Commercial Real Estate Professional Calls for Change to Industry Practices
Non-disturbance agreements have been around for a long time. They have become a crucial component in protecting corporate tenants from being removed from their space by lenders who may foreclose on the buildings occupied by those tenants.
Should commercial real estate brokers be entitled to the same protections…that, if a lender were to foreclose, the broker’s rights to receive future commissions would also carry forward and become the obligation of the lender?
Currently, in most states, broker commission agreements are personal service contracts between landlord and broker, and don’t run with the land. Basically, if a lender were to foreclose on a building where a broker placed a tenant, the broker would likely have no standing. If the commission agreement provided the broker with the opportunity to receive commission payments for future events, such as if the tenant were to expand, extend its lease, purchase the building, or otherwise, in most cases, the lender would have no obligation to honor the commission agreement. And, the broker would likely receive no compensation under the commission agreement.
Since commercial real estate brokers are often one of the primary reasons a tenant and a landlord are brought together, shouldn’t brokers be entitled to the same protections often afforded tenants? Like the tenant not being removed in the case of lender foreclosure, and like other protections afforded landlords, shouldn’t the broker’s rights also not be removed?
This approach has been applied from time to time, but only in extreme instances, and with a lot of effort. An industry wide standardized “broker non-disturbance agreement” is an idea whose time has come, especially at a time when so many commercial landlords are losing their buildings and while others are simply not capable of paying their bills, including commissions. Like a non-disturbance agreement between a tenant and lender, a broker non-disturbance agreement would be a separate document between broker and lender. In a broker non-disturbance agreement, the lender would agree, in the event it foreclosed on the landlord, to take-on the responsibilities to which the landlord agreed in the commission agreement. In this manner, the broker’s future interests would be protected through the agreement with the lender.
Some landlords may misunderstand the true positive value associated with offering broker non-disturbance agreements. Consider the office building that is rumored to have financial challenges. Some brokers might be less eager to aggressively pursue transactions there for fear of not being paid. By offering a broker non-disturbance agreement, financially challenges landlords may be able to attract more brokers to their buildings, and ultimately, increase leasing activity and close more deals.
Of course, other opportunities exist to protect brokers, including the inclusion in the lease document the right by the tenant to pay the broker its compensation, while deducting that cost from its rental obligations
Either way, commercial real estate brokers certainly provide valuable services to tenants and landlords. And, with the extreme challenges and very real risks that exist in today’s business climate, like others, brokers are entitled to reasonable protections and the expectation that they will receive the compensation to which they are rightfully entitled, especially those to which others have contractually committed to pay.
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.
There was a time when a person’s word and his / her hand shake meant a lot. They were both binding and had real meaning. Today, with vast global cultural differences, various interpretations of words, lengthy and extremely detailed contracts, a highly litigious society, and some plain-old dishonest people, conducting business on a hand-shake is not only inappropriate, it’s downright dangerous!
Remember that two honest people, with the absolute best of intentions, can easily misunderstand each other and disagree. If this is true, then why do some commercial real estate brokers still conduct business on a hand-shake? Why do they work on behalf of companies to negotiate transactions without so much as a simple document describing the roles of client and service provider? Are they overly trusting? Are they lazy? Is there an advantage to working in this manner?
In many states, a real estate broker working without a document indicating which party he / she represents may be in violation of license law. Such action could subject the licensee to fines, temporary or permanent license suspension, or worse. In other states, the role of a real estate broker, and therefore his ability to serve his customer as intended, may be predetermined by law, irrespective of documentation.
So, at a time in history when creating written records and documents is easier and quicker than ever before, why do some commercial real estate brokers still work on hand shakes? Is this simple laziness? I’ve heard some brokers say that instead of spending time on documenting their client relationships, they move directly into the deal. They say that paperwork doesn’t make them money, but closing deals quickly does. Some positively characterize this approach as being focused on the client’s needs, not their own. Is that really true? Since the best written agreements, in these instances, describe the roles, rights, and responsibilities of both real estate brokers and their clients, I don’t see how working without such a document could possibly be in the clients’ best interests. I don’t even believe it is the best approach for service providers, either!
