Seven reasons to choose a tenant representation firm
1. Protection Against Brokerage Claims
Commercial real estate in New York City is governed by the State of New York. Accordingly, every broker or advisor is licensed by the state and must adhere to state guidelines. One such guideline, is that the broker that initially presented a property or space to a tenant becomes the “procuring cause” of the transaction at that property. Accordingly, if a tenant does not engage exclusive tenant representation, the tenant runs the risk of having multiple brokers competing for procuring cause. Since a typical NYC office lease indemnifies the landlord from multiple brokerage claims, the legal costs and expense of commission disputes (or multiple commissions) will ultimately fall upon the tenant.
2. Time Savings
Sometimes tenants feel that by having multiple commercial tenant representatives (and/or landlord representatives) looking on their behalf, they will gain market efficiency and a better transaction. In fact, the opposite is usually the case. Do to recent advances in listing database technology, there is much more transparency in the availability of commercial space. Each advisor has access to most of the same information and when working with multiple brokers the likelihood of “overlap” increases. There is always a “ramp up” period when working with a new tenant, so as each new advisor is added, that ramp-up investment increases. Additionally, an exclusive tenant representative will have the opportunity to provide broader, ancillary services such as Construction Project Management, Space Planning, Lease Review, Move Management and others.
3. Objective, consultative advise
Without an exclusive commercial tenant representative, companies fall into one of two potential leasing traps: a) working directly with the landlord or landlord’s agents and b) working with multiple brokers. Unfortunately, in both cases the tenant will receive biased advise. In the case of the landlord agent, while there may be an existing (even friendly) relationship, the landlord’s agent is motivated financially to prevent the tenant from having qualified representation. Additionally, while there may be potential savings offered (in concept) by the landlord, there are many hidden costs in the lease document that will be overlooked. If there is an existing relationship with either the landlord or the landlord’s agent, our recommendation is that the tenant request a “baseline” initial proposal (in writing) from the landlord, for which the exclusive tenant representative can evaluate and improve upon. In the case of multiple brokers, each broker is incentivized to make their individual deal at whichever property was offered and to downplay any potential hidden costs or issues with that property or landlord.
4. A Process-Driven, Total Cost Approach
One of the first steps in working with a tenant representation firm is to assemble a qualified team. This team often consists of professionals outside of real estate brokerage (i.e. project manager, architect, financial analyst, municipal incentives advisor, etc.) who can advise the tenant on hidden costs in the lease transaction. While the media and the landlord community enjoy focusing on base rental rates, the reality is that what’s important to the tenant is to identify the total future costs of the transaction in terms of whatever metric is most relevant to that company ($/month, $/annum, $/employee, $/seat, etc.) This is more difficult to accomplish without an exclusive tenant advisor.
5. Greater Credibility Within the Landlord Community
In many instances tenants look at spaces with multiple brokers. With the digitalization of real estate listings, most brokers have access to the exact same information and that has led to greater transparency in real estate availabilities (i.e. there is no such thing as “hidden space”). Consequently, there are occasions when a tenant will visit a property with two different brokers. When this occurs, not only is there the possibility of a brokerage claim (see #1 above), but the landlord and the landlord’s agent will realize that the tenant has no leverage with either broker and look to fully exploit that situation.
6. Availability of Top-Talent
The most successful and accomplished professionals in the commercial tenant representation industry will not work with a company without a contractual agreement. The basic premise of any such contract is that the tenant will work exclusively through that professional. This allows three things to occur: a) the tenant representative can put in place a process driven approach to maximizing the tenant’s leverage with the landlord community, b) the tenant representative can employ the total cost approach referenced in #4 above and c) the tenant representative can collect his/her fee (in the form of a commission) directly from the landlord and save the tenant from absorbing this out-of-pocket cost.
7. Fee Sharing Potential
Finally, in some instances, particularly on large transactions or with portfolio account management, there is the opportunity for the commercial tenant representative to share a portion of the real estate commission either directly with the client or in the form of increased concessions (free rent, tenant improvement allowance, etc.) Obviously, without an exclusive contractual agreement, this would not be legal or possible.