Some Commercial Landlords Just Don’t Get It…Still!

Why do some landlords think that because they receive rent from tenants, they’ve got great relationships with those tenants?

Why do some landlords hire property managers who cycle in and out of their jobs?  And, why should tenants receive calls from their “New Property Manager” every few months?

Why do so many landlords “Yes” their tenants and not follow-through on promises?  Do they believe that if a tenant stopped complaining, they forgot about what they needed and no longer require service?

What steps can landlords take to build mutually beneficial relationships with tenants, and not just provide lip service?

The best landlords don’t need to answer these questions, because they figured this out long ago!

Here’s an idea or two for those old school landlord types:

Start by changing how you engage in lease negotiations.  Lose the “stick it to them before they stick it to us” perspective still held by some old fashioned entrepreneurial, and even some institutional, landlords.  That doesn’t mean give away your profits!  It means that you will likely benefit by viewing tenants, both existing and prospective, as customers…Yes, CUSTOMERS!  Take a customer focused approach to negotiating.  Transform your organization to focus on words like “Service” and “Excellence”.   I know, for some of you, this is a real novel idea!  Remember…you’ll get more flies with honey!

Build two-way relationships with your tenants.  Do that on an enterprise-wide or institutional-wide basis.  Don’t leave building good tenant relationships to a seemingly friendly property manager after the damage has already been done through uncomfortable negotiations.

In order for such a major shift to take hold, those tenants who attempt to beat the hell out of landlords must also change their negotiating approach. Change must occur in both directions.

Treat your existing tenants like new customers.  They’re more important than new ones anyway, since they’ve already created value for you, and likely will continue to do so.  Prospect your existing tenants – treat them like they’re not yours, court them, build and sustain real relationships with them.  When treated well, existing tenants can be more profitable customers and easier to please than new ones.

Seek to understand how you can support your tenants’ business objectives. Don’t simply consider your tenants as meal tickets.  That kind of attitude shows, and no one likes to be treated that way, no matter how slick you think you are.  Follow the lead of some of the most successful landlords around the country…they’ve been running their businesses like this, and succeeding, for a very long time!

Create an excellent “experience” for all of your tenants.  Don’t simply permit them to occupy your building.  And, that doesn’t mean just buying them ice cream once a year.  Find ways to become a partner to your tenants.

Considering the challenges that so many companies, even landlords, are experiencing in the current economic environment, now is the time for landlords to forge solid relationships with their tenants.  And, NO!…that doesn’t mean agree to lease terms that don’t make sense.  Afterall, landlords are entitled to weather this storm, too!

In hard times like these, some people take advantage of others who need their help and some turn a deaf ear.  Others step up to recognize that by helping others succeed, they’ll likely pave the way for their own greater success when the recovery kicks in.  Remember that companies, and the people who work for them, have long memories.  Give your tenants a lot of good things to remember about their relationship with you.

The best landlords practice these ideas, and as a result, they often achieve greater success than their slower-to-learn competitors.  Now is the time for those other landlords, you know who you are, to benefit by doing the same.

Teaching Old Dogs New Tricks – Take Charge of Your Career Again!

The U.S. Department of Labor recently announced that 16 million Americans are out of work. Bloomberg Television stated that for every open corporate position in the U.S., six or more executives are in pursuit.

CEOs today can expect to be in career transition almost every twelve months. Financial executives can expect to be job searching every fourteen to twenty-two months, and senior I.T. executives are typically out of work every fourteen to eighteen months. While the sources of the above statistics are unknown to me, they have been repeated to me by so many people who are not connected to each other that they appear to have become accepted as truth.

Evidently, when no one was looking, the rules changed. Yet, too many very accomplished executives still operate as if the world was operating under the “Old Normal.” With so much talented competition seeking so few open positions, in many instances the secret to career success is not necessarily having the best credentials, pedigree, or experience. But, rather those executives who are better able to compete are the ones who are landing the few open positions and achieving their objectives.

