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?

Copyright Real Estate Strategies Corporation 2009.  All Rights Reserved.

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4 Responses to “Should Real Estate Brokers Be Responsible to Validate Tenants’ Risk and Creditworthiness?”


  1. 1 Rhonda Mesenbourg October 28, 2009 at 12:26 pm

    Andrew, great article. As a commercial broker, I do my best to qualify a prospective tenant, however we instill that the final analysis and decision rests with the Landlord. I personally know I am not qualified to determine someone’s credit worthiness and believe it is best to utilize an “expert” to assist with that task.
    Be well,
    Rhonda

    • 2 realstrat October 29, 2009 at 10:12 pm

      Rhonda:

      Thanks for writing and for your compliment. As service providers, it is essential for us to understand who our clients really are and what their financial condition is. So, qualifiying is most certainly an important step. However, communicating opinions of a tenant’s financial strength is where brokers can get into trouble.

      A recent court case in Texas found a commercial broker was culpable in having made representations to a seller about a buyer’s financial wherewithall, after not conducting sufficient research to make such a claim. After the deal fell apart, the seller sued the broker and his company for many millions of dollars…AND WON!

      Be well. And, be careful!

  2. 3 Froggy October 30, 2009 at 1:01 am

    The question isn’t really whether a broker is qualified or liable for evaluating the creditworthiness of a tenant. The question is does making a couple phone calls/email blasts and showing a tenant some space entitle them to 6% of the rent upon lease execution? The answer is NO.

    In 2007, I actually had a lease deal with two brokers and a retail consultant asking me to pay them each 3% of the deal! I didn’t do that deal. Younger brokers seem to know little or nothing about real estate and are actually glorified matchmakers in some cases.

    First of all, brokers should not be getting 6%. Hedge Fund managers get 2% of capital under management and when that amount goes down, they get less. HF managers provide investors a much more valuable and comprehensive service than RE brokers.

    In any case brokers can’t have it both ways. If you are going to charge 6%, you ought to share some of the risk with the landlord by deferring a good portion of your commission until the tenant has demonstrated its creditworthiness. For instance, I pay you 2% at commencement and the rest you get in installments each following year according to the performance of the tenant. Maybe throw in a clawback provision if the tenant defaults within the first year or something.

    That way, problem solved. The broker is de facto guaranteeing the creditworthiness of the tenant and sharing that risk with the landlord. The landlord has no cause of action against the broker (that isn’t agreed to) and so has no reason to sue. I’d say under this structure, the landlord ought to be liable for lost TIs and not put that on the broker (we’re already liable!).

    This system is much more performance based and outstanding brokers would prosper and be in great demand to landlords.

    • 4 realstrat October 30, 2009 at 5:26 pm

      I couldn’t disagree with you more! Brokers aren’t in the tenant guarantee business (see previous blogs here). A tenant’s credit worthiness is the business of the tenant and the landlord, not the brokers. That is true, if the landlord chooses, in its sole discretion, to accept that tenant and its corresponding risk. With risk must come upside. Your vision, if I may call it that, includes only downside for the broker without the benefit of any increased benefit.

      Should young commercial brokers who are still green and those who contribute little value be entitled to the same compensation as seasoned professionals who achieve substantial benefits for their clients? The answer is simple. A hamburger at the local burger joint costs $2.00…because that’s what it is worth. An aged steak with all the trimmings, wine in crystal goblets, and silver utensils served by a tuxedoed waiter with violins playing in the background costs considerably more…because that’s what it is worth. Value delivered and the price paid must go hand-in-hand.

      Does making a phone call entitle anyone to large fees? Heck, No! However, few brokers only make a phone call these days and expect to cash-in. You may benefit by spending some more time with a few quality commercial real estate brokers and learning more about how hard the best of them work to earn a living.

      Additionally, you forget that the landlord is not the only one entitled to receive value in a real estate transaction. The tenant will decide the level of service it requires, as will the landlord. If your next comment is about the landord paying commissions and therefore, being the only one entitled to receive value, you may wish to read the earlier posts to this blog and the comments from readers.

      As for hedge fund managers, there are many people in the business world who respect them less than you obviously respect commercial real estate brokers. Moreover, when you’re comparing the billions of dollars managed by an individual hedge fund manager to the value of the vast majority of individual commercial real estate transactions, your comparison of 2% to 6% is way off base. Give most commercial real estate brokers 2% of a few billion dollars and they’ll be satisfied any day!

      Lastly, you missed the entire point of this post. The question IS whether a commercial real estate broker is qualified to determine a tenant’s creditworthiness.
      Thanks for writing-in.


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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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