How Commercial Real Estate Brokers Work

By , Attorney · Santa Clara University School of Law

Many small business owners find it invaluable to enlist a professional real estate broker's help in finding rental space, especially if your landlord will have one, and particularly if your needs are unique or space is at a premium.

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.

Brokers Who Work for Landlords

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.

Brokers Who Work Exclusively for Tenants

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.

Brokers Who Work for Landlords and Tenants

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.

Brokers Who Are Dual Agents

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.

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