Remember when video tape player / recorders first arrived on the scene in the 1970s and 1980s? Remember the competition between BetaMax and VHS? The commonly accepted fact is that the VHS format won, not because it was superior in any way, but merely because the proponents of VHS, an acknowledged inferior technology, put their marketing muscle behind it and outdid their competition. BetaMax went the way of the Dinosaur and VHS reigned supreme for many years.

In, what is today an extremely competitive employment field, the shortest path to executive career success is not only through reliance on track record and achievements, but on expertly packaging the value one can provide to a company, presenting it in a concise manner that will be easily grasped, and running past job-seeking competitors to the finish line. Twice this past week, I spoke at New Jersey executive career workshops, one sponsored by a local business group, and one entitled “Take Charge of Your Career Again!” At the second event, I encountered some very senior executives who, while extremely accomplished in their respective fields, were novices in their understanding and ability to communicate their own value proposition, how to package that, and then how to present and sell it. The group spent hours working through the concepts of networking, relationship building, selling, and more.

The idea here is to be very precise, to view oneself like a product or service, with features, benefits, and outcomes, to understand the buying needs and habits of the consumer (aka employer),a nd be prepared to sell the product like a professional.  

When the workshop ended, those who had entered earlier that morning looking downtrodden and fearful of not knowing where their futures would lead them, left the event uplifted with renewed energy, new ideas and tools that they would put in use immediately to Take Charge of their careers again. Knowing that I’d used my skills to help so many, I also had an uplifting experience.

Tenants: Want to Reduce Your Occupancy Costs? Buy the Building You’re Leasing!

Opportunity springs eternal!   Commercial real estate values have dropped precipitously over the last year or two.  Many experts believe that values have not yet stabilized and that it may take years before they recover and again begin their upward ascent.  So, where’s the oppoirtunity in that?

Many commercial landlords are in jeopardy and are facing a myriad of extreme challenges. Leasing demand is at its lowest point in years; many existing tenants, whose businesses are experiencing their own challenges, are seeking to reduce their current rental obligations by renegotiating their leases; other tenants are offering space for sublease at discounted rents; still others are going bankrupt and ceasing rental payments; the short-term commercial mortgages that financed so many buildings in the last decade are expiring; replacement debt may be unavailable, expensive, restrictive, and / or insufficient to equal existing debt levels; additional equity may be unavailable…the story goes on and on.

Financial executives at every well-run company, tenants and landlords alike, are seeking opportunities to uncover hidden profits and create long-term operating sustainability by reducing cost, and creating predictable costs going forward.  Purchasing real estate may provide a real opportunity for many companies. For those companies that have access to cost-effective capital, that seek greater control over their occupancy costs, that seek long term occupancy strategies, and that may wish to lock-in future returns for when commercial real estate values stabilize and grow again, real estate ownership may prove very profitable.

Companies positioned to own real estate may consider relocating to a facility that is offered for sale. Or, those companies may be better off pursuing their current landlord, irrespective of whether their building is being actively marketed for sale, to ascertain whether they could purchase that building on favorable terms.

Landlords experiencing financial challenges don’t often publicize those issues.  By contacting the landlord, or in the case of a building that is publicly challenged, the lender, your company may uncover a hidden opportunity and achieve more than mere short term cost reduction. 

Real estate ownership could work for some companies as a long term occupancy and investment strategy. For others, it could provide profitability as a short term strategy designed only to lower current costs and capture future profits from eventual rising values. Either way, the opportunity may exist, but only based on a carefully planned and expertly executed approach.

Note that this strategy may not work for some publicly-held companies, those who wish to avoid having to record depreciation expense, and those seeking to increase return on assets. Although, if and when GAAP is replaced by IFRS, that could all change.

So, bascially the opportunity may be directly in front of you.  However, you may need to adjust your sights a bit to realize it.

 

Landlords: You “NEED” Tenants…and Vice Versa!

On many occasions, I’ve written about the perspective of some one-sided landlords who blatantly disregard the needs of their tenants in the name of greed and selfishness.  Some tenants, too, can be just as selfish.  Such tenants often miss the opportunity to build profitable relationships with their landlords. Good tenant advisors constantly counsel landlords that, to be truly successful, they must care about their tenants’ success, and not just view tenants merely as rent payors. 

