Signing a Contract With a Commercial Real Estate Broker

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Just as there’s no such thing as a standard lease, there’s no such thing as a standard broker’s contract. It’s all negotiable (how negotiable depends on the size and type of your business, the local real estate market, and other factors). Make sure all important terms are in writing, especially those regarding payments, conflicts of interest, and the exclusivity of your arrangement. If your broker is performing more services than just showing you space and helping to negotiate a lease, be sure additional duties (such as such as getting traffic flow data, utility bill information, or zoning details) are also covered in the contract you sign with the broker.

Paying Your Broker

Naturally, you’d like energetic assistance with the minimum of expense—and many in the leasing game will tell you that this means paying the broker a commission based on the value of the lease. That said, other fee-based arrangements are sometimes possible.

Commission

The broker earns a percentage (typically, 3%) of the rent over the life of the lease. More precisely, the broker’s fee goes up as the tenant’s rent, square footage, and lease term increase. But high rent is not in your interests, nor is unnecessary space or a lease term that is too long for your business needs or plans. In short, working on commission introduces a total conflict of interest between you and your broker. Most often the landlord pays the broker (especially if the space was listed with a landlord’s broker), but you’ll still be stuck with a high rent, excess space, or a needlessly long lease. Sometimes, a broker will ask for an advance against the hoped-for commission (called a retainer), which is deducted from the commission once it’s earned. If you don’t sign a lease, the broker must return the retainer.

Fee arrangements

These avoid the conflict of interest inherent in paying your broker a commission. You may be able to negotiate a flat fee (you pay a fixed amount such as $2,000, for the broker’s efforts in looking for space for you, regardless of the success at finding suitable space); a fee based on success (you pay a fixed amount only if the broker’s efforts result in your signing a lease); or an hourly fee (you pay by the hour for the broker’s time). You and the broker aren’t limited to choosing only one payment method. For example, you might agree to pay an hourly fee that will be credited toward a success fee if you ultimately sign a lease.

Other financial details

Depending on the fee method you agree on, make sure your contract with your broker covers all money-related details, such as when the payment is due and what additional expenses you may owe the broker (such as the broker’s travel).

Exclusive and Nonexclusive Arrangements With Your Broker

Your contract should specify whether the broker has an exclusive relationship with you or a nonexclusive one.

Exclusive arrangements

The broker earns a fee whether you sign a lease through the efforts of the broker or through anyone else, or even on your own. Most brokers will prefer this relationship, because it will commit you to seriously using the broker’s expertise and contacts, since you’ll have to pay them when you lease any space. If you have any choice in the matter (and you often won’t), avoid exclusive contracts unless you have high confidence in the broker’s ability to deliver a rental.

Nonexclusive arrangements

You owe the broker a fee only if you sign a lease through the efforts of the broker. The broker does not earn a fee if you find space on your own.

Hybrid arrangements

If you are interested in renting space in a particular building or shopping center, you and the broker can agree that you’ll owe the broker a fee only if the broker succeeds in delivering space in the property specified in the contract. This arrangement will work well for you if you’d like to be able to do some space-finding on your own, but want an advocate when it comes to certain properties.

Avoiding Conflicts of Interest With Your Broker

Although your broker is duty-bound to find you the best space at the best terms, you can’t ignore the fact that the broker or others in the broker’s office will represent other tenants along the way—some, perhaps, with space needs similar to yours. And unless you’ve retained a tenant’s broker exclusively, the brokerage may have landlord clients, too—including some who might have space that you will want to see. In either situation, the broker may end up representing two competing parties (two tenant-clients or one tenant-client and one landlord-client). Or, your broker will realize he or she is representing one party (you) while an associate at the next desk is representing the other (the landlord). Your contract with the broker is the place to address these potential conflicts.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.

by: , Attorney

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