Some brokers have told me that they work on a hand shake, because their clients prefer not to sign agreements. I find this to be a weak argument. Don’t companies sign other agreements, like leases, employment agreements, purchase and service contracts? Most companies will gladly sign a representation agreement when the reasons and benefits of doing so, as well as, the risks of working on a hand shake, are properly presented to them. In fact, most companies will shy away from executing an agreement when they’re uncertain of the ability of the service provider to perform, when they lack confidence in the service provider’s experience or expertise, or when they are not yet committed to a project.
Are real estate brokers aware of the true implications of not documenting their client relationships? Do they know that when working on a hand shake, their relationships, and their corresponding obligations, may not be clear? Do they disclose to their clients that without proper documentation, their relationships may be different than intended? Do they explain the increased potential for conflict-of-interest? Do they communicate that, absent a written representation agreement, a real estate broker presenting buildings to a prospective tenant or buyer may have a binding legal fiduciary obligation to represent the property owners? By not informing their clients of these facts, brokers can land themselves in trouble.
Given the apparent dangers, why would any commercial real estate broker or his client, work on a hand shake? What are your thoughts?
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.
It is amazing that today, some commercial real estate brokers still believe that they and their clients must physically visit every building that might possibly support their clients’ needs. This remains the case in many geographic markets that are over-supplied with millions of square feet of available properties. My gosh! Brokers forcing their tenant clients in and out of 10, 15, 20, or more buildings over an entire day or two, just seems so counter-productive! In fact, it is! Your clients’ time is much too valuable to waste it trudging in and out of building after building. And, frankly, your time is equally valuable. So, why waste so much time?
By showing your clients every available property, are you really providing them great service or are you simply protecting yourself?
With the availability of technology and information at your fingertips, there exists no need to show your clients every property.
For those brokers who have not been appointed the authorized or exclusive representative of the tenant seeking to acquire a building, well, yeah, you do have to visit every property. Because in that capacity, you don’t represent the tenant and you’re not really providing them much service. In most states, your binding fiduciary obligations would be to yourself and/or to the property owners whose buildings you present. So, you have to show every building in order to protect your own interests.
The optimal approach to delivering service to your clients is to be formally engaged, by written agreement, and authorized to represent their real estate interests. As your clients’ authorized representative, you should have a process that permits you to gather information about them and their business needs, so you can gain an understanding of how they wish to acquire and use real estate. Coupled with your knowledge of your local market, you should be able to marry your clients’ needs with those properties that can best accommodate them, and eliminate those properties that don’t apply. If you’re uncertain about whether particular properties would work, you can always provide your clients with a written or electronic report, conduct a desktop review, and together with your client select those that are best suited.
If you’re concerned about covering your tail or losing a commission, for fear that some outside broker may bring an eliminated property to your clients’ attention and that your client may forget that you’ve already presented it, or because you’re concerned that some landlord may attempt to circumvent you, there is an easy solution. Simply provide your client with a list of those properties that you eliminated along with your reasons, and offer to inspect those properties with your client at a later date, if the client wishes to see them.
In this manner, your client’s time and resources will be respected and maximized, your tail will be well covered if you feel it must be, you will provide a better service to your clients, and will drive to conclude their transactions quicker, more effectively, and more profitably for everyone.
So, NO, your clients don’t really need to see every available property!
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.
Hey, commercial real estate brokers? Keep your compensation a secret, even from your own clients. They don’t know how much you make, they’re too dumb to figure it out, and if you don’t bring it up they won’t think about it. NOW, REALLY!
In most commercial real estate leasing transactions, commercial brokers representing tenants receive their compensation in the form of commissions paid by landlords. Yep, that sure sounds like a conflict-of-interest to me! But, unfortunately, that’s the way the industry works.
Guess what?
Your clients can figure out your compensation…and, they will!
Why withhold information from you own client?
When your role is to protect your client’s interests, withholding information that they can easily figure out on their own makes you look stupid and dishonest
Are you obligated to disclose your compensation to your clients? While you may not have any legal obligation to do so, from a moral and ethical perspective, I’m pretty sure the answer is “Yes!”
Whether or not you should disclose your compensation to your clients also begs other questions:
Why would you want to be transparent?
Are you concerned that someone might view your situation as your being over compensated somehow?
Did compensation discussions take place that may have negatively affected your client?
Is something negative going on?
Did you have to do any favors or compromise your position (or that of your client) to secure your compensation?
Were those favors at the expense of your client? Did you disclose them to your client?
What might your client have lost in exchange for the compensation you secured?
Have you compromised your client in any way?
