Q&A on Tenant Representation with a Commercial Landlord
Part Two of a Three Part Post
Most commercial landlords understand the role of tenant representation brokers and welcome the benefits they derive when tenant representation brokers properly educate and advise their tenant clients. However, some landlords, mostly old-school die-hards, continue to maintain very negative views of all things about the tenant representation process. Some actually get offended by the very idea of a tenant representation broker. Offended!? What’s that about?
In a recent Q&A conducted via email with a prominent commercial landlord, I had the opportunity to hold a completely frank and open discussion about his views about tenant representation brokers. And, while some of the conversation was challenging at times, both of us came away having learned from each other.
I invited the commercial landlord to provide me with his views on tenant representation, tenant representatives, and how he’d prefer to conduct the business of leasing his properties. The conversation got so good, that it took me three posts to include it all. Be sure to go back and read Part One, and then check-in again next week to read Part Three! Following is Part Two of that dialogue:
Read Part One of this three part post
5. Landlord: I have to put up all the cash and take all the risk! I don’t appreciate that tenant representatives won’t share my risk.
RealStrat’s Response: Tenant representatives are well aware of the many challenges that landlords face, especially in the current economic environment. A large part of what landlords must contend with is how they can effectively manage their risk. Landlords bear a lot of risk in leasing transactions, and in most everything they do. However, with risk comes the potential for upside reward.
Tenant representatives, and brokers in general, are also in the risk / reward business, but only to the extent of investments of their time and resources prior to, and during, the execution of a transaction. Brokers pursue tenants and bear the risk of not winning those assignments. Then after being engaged, brokers risk that their tenants might not complete transactions that would yield compensation commensurate with the broker’s investment of time, resources, and risk.
Beyond that, specifically after landlords and tenants execute transactions, brokers are not in the business of managing the same risks as landlords. Nor are brokers entitled to the same upside rewards as landlords, including equity and portfolio appreciation, tax advantages, debt and equity financing, and more.
So, regarding compensation and risk participation, like every industry, landlords and tenant representatives bear their own risks. When engaged in transactions, tenant representatives are not participants in landlord’s risk (nor in landlord’s upside benefits) for very simple reasons, because participating in landlord risk would:
A) Align the interests of tenant representatives with that of landlords, which would pose a clear conflict-of-interest in relation to tenant representatives’ obligation to act solely in the best interests of their tenant clients.
B) Unfairly affect the compensation of tenant representatives by virtue of their acceptance of landlords’ risk without the benefit of the quid pro quo associated with the upside opportunity afforded landlords. Again, if such upside were provided to tenant representatives, it could align tenant representatives and landlords posing conflicts-of-interest between tenant representatives and tenants.
C) Unfairly force tenant representatives into a compensation model other than that of generating fees
D) Place tenant representatives in the position of acting as guarantor of their tenants’ ability to perform under their leases
None of the above fit into the tenant representation model too well. Frankly, landlords and tenant representatives have their own risks which should be kept separate from each other and from those of tenant representatives.
6. Landlord: It is wrong that tenant representatives want to be paid up front when I don’t know if the tenant will uphold its lease obligations or pay its rent, especially after I put up all the transaction costs and have to wait until all the free rent expires.
RealStrat’s Response: This is a similar discussion to the one above about risk. Waiting for an extended time period before getting paid creates real challenges. As tenant representatives, we completely understand that. Remember, that it typically takes three to nine months for landlords and tenants to complete transactions, plus many months or even years for tenant representatives to build relationships and win a tenant’s business. So, by the time tenants close their deals, tenant representatives have typically been working without compensation for at least a year, and in many cases, longer.
But, let’s get to the real issue of the relationship between a tenant representative’s service and its compensation. When a landlord and tenant execute a transaction, as far as the landlord is concerned, the job of the tenant representative is done. After that, it’s then up to the landlord and tenant to perform their obligations under the terms of the lease they executed.
Prior to executing a lease with a tenant, one would expect that a professional landlord would have assessed the tenant’s creditworthiness, and determined whether the tenant was an acceptable risk and whether or not the landlord should even conduct business with the tenant. During the lease term, it is the tenant’s responsibility to make rent payments on a continual and timely basis and follow the rules defined in the lease. If either the landlord made a bad assessment (or, didn’t conduct one), or the tenant fails to perform, neither of the above are controllable by, nor the responsibility of, the tenant representative. Accordingly, tenant representatives are not in the tenant credit guarantee business.
Like the plumber who installs a sink in your home, if you select the sink because you’re satisfied with its quality and then you pay the plumber because you’re satisfied with his installation, if the sink fails because it was manufactured poorly or it cannot perform the way the manufacturer said it would, then you should pursue the manufacturer, not the installer, unless of course the installer provides you with a written guarantee for the product, too. Few commercial real estate brokers are in a legitimate position to guarantee a tenant’s performance under a lease.
And, NO! Mr. Landlord, you should not rely on claims made by a tenant representative as to a tenant’s creditworthiness. Neither should tenant representatives make such claims. Do your own homework and protect yourself from unnecessary risk. If you foolishly rely on anyone to ascertain a company’s creditworthiness, especially one who is not qualified to make such a determination, then you deserve the added risk and the consequences.
Remember that plumbers don’t accept payment each time you turn on the water, because they don’t usually guarantee the manufacturer’s product, only their own work. Correspondingly, tenant representatives don’t guarantee the ability of tenants to perform their lease obligations, only their own work. If you’re not satisfied with the tenant representative’s work (remember that they represent the tenant!), then address that before completing the transaction (don’t do the deal!), not after the tenant defaults. So, when the plumber and the tenant representative have completed their duties, they both expect to be paid in-full without the risks associated with accepting payments over time, tenant default or sink failure, or otherwise.
Choose any analogy you wish. If you buy a new car and it doesn’t work, the manufacturer must stand behind it. You don’t get to take back the dealer’s compensation.
Read Part One now. Stop by next week to read Part Three of this three-part post.
About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
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