh, they might throw a few properties your way that come across their desks, but they won’t really dig and hunt for the right options for you,
promoting and protecting your best interest. They are just trying to snag a quick commission. You never want to work with brokers who are hungry for a quick commission. They cut corners and rush the deal to get done as fast as possible.
Tenant reps do a lot for tenants. They search for properties, analyze and tour properties, create proposals, coordinate with architects and contractors, and give advice based on decades of experience. It often takes many months, if not years, to work through this process with each
Tenant advisors are highly specialized. They know the ins and outs of leasing commercial space and how to protect the tenant and the transaction. They speculate their time and expertise with no guarantee that the transaction will close or that they’ll ever get paid. They must spend
their time where they can reasonably expect to earn a living. Without an exclusive representation agreement, it’s not a good bet for them. They must, therefore, only work with clients who understand their value and want to work with them exclusively – just as they have committed to
working with the client exclusively.
Be wary of any tenant rep willing to work without a signed exclusive representation agreement. Never share information with a broker who is not working as your exclusive broker. You can only trust the broker with whom you have signed an exclusive representation agreement.
One last thing: Once you hire a tenant rep, don’t talk to the landlord directly again – or the landlord’s leasing agent, property manager, or anyone else associated with the building. Don’t share information with any of them. You don’t want the landlord’s company to hear information that may give them the upper hand. Negotiations can get out of whack in a hurry if you and your tenant rep are both talking to the landlord. Conversations will occur that one of the parties is not privy to, and that will give the landlord an advantage.
Be sure the broker representing you is an exclusive tenant rep who doesn’t represent any landlords ever – not just the individual agent but the whole company. Get a disclosure notice from every broker with whom you discuss a real estate transaction. If brokers don’t offer you one, assume they work for the landlord. Force them to identify as friend or foe.
Sign a written representation agreement that clearly states the tenant advisor represents your interests exclusively for every possible building. Work with only one tenant rep. Don’t waste your time with multiple brokers. Let your tenant advisor speak for you. Do not talk to your landlord during the negotiations even if he or she is a friend. Doing so may jeopardize the negotiations.
Landlords write the leases, and they are never fair and balanced. You may be handing over way too much money to your landlord! As a “recovering landlord,” Bob Gibbons reveals twelve “confessions” – closely held secrets that landlords don’t want tenants to know. Each “confession” will guide you to negotiate a better commercial lease.
About the author.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate. This title creates the acronym for his company’s name: REATA Commercial Realty, Inc. Backed by 30+ years in commercial real estate, Bob now focuses exclusively on representing tenants. He and his REATA partner, Jan Gibbons, host the Confessions of a Recovering Landlord podcast.