Do any conflicts-of-interest now exist or did they previously exist?
If all you’re doing is getting paid, fairly and adequately, why wouldn’t you disclose your compensation to your client…the one who is the very reason for which you’re able to generate compensation?
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.
“Hire us to represent your property, because we represent so many other buildings…and, we can tell about all of the leads at those buildings…to help you lease or sell your building quicker!”
In this day and age, when transparency and conflict avoidance are top of mind of almost every corporate executive, I am amazed that some commercial real estate brokers still use this tired and lame approach when soliciting property representation engagements. What is truly amazing is, that given the above, some property owners still buy this line of trash!
Some brokers actually tell property owners that they should hire those brokers because the brokers represent a lot of other buildings and will share with them the leads that the receive on those other buildings. That is a very common pitch! Those brokers make claims like:
You’ll have our complete attention (How is that possible?)
Because we represent so many buildings in the local market, we see every tenant (Will you share my leads with other landlords?)
We’ll tell you everything that’s going on in the market (Will your other clients mind?)
Sign with us, and you’ll have a greater chance of making more deals (More or fewer deals?)
So, let me understand this: Some property owners are actually comfortable not receiving true representation, the kind of aggressive and objective expertise designed to protect their interests, beat their competition, and help them succeed…the kind of service to which the broker representation agreements the sign actually entitle them?
Instead, they’re ok with their buildings being thrown into a large pool, so when a tenant jumps into that pool, if the property owners’ lucky number just happens to pop up, or if the broker overseeing that pool decides it’s that property owner’s turn, only then would they get a shot at that deal? Is that really what they’re signing up for?
Do these property owners recognize that while they’re enjoying the supposed benefits of so many more leads that come from throwing their buildings into that very large pool, that some buildings or property owners will drown? Do they think that brokers offering this service will favor them, and that all of the other property owners who were promised the same access to “all of the leads” won’t be clamoring for the same tenants?
Have these property owners considered that while they’re feeding on all of those supposed leads generated for them by all of those other buildings, that leads for tenants or buyers who may be sincerely interested in their buildings, will also be thrown into that pool, thereby possibly diminishing their likelihood of success? Do they see that those tenants and buyers may be pulled from that pool and rescued by some other property owner at another building?
Is this true representation? Isn’t this approach a blatant conflict of interest? Do many property owners actually accept this approach? Do the best brokers offer something better?
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.
As a commercial real estate broker, you probably consider yourself to be professional, fair, open, and honest. Are you also transparent? Completely? Follow these questions and comments and decide for yourself just how transparent you are and whether your clients view you the same way.
Can you describe the basic principles behind Sarbanes-Oxley?
Do you tell clients and prospects that you will be transparent in your dealings with them and on their behalf?
Are you really transparent in your dealings, or is that just marketing hype?
Do you keep your tenants and buyers informed about your dealings on their behalf and about the compensation to which you may be entitled when they complete their transaction?
Do you only mention compensation to your tenant clients when a landlord offers you a discount, an unacceptable rate, or payment schedule that takes too long or puts you at risk?
Do you also inform your clients when landlords offer you compensation bonuses or incentives?
Do you disclose relationships to your clients that THEY may see as being in conflict with your ability to properly serve their interests, even if you don’t see the same conflicts?
Are you really completely transparent?
Are your company’s relationships so vast and geographically dispersed that it is often difficult to understand the many possible conflicts-of-interest that may exist, let alone identify and report them to your clients?
Are you transparent with your transactional opponents and competitors? Should you be?
Being transparent is not a buzz word, it’s an absolute, a must in business. You cannot be transparent on some issues, and not on others, and then claim to be transparent. That’s being partially transparent, which means you’re not really transparent. Either you’re transparent or you’re not!
Being transparent in your dealings is not that tough. What are you afraid of? Do you think your clients will figure out that maybe you’re not as good as you said you were? Are you afraid that if you are transparent about your compensation that your clients may want some of it? If you are truly concerned about this, then perhaps you should ask yourself if you really are worth what you expect to receive in compensation…if you deliver sufficient value to your clients, so that they will recognize your worth and entitlement to fair compensation.
