Broker – Friend or Foe?

As The Lease Coach, I am a magnet for leasing questions. One woman called me after recently purchasing a franchise and explained that her franchisor had offered to do her site selection and real estate work for an extra $3,500.00. Not knowing much about commercial real estate, she had thought that was a great deal, had accepted the franchisor’s proposal and met with a local real estate agent to view sites.

She was curious as to why the real estate agent only showed her properties with his name on the “For Lease” sign outside the building. I explained how there are listing agents and outside agents and if she leased one of the agent’s own listings, that agent would then receive the full commission (paid by the landlord). Otherwise, this commission would be substantially reduced.

Prior to 1993 and becoming a Lease Consultant where I work exclusively for tenants, I used to work for landlords. I was a commercial leasing rep and a commercial property manager. It is not uncommon for a commercial leasing rep / real estate agent to represent a tenant but to receive a commission from the landlord. Therefore, the commercial leasing rep is very much deal driven vs. detail driven – payment depends on signed lease deals. Is having a commercial broker represent a tenant truly in that tenant’s best interests? One commercial broker once said to me, “Dale, as you know, commercial agents eat what they kill”. Please don’t get me wrong here, I am not against agents and I am pro franchising.

While giving a leasing seminar, I learned that there was a commercial landlord in the audience. I acknowledged the landlord and asked how he found tenants for his building. He responded that he gave a listing to a commercial real estate broker (or a listing agent) who then would look for tenants. When I asked the landlord who he thought the broker was working for, he replied - without missing a beat – that, “The broker better be working for me with all the commissions I pay him”.

Now, what if there are two agents involved, the landlord’s listing agent and an outside agent? It is traditional for the outside agent to receive a hefty portion of the listing agent’s commission. In other words, the landlord is paying both agents, presumably to represent his best interests. Agents are financially driven to get the landlord the highest rental rate, the biggest deposit and the highest comprehensive personal guarantee – all while offering the tenant only the most minimum amount of inducements possible (including free rent, a tenant allowance, build-out assistance and many other perks).

It is important to note that based on commissions generally paid, the real estate agent will receive a higher commission if the rental rate is higher. If there are substantial tenant inducements, then the real estate agent’s commission is reduced appropriately. Does this sound like a scenario conducive to getting the tenant the best lease deal possible? Beware of the term dual agency agreement. This is a more legal understanding that the real estate agent will be working for both landlord and tenant but typically receiving a commission or payment only from the landlord.

Steer clear of commercial real estate agents may refer to themselves as “tenant reps” as well. This term may mislead a tenant into thinking these agents are looking out for the tenant. Practically every tenant rep that I know receives landlord-paid commissions. Professionals who work on commission should be viewed as sales people, not necessarily advisors. Weigh your options and maximize your bargaining position; consider using a professional Lease Consultant who is being paid by the tenant to represent the tenant.

North American real estate laws state that the tenant is entitled to know if the agent is being paid a commission, how much and by whom. All a tenant has to do is ask. In most cases, the agent commission will be 5% of the base or minimum rent (not Operating Costs). So, if you are leasing 3,000 sq ft. x $28 per sq. ft. for five years at 5% , the commission would be $21,000.00. That is a lot of incentive to get the tenant’s signature on the Offer to Lease.

It is extremely important that business-owners and tenants take charge of their own destiny. In leasing, franchise tenants don’t get what they deserve, they get what they negotiate.