The Three (3) Types of Transparency that Our Clients Deserve in commercial real estate
There are three types of transparency required in commercial real estate:
Lease (or Process) Transparency;
Market Transparency requires the availability of pricing and vacancy information that summarizes the relative market value of a property, and in aggregate, the relative health of any leasing market.
To a degree, market transparency is already here. Commercial real estate websites like ours offer an abundance of information on property availabilities and pricing, historical lease transactions and purchase and financing detail. Unfortunately, most of this data is only available to the consumer for a fee or subscription, but like much internet content, it won't be long before some level of data is made free and public.
Process Transparency requires the availability of simpler documentation, less based on historical contingencies and more focused on mutual trust and cooperation between a landlord and tenant.
Process transparency has a long way to go. Unlike lease transactions, where market demand shifts can cause permanent changes to how space is leased, lease documentation remains mired in a process driven by standards that haven't evolved over time. Much of the existing documentation is so archaic and poorly written, that many tenants don't understand exactly what they're commiting to without expensive translation by attorneys. And that's exactly the way the landlords want it.
Professional Transparency requires disclosures of fees and their calculation, who is paying them and how these fees are shared within an organization.
Similarly, professional transparency has made little progress, but not for the same reasons.
We have written previously about professional transparency, in the context of understanding what information a broker of real estate ("BORE") is required to share with a tenant (see http://www.officeleasecenter.com/blog/people-who-live-in-glass-walled-offices-can-t-cast-stones--why-transparency-matters--)
In a similar fashion, tenants should insist on transparency in working with real estate professionals. It is important that one understands how BORE's are compensated and which interests a BORE represents in order to avoid potential conflicts of interest or misrepresentations. Did you know, for example, that there are BORE's who primarily represent landlord clients and others that exclusively represent tenant clients? Additionally, many landlord BORE's will represent both sides (landlord and tenant) of a transaction without making that representation. (If a BORE is representing both you as tenant and a major landlord, which party do you think will have greater influence over that BORE's actions?)
In residential real estate BORE's are legally mandated to make written disclosures that buyers and sellers acknowledge with a signature. Unfortunately, commercial leasing has no such counterpart!! So how does a savvy tenant protect his/her interests when dealing with commercial real estate professionals? Ask your advisor these five (5) questions:
Are you aware of and can/will you disclose any potential conflict of interests? i.e. "yes, my firm also happens to represent the owner of this property we're looking at";
How are you compensated as my representative and who is paying your fee(s)? i.e. "my fee is based on a percentage of the aggregate cost of your lease and is paid by the landlord";
How is your fee calculated? i.e. the brokerage fee increases as the lease term, rental rate and square footage all increase, but did you know that if your BORE also represents the landlord, that BORE's compensation can increase by as much as 2x?;
Who shares your fee? In many large firms, the brokerage fees are so diluted by overhead, senior team members and/or large teams, landlord agreements, ancillary services and even client sharing that your BORE may disincentivized from working on what he/she perceives as too small (or unprofitable) a project (like yours!);
What guarantees can you provide for my satisfaction with your performance? Only one firm ever offered a true performance guarantee and that firm no longer exists. Still, it's a worthwhile question to ask.
Tenants mistakenly believe that a better deal can be negotiated when dealing directly with a landlord or their representatives. The reality, however, is that a landlord's agent and his client both profit by discouraging a tenant from having unbiased representation. A savvy tenant's BORE will improve the lease terms by creating leverage and identifying and eliminating hidden landlord profit centers while garnering his/her compensation from a pool of fees that would otherwise go solely to the landlord's agent(s). Additionally, having a reputable tenant advisor represent you in the marketplace sends a positive message to the landlord community regarding the credit-worthiness and sophistication of your tenancy!
In conclustion, the commercial office leasing process needs to make way for a much higher level of transparency and efficiency to successfully satisfy the needs of the next generation of tenants!