Are you afraid to disclose that a landlord offered you a compensation bonus? Why? Do you deserve it? Will accepting it have a negative impact on your client? Would your client think so? Would your client be concerned that you didn’t disclose it? If, for some silly reason, you chose not to disclose an offer of a bonus, what a tremendous opportunity you missed to build a stronger relationship with your client
If you don’t create a lot of value for your clients, if you’re merely an old-fashioned real estate space jockey, doing little more than driving your clients around the market, dropping them on a landlord’s doorstep and expecting to pick-up a check when the landlord completes your client’s deal, then you SHOULD be nervous! While you’re still providing a service and are entitled to be paid, you’re probably not entitled to the same compensation as a true professional real estate broker or advisor who helps his/her clients plan and negotiate complex transactions and provides superior service to them. Like in any other business, if you’re in it for a quick hit and provide minimal service and value, you should expect to be compensated in a similar fashion, and frankly, in a lesser amount than your competitors who really deliver!
Wouldn’t it be great if your clients backed you up when it came time for you to be paid? Yours won’t? Why not? Could it be that you haven’t been transparent, that they don’t trust you or don’t believe that you are worth the amount of compensation you seek? Your relationship with your clients, and how your compensation is treated, can’t be one way. If you choose not to accept discounts, then don’t accept bonuses. State your compensation requirements to your clients at the outset of your engagement. Inform them that you don’t accept bonuses, and neither will you accept discounts. When a landlord or seller offers you a bonus, tell them you must inform your client (that tells the opposition you can’t be bought), then tell your client! $10 bucks says that, so long as you provide your clients with stellar service, every once in a while, your clients will let you keep those bonuses. If not, then by your transparent disclosure, it will be the best investment in your relationship with that client that you could ever make! You’ll also likely find that your clients will support you when a transactional opponent attempts to under-pay you or tries to put your compensation at an unfair risk.
If a rogue landlord attempts to force you to accept a compensation amount or structure that is less than you would ordinarily accept, advise the your client, and let the landlord know you intend to do jus that.. Many tenants won’t feel comfortable with a landlord who attempts to under-pay their real estate advisor, as they often see that as a sign that the landlord will be unfair to them, and will likely under-fund or under-deliver for them, too. Ask your client to support your efforts to secure fair compensation. If your client recognizes the value you’ve created for it, they’ll back you up almost every time!
Heck! Even if you don’t get to keep a landlord offered bonus, think of all the incredible goodwill you’ll create with your client, your ability to deflate the opposition’s intent on swaying your negotiating strength by “buying you off”, how much stronger you’ll be in negotiating on your client’s behalf, the additional concessions you’ll likely secure on your client’s behalf, the strengthening of your reputation, and the future credibility and additional business opportunities you’ll likely get from the client who knows he can trust you…even with cash!
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.
Yeah, that’s right! “Always Cut Your Commission!” And, why not? If the only value you can offer your clients is your price, then you probably will have to cut your commissions to stay in business!
Actually, let’s clarify what is often referred to as “Commission Cutting.” It simply means that one broker is willing to sell his or her services at a lower rate than he or she would for other projects, or perhaps in comparison to his or her competitors. So what? Does that mean every one in the local market must sell their services at the same price? If you buy shoes from one store at a low price, does that mean that all of the other shoe stores will lose all of their customers and go out of business, just because you got a good deal?
Just like in other industries, there exist many common practices in commercial real estate, including those surrounding broker compensation. But, no “standard” compensation or commission structure exists. In fact, in most states, setting commission standards is considered price-fixing, and is illegal!
So, what’s all this noise about brokers who cut their commissions and how that supposedly affects the compensation of other brokers? The response I often hear is that if one broker offers low-priced services then every landlord, tenant, buyer, and seller in that market will make the same demands. Really? Well, guess what? They already want your services at the lowest possible price. Shouldn’t they? Don’t you want to buy those shoes as inexpensively as possible? Don’t you negotiate for a lower price when you buy or lease a car? Didn’t you negotiate when you bought your home? Did everyone else get their home for the same price you did? Of course not! Seeking a lower price is the American way, and there isn’t a darned thing wrong with it.
Ask yourself these questions:
Are you a low-cost service provider?
Is low-cost always the winner?
NO! If that were true, there would not exist high-priced hotels, restaurants, resorts, clothes, homes, cars, etc., etc., etc., or anything of better quality. If low price always won, consumers and businesses would never buy the best quality or engage the best of any service provider. Instead, they would only hire the cheapest. And, in those instances, they’d get what they paid for.
