To act as a real estate broker, a person needs to get a license. The requirements vary by state, but usually involve passing an exam, taking continuing education courses, and adhering to strict rules issued by the state. Brokers may play different roles in landlord-tenant transactions, so it’s a good idea to understand the various types of arrangements, before you start looking for a broker or sign a contract with one.
In a traditional commercial leasing situation, the landlord lists available space with a broker who then goes out looking for tenants. If a lease gets signed, the landlord pays the broker a commission—typically 3% or so of the rent paid over the life of the lease. The broker with whom the landlord lists the property is called the listing broker. If another broker (a nonlisting broker) brings in a tenant and a lease gets signed, the two brokers usually split the commission.
Under this traditional way of doing business, the listing broker is the landlord’s agent, and is duty-bound to work out a lease that’s as favorable as possible to the landlord. Legally speaking, even a nonlisting broker is the landlord’s agent unless you and that broker work out something different. Obviously, it’s crucial for you to know right from the get-go if the broker you’re dealing with is obligated to look out for your interests. Laws in most states require brokers to tell you whom they’re working for.
If you’re uncomfortable dealing on your own with a landlord and the landlord’s broker, you can engage your own broker, who will represent solely your interests. A broker who works exclusively for you has one main assignment—to get you a good deal on a space that meets your needs—not to help the landlord quickly fill the building or get top dollar rent. An experienced broker can help you evaluate the financial consequences of the landlord’s lease terms, and can spot hidden charges that translate into higher rent. Finally, the broker who’s acting as your agent can help in lease negotiations—a terrific boon if, like many people, you don’t feel like you’re a natural born negotiator.
The main disadvantage to hiring your own broker is that you might have to pay all or a portion of the commission (unless you negotiate a different payment plan, such as a flat fee). If your share of the commission is half of 3% of the rent over the life of your lease, you could be looking at a significant amount of money. And because the broker doesn’t usually earn any money until a lease is signed, brokers have an interest in closing a deal sooner rather than later. But here, at least, you’ll find that market forces will put pressure on brokers to put their client’s best interests first.
The next best thing to engaging a dedicated tenant’s broker is to find a reputable broker who works for landlords or tenants. You’ll have an easier time finding a broker like this to work for you, as opposed to finding a broker who works exclusively with tenants. Such arrangements will work just fine when your broker is showing you properties represented by brokers in other offices. However, the situation gets cloudy if your broker’s own office has taken listings for spaces that you want to see. This puts your broker in an awkward position. The broker is duty-bound to find you the best space, regardless of who has the listing, but is also committed to contribute to the success of the office. You’ll want to address this potential conflict in your written contract with the broker.
A final option, allowed in some states, involves asking the broker to step away from his or her role as an advocate and instead assume a neutral stance. A broker who works like this is known as a dual agent. Since this type of broker’s role is limited to attending to mechanical details and helping to make sure the transaction flows smoothly, the benefits of using a dual broker are limited. You won’t really get much, if anything, in the way of useful advice or practical guidance, since the dual agent can’t be your advocate.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.
]]>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.
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.
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.
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).
Your contract should specify whether the broker has an exclusive relationship with you or a nonexclusive one.
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.
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.
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.
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.
]]>Finding a commercial real estate broker isn’t all that different from finding a good doctor, lawyer, or dentist. A hefty application of common sense, professional and personal connections, and some independent research usually does the trick. The same method works when looking for a broker. Here’s what to look for:
Other commercial tenants in your community will be the best source of leads for brokers. Ask businesses if they have engaged a broker and whom they would recommend. Look for tenants who appear to be running a healthy business (chances are that their good business sense was at work when they chose a broker, too).
You can narrow your field of inquiry by approaching tenants whose businesses are similar to yours, especially if you’re in a large city where brokers may have divided the market into niches, with some specializing in office space, others concentrating on restaurants and food stores, and others working mainly with light industry. For example, if you’re intending to open an art gallery, you’ll want to deal with a broker who’s familiar with the commercial space that is appropriate for a gallery. The owner of a currently operating gallery may have found just the broker.
In some cities, brokers may even concentrate on specific neighborhoods. If you want to locate in a particular area, to take advantage of adjoining businesses, traffic patterns, or expected rents, it makes sense to look for brokers who have already done deals in the neighborhood.
Be sure to check out brokers who represent buyers—but not sellers—of commercial real estate; they may act as tenants’ agents in leasing transactions too, or they may be able to direct you to a kindred spirit who represents tenants only.
Try to get recommendations from several tenants and businesspeople. You may find that the same name or names pop to the top of everyone’s list. Once you’ve whittled down your list to two or three promising names, you’ll want to ask your contacts about the broker’s strong and weak points, before you interview and choose a broker.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.
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