Shawn Massey, CCIM, SCLS

Why Should I Hire a Commercial Real Estate Broker and/or Advisor?

If price is the only determinant in a real estate negotiation than it is legitimate question “Why should I hire a commercial real estate broker and/or?”  Since price is only one of many factors in any transaction from the Landlord/Seller or the Tenant/Buyer perspective then the answer is simple to above question that you should always hire a commercial real estate broker and/or advisor.

We all have had clients who feel that they can save a buck or two without using a commercial real estate broker.  They either pride themselves as great negotiators or they simply feel they know it all and we add no value to the transaction.  I will save the latter complaint about “adding value” to a transaction in a subsequent post.

As I was contemplating writing this subject as one of my blog posts for several weeks the subject came up in a LinkedIn discussion group that I follow.  So not to re-invent the wheel I am going to use some of my esteemed colleague’s thoughts on the matter within the discussion group and some more from my research online.

21 Reasons to Hire a Commercial Real Estate Broker   

  1. 1.    Cost Savings – Just as the owner’s or seller’s agent works to get the owner or seller the most advantageous transaction (highest price), your agent or representative, has the duty to work to get you the best deal. Bob Fetterolf

The most common reason people don’t engage a commercial real estate broker is to save on the cost of a commission.  In commercial real estate the majority of properties is listed by owners with commercial real estate firms and or has commission agreements with their in house marketing people.  In such cases a compensation or commission is already built into the pricing of the property or space and it is customary to split commissions with cooperating brokers representing tenants.  Thus, no real savings usually are achieved here.  More important aspects to consider are the cost savings that can be achieved through time management, successful negotiations, and proper deal structuring and market knowledge that only an experienced commercial real estate broker brings to the table. Guy Levingston, SIOR

Typically, landlords have built in commissions for buyers and landlord representation.  If you elect to not have representation, the budgeted commission goes to the broker negotiating against you, not on your behalf. Net Lease Commercial Advisory Eric Odum

 2. Best Fit – With an extensive knowledge of the market, your broker works to ensure that any property or space you invest in is truly appropriate for your needs. Unlike when you work with the owner’s or seller’s representative or “listing agent”, there is no incentive to steer you to any one particular property.

In addition, a good broker has access to data and tools such as demographics, traffic counts, and comparable lease and sales data. Knowing what is standard or typical in the market is extremely important when making a decision. Bob Fetterolf

3. Market knowledge – Knowing the market and where you will attract your targeted clientele is paramount in the success of your business. Bob Fetterolf

As in every industry, market conditions are constantly changing and opportunities are found and lost on a daily basis.  The commercial real estate industry is very proprietary on sharing information unlike the residential real estate market.  A commercial real estate broker processes hundreds of opportunities each day through various sources while filtering out the best for their clients. Guy Levingston, SIOR

  1. More Choices – With a broker as your advocate, you will see all available properties on the market, not just the ones listed by any one firm or agent. Bob Fetterolf

5. Information disclosure – As your agent, they can disclose information to you concerning the seller’s or owner’s motivation, prior transaction data, or other information that the listing agent may not or will not disclose. Bob Fetterolf

Your representative can keep private information that other agents cannot. You may disclose information to them about your situation. As a seller’s or owner’s agent, they might be required to transmit the information to the seller. As an exclusive agent, they do not have that requirement. Bob Fetterolf

6. Loyalty – A listing agent may agree to show you properties other than the ones that they have listed, however, they may make half as much money if you do not buy or lease one of their listings. Therefore, they have a powerful incentive to steer and influence you to their properties. By handling only tenant and buyer representation, there is no chance that any of the properties you will be considering will be represented by your broker. Bob Fetterolf

7. Negotiations – As your exclusive broker, they are looking out for your best interests and should have experience with a commercial lease. While there is no substitute for hiring an attorney yourself, it is beneficial to have your broker reviewing the document as well. Bob Fetterolf

The art of negotiating in a specific industry is honed over years of transactions.  Successful negotiation of a real estate transaction is stressful and in many cases time consuming for those involved.  A commercial real estate broker utilizes their experience in handling negotiations for their client relieving them of that stress by acting as a buffer, and freeing up their client’s time so that the client can focus on their daily business. Guy Levingston, SIOR

Structuring leases or purchases can be complex.  It should help to have someone on your side of the table armed with knowledge on sound structure and market conditions.  Eric Odum