Tenants have a similar interest in seeing their landlords succeed. This doesn’t mean that landlords and tenants should run each other’s companies. It does mean that both landlords and tenants should view each other as more than mere transactional opponents.

Landlords and tenants would do well to consider themselves as interdependent partners.  A tenant without a building to rent would have no place to conduct its business, and would likely be forced to divert capital from investment in itself to real estate ownership.  And, a landlord without tenants would own a lot of empty buildings.

I find it amazing when over-zealous brokers get tenants worked-up by suggesting that landlords should not be entitled to profit when they complete lease deals or renegotiate leases. Writing as a tenant advisor, I must ask those brokers how silly it is to assume that anyone would engage in a business endeavor without a profit motive.  Everyone is entitled to profit! 

The issue isn’t one of whether a landlord is entitled to generate profit, but more of HOW landlords generate profit, how much they generate, and are they transparent in doing so?!  Don’t get me wrong.  As a tenant advisor, I don’t advocate over paying for anything, let alone rent.  And, neither am I suggesting that tenants should consider themselves as the funding sources for commercial landlords’ profits.

Interestingly, landlords are not perceived as a group that garners anyone’s pity. However, given current global economic condition, and those of credit and real estate markets, if there ever was a time when landlords deserved anyone’s sympathy, now would be that time.  The government and the business communities must recognize the challenges commercial landlords currently experience, along with the ongoing struggles that most of them will endure over the next few years.  If not, the tenants we advisors and brokers represent may have fewer stable leasing opportunities, and therefore, those tenants could encounter much bigger problems! 

Given the above, tenants are now in a great position to negotiate very aggressively to secure favorable terms, either on acquisitions or on lease renegotiations. How they do that, and with which landlords, will make all the difference in the world.  However, aggressive negotiations don’t mean stupid negotiations!

Should Real Estate Brokers Be Responsible to Validate Tenants’ Risk and Creditworthiness?

In today’s tumultuous economic times, landlords need to accurately determine the creditworthiness and risk profile of new and existing tenants.  Whose responsibility is it to make such a determination…the landlord or the tenant’s broker?

In previous blog posts I’ve discussed the issue of landlords seeking to pay commissions at rates and on terms deemed to be less than favorable by many brokers, especially when those landlords perceive tenants as not being creditworthy.  A reader commented that, as part of the reason for receiving commissions, commercial real estate brokers should be responsible for evaluating the creditworthiness of the tenants they represent.  At first, I was a bit surprised by that one.  Given that this particular reader was from an institutional type of commercial landlord, I understood his mindset, nonetheless. 

The reader’s desire was to secure third-party analyses of the creditworthiness of prospective tenants for his buildings. However, his idea of forcing that responsibility onto commercial real estate brokers is a dangerous one.  Real estate brokers as credit analysts?  Moreover, I saw his comment as a landlord’s desire to transfer its obligations and risk to another party.  Of course, if a broker were to take on such a responsibility, you can bet your hat that a landlord would also place the liability of accuracy on the broker, too!

So, should commercial real estate brokers be responsible to validate their tenants’ creditworthiness?  Here’s a better question: 

Are commercial real estate brokers QUALIFIED to evaluate their tenants’ creditworthiness, financial viability, risk, and ability to perform under their leases?

Credit analysis is not an easy task, especially when it comes to privately-held and private equity owned portfolio companies.  But, brokers as credit analysts?  Placing such an important component of deal making as risk analysis in the hands of commercial real estate brokers would be an extremely dangerous move for all involved, and would not likely minimize risk for landlord or tenant.

There exists an entire industry dedicated to analyzing companies and their ability to sustain and perform their financial obligations.  Perhaps landlords should rely on these qualified independent third parties to analyze the credit of prospective tenants.  Those experts are versed and capable of conducting such risk based assessments and properly reporting their results.