Forget what other brokers do. There is plenty of room in every industry for low-cost service providers, because some clients do make purchasing and hiring decisions purely on cost. Low cost, almost always means low quality, and those who hire only on a low-cost basis typically receive services commensurate with what they pay. And, if that’s their preference, so be it!
The answer here is very simple: If you are a low-cost service provider, be the best one in your market. If, on the other hand, you wish to be something other than low-cost, make sure that like Mercedes, BMW, Nobu, Gucci, and other fine products and service providers, you provide your clients with such incredibly valuable services, experiences, and outcomes, that your other-than-low-price will be warranted and you will be in demand!
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.
If you’ve read any of my writings over the last few years, my positions are clear about the silliness that some die-hard commercial landlords still play when it comes to paying commissions that are due real estate brokers. Most landlords are very professional, appreciate the efforts put forth by commercial real estate brokers, and gratefully pay their compensation in-full and on time. But, there still exists this small, decreasing group of curmudgeon-like landlords, who think it is their right to treat brokers unreasonably and unfairly. Their days, like their ability to realize great success, are numbered.
One of my all-time favorites is how many in this dying little group of commercial landlords think that real estate brokers are the guarantors of tenant creditworthiness, and that commissions paid to brokers should be conditioned and contingent on tenants performing their lease obligations. Some of these knuckleheads even think brokers should reimburse landlords when tenants default. The answer to this is really simple. Commercial brokers:
* Are not credit analysts, and cannot provide you with any more details than you can obtain on your own
* Cannot guarantee tenant performance any more than they can guarantee landlord performance
* Deliver tenants to landlords, landlords to tenants, and negotiate transactions
* Have completed their job when the lease is executed
* Are protected by the laws of most states, which say that commissions on lease transactions are earned when the documents are executed, not over time or based on anyone’s performance
Despite the above facts, some landlords unfairly seek to shift their business risk to commercial real estate brokers, by claiming that the commissions due those brokers should either not be paid or reimbursed to the landlord, if a tenant defaults in the performance of its lease obligations.
To those landlords, I offer a simple response:
When you stop payments to, and / or receive reimbursements from ALL of your accountants, advisors, architects, attorneys, builders, cleaning companies, consultants, contractors, cost estimators, expeditors, delivery companies, drywall installers, electricians, elevator companies, engineers, environmental service providers, financial advisors, fire safety technicians, HVAC installers, insurance brokers, landscapers, lenders, masonry contractors, maintenance companies, management company, mortgage brokers, paving contractors, plumbers, roofers, security contractors, steel erectors, subcontractors, suppliers, tax advisors, trash haulers, truck drivers, utility companies, vendors, window suppliers, YOURSELF, and everyone else involved in your transactions in any way…AND, you advise me BEFORE we engage in any discussions that you will unfairly attempt to shift your business risk to me and to everyone else…only then, would I possibly consider doing business with you!
And, after you inform all of the above about your new payment policies, let me know how much longer you actually expect to be in business. Frankly, when I explain your approach to my client…the tenant…there’s a very good chance they won’t want to do business with you, either!
So, let’s avoid this ridiculous conversation. You bear what is rightfully your risk, the tenant will bear its risk, and we’ll bear ours, so we can all focus our energies on the real reason we’re engaged in a dialogue…creating a transaction between you and our tenant!
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.
As your company seeks to reduce costs and preserve its cash, it is important to keep a careful eye on those other companies that provide services to you that can have a material affect on your ability to conduct business productively, safely, and profitably. Specifically, your company’s landlord could be experiencing financial or other challenges that, if unresolved appropriately, could hinder your company’s ability to enjoy a productive business environment, irrespective of your continued rental payments.