8. Simplification – As an exclusive buyer’s or tenant’s agent, they are your one point of contact. This is much simpler than keeping contact with each broker on each property. Bob Fetterolf

9. No Cost – Brokers’ services are free to tenants and buyers. Brokers are paid through the listing agent as part of the normal cooperation or brokerage fee sharing arrangement. This is a no lose situation for buyers and tenants. Bob Fetterolf

10. Financing – Brokers have relationships with lenders which have money to lend at competitive rates as well as connections for small business and various other programs. Bob Fetterolf

11.  Relationships – In addition extensive local knowledge of the market and relationships, your broker brings their experiences that assist the client in understand and weigh the facts to find and select the best site. Bob Marcus

12. Buffer – I would add that you always want to have at least one broker involved. So if the seller or lessor does not have one, at least yours in acting as a buffer between the parties.

Brokers add a great deal of value by managing the interaction between parties. I will never again attempt to save money by avoiding a brokerage commission. The landscape is littered with failed deals and ruined relationships because someone wanted to save a few bucks. A good broker can smooth the often difficult and emotional path through the deal. It’s worth it. Joe Rando

13.  Experience – Commercial real estate is not rocket science yet can be complex in structuring advantageous lease or purchase terms.  Nothing in business can replace years of hands on experience.  You may have access to some real estate information via the library, newspapers, Google and the internet but the benefit of hands on experiences is priceless.  A seasoned commercial real estate broker who has lived through the beginning and the end of numerous transactions can offer the benefit of their experiences to your real estate transaction.  This experience is Priceless! Guy Levingston, SIOR

Good commercial property brokers scour the market on a daily basis.  They know the owner of many of the properties in the area and know how willing which landlords are to negotiate and which ones are difficult. Eric Odum

14. Specialization – In most metropolitan cities, commercial real estate brokers specialize in an area such as the office, industrial or retail markets.  As a result, they achieve and maintain expertise in that specialty and utilize this expertise when seeking out and obtaining optimum terms for their clients. Guy Levingston, SIOR

15. Time Management: A business owner or manager usually has their hands full running the day to day operations of their company.  By engaging the services of an experienced commercial real estate broker, owners and managers can maintain their focus on their business while obtaining the benefits and guidance of real estate professional in quantifying and securing their new facility. Guy Levingston, SIOR

A good agent knows the market and does not have to start from scratch learning the good areas and good deals. Eric Odum

16. Deal Structure – Each and every real estate transaction is concurrently similar yet unique in its structure and function.  Proper structuring of a transaction can save a client hundreds if not thousands of dollars.  An example of potential savings deals with proper structure of “Base Year” in leases for building operating expenses.  Compounding these costs over a five year term can either be a) costly or b) savings to the tenant dependent upon the negotiated structure of the lease terms. Guy Levingston, SIOR

17. Professional Network – An experienced commercial broker specializing in a specific area has established a proprietary network of resources and informational contacts to assist and support their commercial real estate transactions.  This network of resources can be utilized as needed for your real estate transaction at no additional cost, or time via your commercial real estate broker. Guy Levingston, SIOR

18. Access to Data and Systems – An experienced commercial broker has established systems to facilitate the process and eliminate unnecessary costs.  These systems, combined with years of accumulated data are available to you via the commercial broker to assist you in the transaction process.  The result is an efficient, cost effective method of securing your real estate requirement on the most beneficial terms to you. Guy Levingston, SIOR

Most commercial property agents spend hundreds if not thousands of dollars a month for reports and market data on sales and leasing trends in their markets.  This can be invaluable when making site selection decisions, discovering where your customers are and how best to logistically position your business. Eric Odum

19. Space efficiency Some buildings are more efficient than others.  Common areas can consume enormous amounts of space and increase your rent dramatically.  A good agent can guide you away from buildings that have huge common area charges (or at least provide an apples to apples comparison) and provide additional insight on to how best to design office layout after you have decided on a location. Eric Odum

20.  Integrated Services Legal, interior design, office layout, architectural services.  Would you know where to go and who to trust to help you properly set up your business or practice?  Leverage the commercial broker’s network to help you accomplish your goals. Eric Odum

21. Legal Expertise – Agents are able to bring legal expertise to the table. A good agent will be able to read and interpret legal documents, has a number of years experience helping clients with commercial property contracts and has the ability to close the deal for you.  This agent also understands potential property restrictions and finds any other potential problems with a property.  However, a prudent agent will always recommend that you have their work reviewed by a good real estate attorney.  It is wise to have someone like an experienced real estate attorney (and not just a general type of attorney that doesn’t specialize in real estate and doesn’t have many years of specific real estate experience) checking over all of the details.  Two sets of experienced eyes are always better than one and the agent and attorney come from different but important perspectives and form the best team.  Depending upon the complexity and size of the transaction, many savvy commercial agents will offer their clients a review of the agreed upon contract by a recommended real estate attorney as part of the commission they receive or for a small additional fee to their client.

