6 Critical Steps to Protect Your Commissions in a Challenging Market

The compensation of most commercial real estate brokers is performance based, especially in lease transactions.  When real estate brokers perform, they are entitled to receive their compensation. Yet, too many seasoned brokers put their compensation at risk, too often.

Follow these six simple, but critical steps to protect your commissions, and to ensure that you’ll be paid fairly, in-full, and on-time.

Step 1. Speak Up!

As early as possible, discuss your compensation requirements with both your tenant – client and any landlords with whom your client may consider entering into lease negotiations.  That means at your first meetings, before your prospective client actually becomes your client, and at your first landlord meetings, advise them how you expect to be compensated, how much, and why.  Advise them that your compensation is performance based…based on YOUR performance in bringing about an executed lease, not based on the tenant’s performance once the lease is signed.  That’s a critical aspect of a real estate professional’s compensation.  Once the transaction has been completed, so has the job of the real estate broker, and at that point his / her compensation has been earned and is due.  Real estate brokers are NOT in the tenant credit guarantee business and are not responsible for the performance of the tenant after the lease is executed.  Read more on this subject.

Explain to your tenants that at some point, while you are working to protect them, you may ask for them to demonstrate to the landlord that they expect you to be compensated adequately.

Step 2. Make It Clear in Your Representation Agreement

Never work to acquire real estate on a company’s behalf, without having a written agreement between them and your company.  Your agreement should define your obligations and those of your client.  It should specify how and by whom your company would be paid, and should state that your compensation is not dependent on your client’s performance under any lease. Moreover, in your agreement, your client should agree not to execute a lease until your company has secured an executed commission agreement from the landlord.

Step 3. Spell It Out in RFPs and Offers:

Include text in all requests-for-proposal and offers, specifying how much and by whom your company would be paid, that your compensation is due in-full upon execution of the lease, and that the tenant’s creditworthiness and/ or performance under the lease shall not impact how, how much, or when your compensation would be paid. The old standard text that often appears on offers saying “Commission to be paid by separate agreement” is no longer a viable means of protecting yourself.

Shouldn’t the landlord know in advance what your compensation expectations are, so he/she can properly budget for transaction costs?  Shouldn’t your tenant-client know how you’ll be paid?  Then, why not be transparent?

Include text in RFPs and offers clearly stating that you make no representations, claims, or warranties, as to the tenant’s creditworthiness, financial condition, or ability to perform any of its obligations, that the landlord will be solely responsible to conduct its own investigation of the tenant and satisfy itself as to the tenant’s financial condition, and that your compensation shall not be conditioned on the tenant’s creditworthiness, financial condition, or ability to perform any of its obligations.

Step 4. Be Clear in the Commission Agreement

Irrespective as to whether it is a common practice in any market for a landlord and tenant broker to enter into a commission agreement, always secure a written commission agreement before a lease is executed.

In almost an identical fashion, include text in the commission agreement, whereby the landlord acknowledges that you made no representations, claims, or warranties as to the tenant’s creditworthiness, financial condition, or ability to perform any of its obligations, that the landlord will be solely responsible to conduct its own investigation of the tenant, and that your compensation shall not be conditioned on the tenant’s creditworthiness, financial condition, or ability to perform any of its obligations.

By the way, since you’re asking the landlord to acknowledge that you made no claims, be certain not to make any!

Step 5. Use the Lease to Protect Your Compensation

The lease provides an excellent opportunity for you to be transparent with your tenant and bring the tenant in on the commission conversation.  Explain to your tenant that as you fight hard to secure favorable terms on its behalf, you will need the tenant’s help in securing favorable commission terms.  The tenant’s assistance becomes especially important since you will not ask the tenant to compensate you, but only to stand arm-in-arm with you as you negotiate both the lease terms necessary to protect the tenant and the commission terms needed to protect your company.

With tenant and broker in a unified front, this approach benefits both tenant and broker.  It clearly telegraphs to the landlord that both tenant and broker are aligned in all respects, are co-dependent, and that the landlord will not likely be able to divide and conquer, as some overly-aggressive landlords will seek to do.

Include text in the lease stating that if the landlord does not pay the broker its commission in-full and on-time, in accordance with the terms of the commission agreement, then the tenant may, at its option, pay the broker’s commission and deduct an equal amount from its rent without being in default.

Most tenants will have no issue with the addition of this type of text, as it places no burden on them, and the decision to pay you will be at their discretion.

Some landlords will yell and scream and claim their lenders will never approve of such text. Since such text places no greater burden on landlords than the terms contained in the commission agreement, and since it specifically references the terms of the commission agreement, lenders typically take no issue with such text.  If a landlord fights hard on this issue, be very careful and there may be real problems hiding around the next corner.

Step 6. Secure the Lender’s Cooperation

Landlords get lenders to grant non-disturbance agreements all the time, wherein lenders agree not to disturb tenants’ right to use and occupy their space in the event of a building’s bankruptcy or other similar circumstance.  Similarly, brokers should insist that landlords secure from their lenders written agreements stipulating that, in the event of a building’s bankruptcy or other action that might displace the landlord, the lender would fulfill the landlord’s commission obligations.

In tough times, unusual things can occur, and a business-as-usual approach can prove dangerous. This is especially true when it comes to broker compensation, which is sometimes treated as the last point to be negotiated or as a landlord’s slush fund, in some transactions.  Moreover, if during lease negotiations on your client’s behalf, a rogue landlord thinks he/she can get the best of you because you were not aggressive in securing your compensation requirements, that unfortunate perspective will likely translate into how the landlord will negotiate with you for your client’s lease. If you’re weak in protecting yourself, you’ll be perceived as being weak on your client’s behalf, and in fact, you may actually lose for your client, while you lose for yourself.

 

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 finance 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 Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, 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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Copyright Real Estate Strategies Corporation 2011.  All Rights Reserved.

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THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.

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