New insurance based third-party analysis and credit guarantee products are beginning to emerge in the marketplace as a means of evaluating tenant creditworthiness.  These combination services and products promise to provide commercial landlords with the qualified risk analysis they desire along with alternatives to security deposits and guarantees.

Demanding third party credit and risk analyses can be a slippery slope for landlords, as tenants may demand similar analyses of landlord creditworthiness.  This could pose particular challenges for landlords, given the financial struggles that many landlords are experiencing in the current economic climate. 

So, should landlords be entitled to accurate assessments of tenants’ risk before entering into transactions?  You bet! With an entire financial services industry dedicated to risk analysis, should commercial brokers provide such services?  Absolutely not!

What do you think?

The Imploding Commercial Real Estate Brokerage Industry in 2010

“Too big to fail!”  “Been around too long!”  “Too entrenched in the market!” Where have we heard these terms before?  The commercial real estate brokerage industry is in for a drastic change in 2010! 

Commercial real estate brokerage companies have been consolidating for years, at the upper size range, right on through to mid-level and small firms.  The last ten years have seen large national brokerage companies swallow-up established brands.  Some of those include  ”include CBRE’s acquisitions of Insignia/ESG,  Trammell Crow, and others, and JLL’s acquisition of The Staubach Company and others.  One recent notable acquisition saw FirstService acquire certain GVA affiliated offices.  Others are in the making.

Despite those strategic acquisitions, the current economic crisis appears to be accelerating change in the commercial real estate brokerage industry. Some small and mid-sized companies are failing.  Some of them are closing their doors and others are being acquired, with their brokers moving to larger companies one way or the other.

The rumors have again begun to swirl about some of the largest commercial real estate brokerage companies in the nation being in irreparable financial distress.  Those companies that have been around forever, that until recently have been considered too big and too entrenched in the national market to fail may, in fact, close their doors and / or be absorbed into larger more stable motherships.

One of the largest and most prominent internationally known brokerage companies, one which once was the gold standard in commercial real estate brokerage, is rumored to be imploding from within.  It has been suggested that this particular company may have only months before its current life support systems are terminated.  Another equally well-known industry behemoth came close last year to defaulting on its debt, which ranged in the hundreds of millions of dollars.  There’s more to come!  2010 promises to be an interesting year in the commercial real estate brokerage business.

The world has changed.  It always does. Sometimes faster than others. And now, the commercial real estate brokerage industry, a business that has remained relatively static for many years, is changing, too.

Will this change be good for the commercial real estate industry?  How will this inevitable evolution affect commercial tenants, buyers, landlords, and investors?   Will it prove positive?  How will individual brokers and their companies (old and new) maintain continuity of service and properly protect their clients?  Some have suggested that the big commercial brokerage companies could become too big to be effective in serving all but the very largest of companies…will that be the case?  How will these changes affect those of us who will still be standing?

What do you think?

Talk About a Broker Creating a Conflict of Interest!

In a recent commercial real estate transaction, two brokers became embroiled in claims of unprofessionalism, unethical behavior, and conflicts-of-interest. What’s your opinion?

A local broker represented a national company in offering that company’s single tenant building for a short term sublease. The sublandlord’s broker placed the space on the market, publicized the offering, and arranged appointments for prospective subtenants and brokers to visit the building.

The sublandlord’s broker hadn’t read the lease and was unaware of its details, despite the building having been on the market for over a year.  He hadn’t contacted the building owner to discuss a potential sublease. Therefore, he had no insight into the owner’s objectives and any associated obstacles the sublandlord might encounter, and was unable to answer basic questions about his offering.

Another broker, representing a tenant, contacted the sublandlord’s broker about the building. The tenant was interested in leasing a large portion of the building, but only for a longer term than the sublandlord could offer.  The sublandlord’s broker confirmed that he had no ability to offer a longer term. He claimed not to know who the owner was, stated that he did not represent the owner, and disclosed that he had never spoken with the owner.