Other legal benefits include: 

-Learning about new developments that might affect a properties value or use. A good agent will know of proposed new developments that might affect different properties in which a buyer or tenant is interested. Whether these developments are positive or negative can be valuable in weighing different options.

-Knowing what the language and comments mean in a lease or sale or purchase contract and knowing how to change it in their client’s favor.  A smart agent will also suggest creative clauses such as options to buy, terminate early, renew, free rent, operating expense exclusions and in many other critical areas that will save you money, give you flexibility and peace of mind, and favor you for your specific needs.

Real Life Horror Story One

I received a telephone call yesterday from a business owner 2 years in to a 5 year lease.  This is not an unusual occurrence.  It happens frequently.  What made this unusual is the business owner (let’s call him Bob) had spoken with me over 2 years ago, inquiring about using our services to help them relocate their business in Tampa, Fl.

For whatever reason, Bob had decided to go it alone and not use our services.  Now, here he was 2 years later asking me what could be done to rework his lease.  Bob had negotiated a $22/sq ft lease, which would have been on the high side of his submarket as a modified gross lease, but not an unreasonable rate at all.

The problem was, he had negotiated a triple net lease and he was responsible for Common Area Maintenance (CAM) on top of the negotiated rate.  The CAM being charged was close to $6/sq foot and upon reading the CAM definition in the written lease, it was packed full of JUNK FEES!  In other words, CAM (which is supposed to be a pass through cost from landlord to tenant) was nothing more than a profit center for the landlord.   As a result, Bob was paying roughly 30% higher than the market rate and having a difficult time covering his rent.

The fact that we lose business to other brokers is no surprise.  It happens every day, but I am always perplexed when a buyer/tenant decides they can handle locating a property and negotiating a lease on their own.   Commercial real estate is not rocket science, but there are HUGE pot holes that tenants can hit, if they are not careful.  Most services of tenant/buyer brokers are usually paid by the landlord/seller, so it is always hard for me to understand why someone would decide to go it alone in an arena in which they (tenant or buyer) have limited experience, the stakes are high, the amount of market information available on commercial real estate to the general public is limited and the lease structures are complicated.  Eric Odum

Horror Story Two (An Example)

You are a business owner with barely enough time in the day to run your company, much less worry about real estate. Someone on your staff reminds you that your lease will be expiring in a few months, so you start to think about what that will mean. Mostly, your current space works for you. You might need more or less space and the carpet and the paint might need replacing but it works.  You are comfortable and moving is a hassle!

At the same time, you begin to notice all of the “Available Space” signs on your way to and from your office some in nice buildings. You call some of them and discover that although there is a sign in front of the building, there isn’t necessarily any space that would suit your operation and the rents seem about the same.   It all becomes a little overwhelming, and soon you contact your landlord and “ask” him if you can renew your lease. He says, “Sure, I’ll send you a simple lease amendment. Just sign it, and you’ll be good for the next five years.”

You have taken the path of least resistance; done deal. You read the amendment and notice that they are going to repaint your space and drop your rent a few cents per square foot but wonder if they are really giving you a “market” deal. Still, you’ve have your business to run, so you sign it, and it goes back in the file until next time.

You are a landlord’s dream come true! You may have saved some time, but it came at a high cost – usually 20% to 40% or more in occupancy costs and with short and long term legal/economic exposure that would surprise you and cause you to not to renew your lease if you knew they existed.

Here are just a few of the items that you might have missed:  Lower rent (those continued escalations over the past years have caused your rent to be above market for comparable space); Free Rent (most submarkets are seeing as much as 1 month free for each year of lease term); Improvement allowance (air conditioning/heating, new carpet, paint, move walls, lighting upgrades, etc.); New base year for real estate taxes and other operating expenses, limiting which expenses are even allowed and can increase and be added to future years; Options to expand or contract your space or to renew or terminate your lease early; and one of the most common, rent reductions a year or more in advance of when your current lease term ends.