Watch for a number of issues that could signal your landlord is having difficulties, or may be headed for them. They could be signs that your landlord may be in danger of losing its building. While this list is not intended to be complete, some indicators may include:
1. Significant increases in vacancy in your building
2. Increases in vacancy in other buildings where your landlord has an ownership interest
3. Increases in vacancy in neighboring competitive buildings
4. Construction projects that start at your building but, languish unfinished for extended time periods (typically a sign that contractors are not being paid on time or at all)
5. Decline in response time and / or communications for service, maintenance, or repairs (a sign that staff has been cut or is stretched too thin)
6. Increase in equipment and system breakdowns, such as elevators, HVAC systems, etc. (indicates a decline in preventative maintenance, staff cuts, or more)
7. Fewer landlord or management company employees visible on site
8. Decline in security, life and property safety services
9. Consistent lack of consumable items in restrooms and other areas
10. Interior office, common area, or window cleaning occurs less often
11. Trash not disposed of in a timely manner or is stored in basements and other areas
12. Snow not removed from parking lots in a timely manner
13. Landscaping not updated or maintained and / or grass is cut less often
14. General deterioration of the appearance of the building, parking lots, and grounds
15. Reduction of tenant events
16. Deferred capital improvements
17. Preventative maintenance announced or planned but, not implemented
18. Floors, glass, and metal and other interior components not polished or maintained
19. Band-aid repairs being made in place of needed capital replacements
20. Unresolved mechanics liens from contractors and other service providers
21. Real estate taxes delayed or not paid
22. Mortgage payments delayed or not paid
23. Water, utility, or other payments delayed or not paid
24. Increase in unresolved or unpaid fines from the municipality and / or other governmental authorities
25. Substantial and / or unexplained increases in operating expenses and costs of landlord or management company provided services passed on to tenants
26. Landlord making multiple requests for you to sign estoppel certificates or lease summaries (suggests that the landlord may be scrambling for financing or attempting to sell the building)
27. Real estate brokers unwilling to show your building to prospective tenants (suggests that landlord is unable or unwilling to pay commissions – typically a sign of a cash crunch)
28. Contractors seeking payment from you instead of landlord (indicates a lack of confidence on the part of contractors in their ability to be paid on time, in full, or at all)
29. Contractors unwilling to work in your building (see above)
30. Multiple switching of leasing and / or managing agents, building managers, cleaning companies, security services, vendors, service providers
31. Landlord selling other assets
32. Landlord’s inability to sell or refinance your building
33. Change in landlord’s leasing program – agreeing to many short term leases to small, transient, and / or undesirable companies
What can you do to protect your company and assure that your environment remains productive, safe, and profitable, and that your company receives the services to which it is entitled?
Imagine planning and executing a well designed defensive operational and financial strategy, only to find out that the real estate your company leases may not be under your control and that the space may be pulled out from under you! That’s right! Your landlord may not be as good at pruning expenses and could lose your building, throwing into question your company’s rights to remain in its space.
“But, we have a lease with many years remaining; We pay rent and have never been late! They can’t take our space away from us….can they?”
The answer to that question is a resounding…..”That depends!” It depends on a number of factors, from whether or not your landlord will really lose its building, to who will end up with it, to what the process will be if the landlord does lose the building, to how thorough your company’s lease was negotiated in the first place and what protections that document affords you.
The first step is to read your company’s lease. Check all of the clauses that might impact your occupancy, including those pertaining to non-disturbance, landlord default, self-help, sublease, early termination, and others. Since your lease constitutes the rules of engagement, be certain to understand your company’s rights, privileges, and obligations, in the event of a serious landlord problem.
Make it your business to understand all lease components that could affect your company’s ability to remain in the building if the landlord were unable to support it financially. Specifically, does your lease provide for self-help (the ability to secure services that the landlord fails to provide) in the event that the landlord defaults in providing services to you? Can you contract for temporary cleaning and other services? Can you secure utilities directly from the utility provider? Can you do the above without putting your company into default of its lease?
What if the landlord actually goes bankrupt and ownership of the building reverts to the lender? Can the lender terminate your lease? Maybe! Does your lease require the landlord to secure a non-disturbance agreement for you from the lender? Has the landlord provided you with that document? A non-disturbance agreement, if written properly, will most often prevent a successor, like a lender, from terminating your lease.
By now, you’re likely asking: “Why would a lender terminate our lease? Wouldn’t they prefer to retain rent paying tenants?”
That, too, depends! It is possible that your building could have a greater value or a greater likelihood of being sold if it were vacant. Perhaps a larger tenant, or one that for some reason is more desirable, may want your space. Or, maybe your company’s use of its space is not conducive to the lender’s future plans for the building. Without a non-disturbance agreement, your company could receive notice to vacate and have little choice.
When commercial landlords experience financial difficulties, the tell tale signs may be easy to spot. In many cases, payments to vendors, service providers, taxing authorities, and others become delayed or are sometimes not paid at all. In others, the building shows signs of neglect.