Given the above, the tenant instructed its broker to contact the owner directly to assess the possibility of a long term direct lease between owner and tenant. Under that scenario, the owner would have to terminate a portion of the sublandlord’s lease and enter into a new lease with the tenant.

The owner confirmed that it negotiated transactions without engaging brokers to represent it and confirmed that it was not represented by a broker on the building in question. The owner advised the tenant’s broker to deal with the sublandlord’s broker if the tenant was interested in a sublease and to deal with the owner if the tenant wanted a direct lease for a longer term than what the sublandlord offered.

The sublandlord’s broker became enraged that the tenant’s broker contacted the owner directly, and made claims about the tenant’s broker’s actions being unprofessional and unethical. Then, the sublandlord’s broker demanded that the tenant’s broker deal only with the sublandlord’s broker on all transactions, including: A) a sublease; B) a combination sublease and follow-up direct lease, or; C) a direct lease with the owner.

Remember that the sublandlord’s broker did not represent the owner, but only represented the sublandlord. Yet, the sublandlord’s broker, who had a fiduciary responsibility to protect the sublandlord’s interests and accused the tenant’s broker of unethical behavior, untruthfully claimed to have authority to represent both the sublandlord and the owner.  If this were true, the sublandlord’s broker would have been involved in an obvious and blatant conflict of interest. Moreover, the suggestion by the sublandlord’s broker that the tenant’s broker should only deal through the sublandlord’s broker for all transactions at the building was merely a move designed to restrain the tenant’s ability to deal directly with the owner and achieve the best deal. Sound a bit like a restraint of trade?

My observations:

• The sublandlord’s broker created a conflict-of-interest by insisting that the tenant’s broker not deal with the owner for a direct lease, when the sublandlord’s broker only had authority to represent the sublandlord

• The sublandlord’s broker misrepresented his authority to represent both sublandlord and owner

• The sublandlord’s broker did less than a professional job of representing the sublandlord by not having read the lease; by not being aware of the terms of that lease before marketing the sublandlord’s property; by engaging in presentations and deal discussions with insufficient knowledge; and by not being aware of the owner’s objectives and any associated obstacles, or any opportunities that could be achieved on behalf of the sublandlord

• The sublandlord’s broker was only authorized to negotiate a sublease or assignment, a transaction in which the tenant was not interested. Since the tenant sought a transaction that could only be entered into by the owner, the tenant’s broker acted rightfully in the best interests of its tenant by contacting the owner directly. The claims by the sublandlord’s broker that the tenant’s broker had acted unprofessionally or unethically were false and without basis.

• The tenant’s broker could have extended a courtesy to the sublandlord’s broker by advising that the tenant had elected not to pursue a sublease and had instructed him to contact the owner directly. However, the tenant’s broker was under no obligation to do so, and by this action the tenant’s broker was not in violation of any standard of ethics or professionalism

 

I found this circumstance to be a fascinating twist on the commercial real estate broker industry. What do you think?

Why “TENANTS” Need Written Tenant Representation Agreements!

…because only with a written representation agreement can a real estate broker or advisor represent the interests of a tenant or a buyer!  Absent a written agreement clearly stating that the broker represents the tenant or buyer, under common law the broker likely has an obligation to protect the interests of the landlord or seller.   That’s right!   This is true even if the landlord or seller already has a broker representing it!

What corporate executive in his or her right mind would work with a real estate broker whose job is to negotiate against the executive’s company?  Besides, don’t landlords engage brokers via written agreements?  Don’t companies engage executives via written employment agreements?  Employment agreements, representation agreements, and the like serve, among others, one very important purpose…they set down the terms of a relationship between employer and employee, service provider and client, or otherwise.  So, why wouldn’t a company “employ” its broker or advisor, especially given the risks of not doing so? 

The process of engaging a broker or advisor to represent the interests of your company is very simple.  First, select the right commercial real estate broker that is qualified to address your company’s specific objectives.  Then engage the broker via written agreement that clearly states that the brokerage company is obligated to protect your company’s interests.  Address all the terms that are important to your company, including how the broker will be compensated (most often through commissions paid by landlords) and any other terms that are important to you.  Then get to work on your real estate project knowing that your company will have an objective real estate representative authorized to advise it and negotiate on its behalf.  It’s that simple!