Most importantly, there are hidden profit centers in your lease you may never have heard of and don’t understand that increase your rent like: Measuring your space and the building common areas incorrectly; operating expenses with no limits; the large amount of your share of property tax increases due to the sale of the project will surprise you; and earthquake insurance costs, an expensive type of insurance, where you pay your share of a shocking 20% deductible of the entire project’s value which could bankrupt many tenants).   The leases clauses are usually more important than the economics of the deal itself and many times it would save you money to have a higher rent but better lease clauses!

If your rationale is that your landlord would not want your broker involved you are correct. Re-read above, and you’ll know why. It’s not primarily because your landlord doesn’t want to pay a broker’s fee.  It’s primarily because many of the countless economic deal points and clauses in your lease that you are not equipped to negotiate are landlord profit centers.  Keep in mind that landlord rents include paying a broker commission already so by not using a broker, you have just saved the landlord even more money.

And remember, not all real estate brokers are created equal.  Make sure you find one that does more than find you a location and negotiate the basic economic terms of your deal.  Many brokers and real estate attorneys don’t even know where all of the hidden lease profit centers are.  Unless a broker has been employed directly by the landlord, it will be almost impossible to find these profit centers. David Massie

Therefore, if you are thinking about not using a commercial broker and/or advisor than I suggest you read the following article and if you can answer YES to all of the below reasons why you should not hire a commercial real estate broker and you are OK going it on your own!

Top 10 Reasons Not to Hire a Commercial Real Estate Broker

10. You can save the commission.

9. You have found tenants for your building in the past.  You can do it again, filling your space for market rents, faster than your neighbors.

8. No one represents you better in a negotiation than you. You’re objective and rarely lose your cool.

7. Marketing your opportunity won’t be a problem. You know everyone in your commercial real estate investment market.

6. You made your money from off-market deals.   In fact, you’ve never bought a property listed by a commercial real estate broker.

5. You know the best lenders, commercial real estate attorneys, commercial real estate lenders, architects, engineers, environmental engineers, and construction firms in your commercial real estate investment market.

4. You have your CCIM designation.

3. You have a career’s worth of experience in commercial real estate investing.

2. You spend 8-12 hours every weekday speaking with property owners, lenders, tenants, and commercial real estate brokers in order to stay current on the market and ahead of the best commercial investment property opportunities.

1. Your commercial real estate investing has fared well, there’s absolutely nothing you would change, improve or could do better.

The above article was published by Mansard Commercial Properties. 

In conclusion, my advice to all clients is always to hire a commercial real estate broker or advisor!  Next week I will share with you “How to choose your commercial real estate broker wisely!

Much thanks to those of you I have included in this post as you have provided valuable information to our industry and to potential clients who may re-think their position on using a qualified and competent real estate broker and/or advisor.

I hope you will check out future weekly commentary at

www.RetailRocksintheMidsouth.com.   If you enjoy the commentary please subscribe online.

Cheers,

Shawn

Shawn Massey, CCIM, SCLS is a partner with The Shopping Center Group a 3rd party retail real estate advisory firm in their Memphis office, an adjunct professor in the graduate real estate program at The University of Memphis and a co-founder and Chairman of the Board for the Memphis Business Academy charter schools (K-12grade) in the Frayser area of Memphis.  

For all your retail real estate needs (tenant representation, landlord representation and property, investment & land sales) I hope that you will choose The Shopping Center Group and me to represent you and your business.  We understand that representation is a privilege and that you have a choice!

Sources:

7 Reasons to Use a Commercial Real Estate Broker

http://floridatriplenet.com/blog/tampa-business-political-news/reasons-to-use-a-commercial-real-estate-broker/

 Top 10 Reasons Not to Hire a Commercial Real Estate Broker

http://masscommercialproperties.com/2010/10/15/top-10-reasons-not-hire-a-commercial-real-estate-broker/#

Ten Reasons to Hire a Commercial Real Estate Broker

http://www.zoliath.com/commercial-real-estate-blog/2010/05/10/ten-reasons-to-hire-a-commercial-real-estate-broker/

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One comment

  1. This page certainly has all of the information and facts I needed
    about this subject and didn’t know who to ask.

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