If you believe you have reason to be concerned, do a little detective work. Check with the local property tax dept, utility companies, and other building services providers to confirm that bills are being paid in-full and on-time. Ask around, too. Are vendors, commercial real estate brokers, contractors, and others being paid in-full and on-time? But, be careful here. You wouldn’t want to spook anyone and create concern about your landlord if problems don’t exist.
Above, we discussed 33 Signs That the Building Your Company Leases May Be In Serious Financial Trouble. Guess what? There are more than 33 signs! Take a look around your building and ask yourself some of these questions:
34. Has building management or maintenance staff been cut?
35. Is the landlord any less responsive?
36. Are capital projects being delayed?
37. Is construction languishing in an incomplete state for extended periods?
38. Are repairs taking too long to complete?
39. Does the building look as good as it did?
40. Are the interior and exterior common areas being well maintained?
41. Is the landscaping being properly maintained, trash being removed and parking areas being plowed of snow promptly?
42. Are vacancies growing?
43. Are smaller, less desirable, and / or transient tenants taking space?
44. Has the landlord tried unsuccessfully to sell or refinance the building?
These are common indicators that a building and / or its landlord may be in serious financial trouble. So, how bad could it get? What could happen if your landlord DOES lose your building to its lender…..or, to the sheriff for non-payment of property taxes? It could get ugly…very ugly, with your company’s productive becoming the victim.
Do your homework…early and thoroughly!
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.
I love it when some commercial landlords claim that the commissions they pay to commercial real estate brokers should be conditioned on whether a tenant performs or defaults under a lease. Some landlords insist that they should not be required to make future commission payments if tenants default. Some go so far as to demand reimbursement of commissions by real estate brokers when tenants default.
Many commercial landlords argue that commissions should be paid based on the value landlords derive when tenants pay rent. Those landlords claim that if a tenant defaults in paying rent, then the landlord’s value is diminished, and the commercial real estate broker should somehow be responsible for that default and should not be entitled to its full compensation.
This is simply an issue where commercial landlords attempt to pass on their risk to real estate brokers, as a result of landlords not performing the due diligence necessary to protect their own interests. Do landlords really believe that real estate brokers are capable of analyzing the financial abilities of commercial tenants? Do landlords really expect brokers to act as credit analysts and insurers of tenant creditworthiness?
Sure, the compensation of commercial real estate brokers is performance based. But, to who’s performance does that relate? Not the tenant’s performance! Real estate brokers are not compensated based on the performance of their tenants. That’s why most courts of law have found that a real estate broker’s commission is due when the lease is executed by landlord and tenant, not at the end of the lease after the tenant has performed its obligations. So, from a landlord’s perspective, a commercial real estate broker should be paid for its own performance, for “delivering” a tenant, not for what that tenant does or doesn’t do after the landlord has accepted the tenant and after the landlord has freely elected to enter into a transaction with that tenant.
In fact, a commercial real estate broker working on behalf of a tenant may receive payment from the landlord, who is, in turn reimbursed by the tenant for the cost of the broker’s compensation along with other costs through payment of rent. So, because tenants reimburse landlords for real estate broker compensation, some courts of law have held that, in fact, it is the tenant that actually pays the broker’s commission.
The world has changed and business, especially commercial real estate, has become a riskier industry. Companies that appear to be healthy may not be, or may become unhealthy and default on their obligations at a later date. This puts more burden on commercial landlords, and the necessity for them to take greater steps to protect their interests has become even more important. For the record, it is not only tenants that can become unhealthy….
The issue of whether landlords should place the burden of tenant default on the backs of commercial real estate brokers has been an on-going source of debate, both in this blog, in LinkedIn, and in the commercial real estate industry. And, so long as some commercial landlords, not the best or strongest landlords, mind you, unfairly attempt to shift their obligations and risks onto commercial real estate brokers, unfortunately this discussion will continue.
However, as the commercial landlord industry consolidates and becomes more sophisticated, that out-dated mentality of “stick-it-to the-real-estate-brokers” appears to be fading away, as greater numbers of commercial landlords recognize the benefits they derive from commercial real estate brokers representing tenants and the commissions to which those brokers are rightfully entitled.
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.
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.
Non-disturbance agreements have been around for a long time. They have become a crucial component in protecting corporate tenants from being removed from their space by lenders who may foreclose on the buildings occupied by those tenants.
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