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Choosing A Commercial Real Estate Broker - Considerations for Tenants

By: Jeffrey Lerch, CPM

Let’s face it, leasing space is a drag. It takes time away from your business, you don’t know where to find spaces, and getting a good deal is more of a feeling than an objective measurement. Worse yet, landlords lease space every day as experts in the field, where you are not. So what’s a business owner to do? Enter the commercial real estate broker.

I know what you are thinking - brokers are aggressive, fast-paced, gunslingers whose constant barrage of cold calls have you dreading each unlisted number that shows up on Call ID. Brokers will pat you on the back after the lease is done, send you on your way, and wish you luck as you live out the terms of your lease. “See you in five years” they say as they move onto the next transaction.

While many brokerage relationships go this way, the range of real estate services varies widely depending upon the company and individual, making it important that you properly research your alternatives before bounding into a relationship.

In its most basic context, the professional commercial real estate broker should:

But with so many brokers, how do you know who to choose? What should you expect? How do you go about evaluating those brokers that you speak to? This paper intended to help you better understand the process and make an informed decision.

I. Why Hire A Broker:
Commercial real estate brokers are specialists who can help you find a new location for your business. They work on real estate matters, leaving you to focus on the demands of your company. Brokers provide you with more choices than you would otherwise uncover on your own, and they can help to negotiate the transaction. Unless you have an intimate understanding of real estate AND access to timely information, a real estate broker can add value to any real estate transaction.

II. Cost of Brokerage Services:
Tenants rarely, if ever, pay for real estate brokerage services. Brokers are compensated by landlords in the form of a commission that is either a percentage of the total leasehold rent or a factor of the square footage leased. Landlords recognize the value that a broker brings from introducing their building to the prospective tenant, and since the landlord is the beneficiary of the lease income stream, it is customary that he compensate the broker for the transaction. Regardless of who provides compensation, the broker owes an absolute duty to perform in the best interests of their client without doing harm or otherwise compromising the client’s interests (known as agency).

Some tenants think that bypassing the broker and working directly with a landlord will save them thousands of dollars in leasing commissions. This is generally not the case. There is almost always a lease commission due. If a tenant represents himself, that commission is paid entirely to the landlord’s broker. However, when a tenant is represented by a broker, the commission is split between the landlord’s and tenant’s agents. In situations where the landlord represents himself, there is often an “in-house” leasing agent who will receive a commission. In the final result, a broker’s knowledge of the market and professional representation will drive significantly greater value than any commission that might be paid.

III. The Relationship:
Most brokerage relationships are informal agreements between a broker and client. There are times, however, where the relationship needs to be terminated, which can create all sorts of complications. For this reason, it can be helpful to put your agreement in writing, making certain to include a right of termination upon written notice. This way you can end the relationship if you feel that the broker is not working in your best interest.

IV. Broker Services – What To Expect:
Some brokers work exclusively with tenants (called “Tenant Representation” specialists), while others may also lease or sell buildings, and perform other functions (called “Real Estate Generalists”). Generalists often work for landlords and tenants, earning commissions from both sides of the transaction, whereas Tenant Rep brokers only work for tenants and typically do not represent building owners.

Brokers may choose to focus on a particular product, such as office, land, industrial. All brokers must be licensed and in good standing in the state in which they work, which can often be verified by online inquiry or phone call to the Department of Real Estate.

A broker should be knowledgeable, friendly, and helpful. However, the level of service provided will vary depending upon the individual broker’s ability and desire. There are certain basic services that every tenant should expect to receive, as well as specialty services that can further enhance to the process. However, there is no “outline” of services for brokers to follow, making it important for both parties to understand what is expected from the brokerage relationship.

Basic Services: Any commercial broker should be able to provide basic services to assist tenants with real estate acquisitions. Basic real estate services include:

Specialty Services: Certain brokers offer specialty services that can be very helpful in evaluating and completing a transaction. Such specialty services may include:

V. Choosing a Broker – A Systematic Approach:
When the time comes to select a broker be sure to take the process seriously and deliberately. Be sure to interview and evaluate individuals or teams who you feel might be a good fit. Remember, you are entrusting them to represent you in a transaction that will have significant fiscal and operational impacts to your business. The following steps will help you to determine which broker is right for you.

Closing Thoughts: Almost any firm can benefit from the services of a professional real estate broker, if for no other reason than for the market knowledge that they can provide. However, the professional agent can add significant value to the transaction saving you time and effort, and that translates into money. Take a little time to find the right individual and you might find that leasing space is much less of a drag than you might expect.