By formally engaging a broker, your company will send a clear message to landlords, sellers, and others that it is serious and has thought-out its real estate project.   Landlords and sellers also benefit when tenants and buyers engaged brokers, as doing so clarifies the relationships between the tenant, landlord or seller, and brokers.

There’s a lot more to this discussion.  But for now…Enough Said!

 

The above is based on guidance I have received from numerous legal experts.  I am not a legal expert.  The above may vary from state to state or province to province.   So, you may wish to validate how this works in your area.

Real Estate Brokers Are Not in the Tenant Credit Guarantee Business – Part Two

In last week’s post, I reviewed a number of issues concerning the transfer of cost and risk from one party to another in business transactions, specifically in commercial real estate deals. That post received a number of interesting comments. There’s more to this story.

When landlords find prospective tenants to be unacceptable risks, those landlords should consider the multiple risk mitigation alternatives available to them, including accepting the risks as they are, working with prospective tenants to minimize risk or to enhance the tenants’ creditworthiness, modifying the terms of the transactions to support acceptable risks, or electing not to complete those transactions becuase of the existing of too much risk. 

When landlords complete lease transactions, a large number of service providers may be involved on both the landlord’s side and that of the tenant. That list could include: lawyers, accountants, space planners, architects, engineers, asset managers, construction contractors, plumbers, electricians, HVAC installers, drywall contractors, carpenters, flooring installers, ceiling installers, elevator technicians, painters, other sub-contractors, property managers, asset managers, mortgage bankers and brokers, delivery contractors, administrative assistants, cleaning contractors, trash haulers, landscapers, snow plowers, and all others involved in completing a transaction or in maintaining the landlord’s property.

Like a tenant’s broker, none of the above service providers are responsible for assessing a tenant’s creditworthiness nor for the future performance of the tenant or the property. So, if a landlord wishes to shift the burden of its transaction costs and risks from itself to an entity other than the tenant, and since shifting that burden to the tenant broker would be unfair, then the cost and risk should be shifted to the entire list of service providers involved in any aspect of the property and its corresponding transactions.   Adjusting the payment of other service providers based on the landlord’s interpretation of a tenant’s risk would actually be unfair, too.  However, if a landlord’s policy was to compensate all of its service providers on a risk adjusted basis, then only in that instance might it be reasonable to compensate the tenant’s broker in that manner.

Interestingly and consequently, if a landlord did attempt to compensate its other service providers in the above fashion, that landlord would likely be out of business.  (I have this vision of big burly union contractors showing up at the landlords office to collect their pay, when told they won’t get their money because the tenant didn’t pay its rent!)  Under that scenario, most service providers would probably find work elsewhere, leaving the landlord with no services to receive or to offer, no ability to conduct business or lease any space, with ALL of the risk for EVERYTHING borne by the landlord, and no one to transfer that risk to.

So, what quid pro quo could a landlord provide to a tenant’s broker in exchange for accepting greater risk?  Could the landlord offer:

• An insurance policy to protect the tenant broker’s compensation in the event of the tenant’s default? 
• The opportunity to participate in the landlord’s future equity appreciation?
• Some other incentives?

But, the above might more closely align the broker and landlord, and could create a conflict-of-interest for the tenant / broker relationship.  Now, that wouldn’t work.  Resolving this issue using the above approaches could become very complicated…probably more so than is really necessary. 

I’ve got a great idea for those landlords that seek to mitigate their cost and risk by shifting that burden to tenant brokers.  Since commercial real estate brokers, especially those that represent tenants, are not in the tenant credit guaranty business, your best bet will simply be to follow the lead of the better quality landlords with which you compete. 

Aportion the cost and risk of your transactions appropriately between yourself and your prospective tenants.  Make as many deals as you can. Don’t unfairly shift your transactional burdens to anyone who shouldn’t participate in them, including tenant brokers and your other service providers.   Life will be a lot simpler that way.  Tenant brokers will be more comfortable dealing with you, and will likely bring you more tenants.  Guess what?  You will almost certainly receive more interest from tenants, because they’ll see you as fair and equitable…the way most tenants like their landlords!

Risk is a funny thing.  When minimized by one party in a negotiation, risk never really goes away…it just goes somewhere else.  Be sure to transfer risk in the right direction.  And, remember that Real Estate Brokers Are Not in the Tenant Credit Guarantee Business!

Real Estate Brokers Are Not in the Tenant Credit Guarantee Business – Part One

In every kind of business transaction, whether real estate or otherwise, the wise approach to increasing profitability is to reduce costs and risk.  Risk is an interesting concept, in that even when avoided, it never really goes away. Risk remains…always, only in different forms and quantities, and in different hands.  If one party in a two-party transaction reduces its risk, it is likely that the avoided risk simply transferred to the transactional opponent. 

Transferrals of risk are a reasonable part of every negotiation, so long as such obligations are not unfairly thrust onto others.  But, like investment in a risky stock or placing a risky bet, an increase in risk must be accompanied by additional opportunity as an offset. Otherwise, the risk receiving side of the transaction loses by virtue of taking on a bigger burden with no potential increase in profit or other benefits, and the transferring side of the transaction experiences a dramatic win as the result of paying no cost in exchange for minimizing its risk.

In lease transactions, commercial landlords must manage their risk in order to compete profitably and to sustain their own businesses.  Transaction related cost and risk should be borne either by landlord, tenant, or both, depending on various considerations.  However, lesser quality landlords will attempt to reduce their cost and risk by shifting some of those burdens not to tenants, their transactional opponents, but instead to tenant brokers. This usually comes in the form of an insistence by the landlord to:

•  Lower commission rates
• Calculate commissions on phantom rent amounts and other discounts 
• Calculate commissions on shorter lease terms that aren’t applicable to the corresponding transaction
• Propose payments over periods of time 
• Avoid or suspend payments or require paid commissions to be returned in the event of tenant default
• And, plenty of other reasons that serve only to unreasonably benefit landlords

Transactional cost and risk should only be borne by transactional participants. Transferring cost and risk to service providers, those who seek to perform a one-time service, collect their compensation and move-on, is unfair and inappropriate, especially when forced. Tenant brokers, like other service providers involved in various stages of real estate transactions do not belong in the chain of risk. Interestingly, landlords rarely offer tenant brokers an upside quid pro quo in exchange for a proposed increase in risk. 

The existence of a tenant broker in a transaction means that the tenant will be better advised as to its in-place transactional alternatives and those associated with relocating.  It is for this reason and others that most landlords would prefer that tenants not utilize the services of tenant brokers. So, when landlords attempt to shift cost and risk to tenant brokers, they typically feel little sympathy for the impact their actions have on them.  Moreover, many landlords assume that if they can shift cost and risk from themselves without placing additional burden on their prospective tenants, they’ll have a greater likelihood of completing more transactions. 

An experienced tenant broker will advise its tenants in advance that, because landlords must focus so intently on managing risk, especially in the current economic environment, the tenant’s creditworthiness will play a significant role in the structure of all components of the transaction they seek. The tenant broker must make it clear that, like in other financial transactions, the tenant will be able to achieve certain terms or not, based on the landlord’s interpretation of the tenant’s financial condition. A reasonable tenant will recognize these facts and will proceed accordingly.

The role of the tenant broker is not to analyze nor qualify the quality of a tenant’s credit. Since that responsibility should fall to the landlord, and since the tenant broker is not a direct participant in a transaction between landlord and tenant (paying or receving rent, fullfiling lease obligations, etc), the tenant broker should not be expected to shoulder the burden of the tenant’s creditworthiness in how it receives its compensation.  Interestingly, landlords rarely offer tenant brokers higher compensation when their tenants have excellent credit! 

In next week’s post, I’ll write more about specific issues associated with the transfer of cost and risk in lease transactions.  Please send me your comments and check back again!