Would a Landlord Really Kill a Deal Over Broker Fees?

I recently had lunch with a fellow commercial real estate professional who lamented  about how some old-fashioned commercial landlords he’s encountered will let a real estate transaction die, or actually kill it themselves, rather than pay a real estate commission on terms that they don’t deem appropriate.  I was amazed to learn that there still exists some of those landlords.  I thought they all had died off.  What these landlords, the type to which this real estate broker referred, often consider acceptable is a substantially lesser commission amount than requested by most real estate professionals, and one that they can pay via an extended series of payments over a very long time period.

The idea behind the long-term payment schedule is most often two-fold:  One is purely cost and cashflow management (Some will say it’s merely a way to make life difficult for brokers – I’m not that cynical!) .  The second is a means of sharing with the broker the risk that the tenant may not perform (pay rent!), default, or breach the lease.

Mind you, the real estate professional with whom I was chatting is no slouch.  He’s not one of those whiney “How come I don’t make enough money? – The world owes me a living! – All landlords are out to get me!” types.  He’s a respected, accomplished pro, who knows his stuff and works for a nationally recognized commercial real estate brokerage company.  In fact, a large part of his company’s practice includes representing commercial landlords.

I found it very interesting, based on what this broker told me, that in the year 2010 some landlords would rather put a transaction at risk, possibly lose a deal, before they agree to pay a market rate commission.  And, why?  The best landlords see real estate professionals as beneficial to transactions and seek to compensate them fairly.  The most successful landlords quickly dispense with  issues as minor as commission payments and agree to reasonable terms that are in-keeping with local customs.  Those landlords, the intelligent ones, recognize that losing 100% of a good deal never makes sense, especially if the reason is because of too great a focus on commissions, which in almost every case, represent  a very small percentage of transaction costs.   The best landlords by-pass that stuff and almost immediately train their energies on making the deal by negotiating favorable terms with prospective tenants.  Isn’t that what it’s really about anyway?

Let me clarify one thing.  Unlike many other commercial real estate brokers and advisors, I am not of the mindset that every landlord, every tenant, and every transaction must include real estate professionals.  If a landlord or tenant has the resources and the inclination to negotiate on its own behalf without engaging representation, then it should  do so.

And, another thing!  As for dealing with brokers and other real estate professionals, this is America, pal…land of the Free!  Despite many opinions about the current federal government becoming socialist, this is still a free country!  And, any landlord, company, or individual is free to conduct their business as they see fit.  A business person is allowed to agree or not agree to do business with whomever she chooses.  She can choose to pay any price for any service, so long as someone will sell it to her for that price.  That goes for landlords, tenants, brokers,  and commissions, too.

While we were at lunch, my friend commented that some landlords, no matter how outdated their approach may be, will often do almost anything they can to pay lower commissions, to pay those commissions over extended time periods, and to put those commissions at risk in the event tenants default.  I guess it is a landlord’s right to do that…isn’t it?  But, suggest to some of those very same landlords that they should pay commission rates that are higher than what may be customary, and watch the fireworks!  Can they have it both ways?

I get that some landlords believe tenant brokers don’t work for them and that those brokers should be paid by their tenant clients.  I’ve written about this topic many times.  My answer to that is:  When all the landlords and tenants get together to change how brokers’ compensation works, and when tenants elect to take-on the obligation to compensate their real estate advisors, I’ll be out in front of that discussion.  If that change ever occurs, landlords and brokers will finally get past this issue, certain landlords will stop pressuring tenant brokers, and the entire commercial real estate industry will be more in balance, will operate more efficiently, and will be able to focus on structuring more creative transactions.  Until that time, let’s stop wasting time…we’ve got clients to represent!

Since America is a free country, isn’t it also true that real estate professionals can choose who they do business with, how much they get paid, when, and what risks they’re willing to accept for the services they deliver?  The answer is a resounding “Yes!”, so long as the real estate professional acts in accordance with his client’s knowledge and approval, and so long as he adheres to the terms of his State’s licensing regulations and requirements of conduct.

So, why would any landlord…any intelligent business person…risk 100% of any transaction because of a commission…a small percentage of any transaction?  I never have figured that one out.  There has got to be more to this story!  What am I missing?

What do you think?

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16 Responses to “Would a Landlord Really Kill a Deal Over Broker Fees?”

  1. 1 Brian S. Brennan May 10, 2010 at 8:18 pm

    Certainly this economy has all persons hoarding cash. Landlords come in all flavors and some battle against the commission as being a lottery windfall to the broker. Many brokers work on deals for extended periods of time which end up nowhere….or are later done with other parties being compensated. Nevertheless, not that long ago, leasing brokers recieved a choice: (a) 6% term commission payable over the term of the lease and subject to the collectability of the tenant rent; or (b) 4% cash out commissions payable up front with no link to the tenant’s credit strength. Over time, option (b) became the norm. Option (a) had issues at time of property sale as these installment commission contracts ran with the property and had to be assigned to the new owner(s).

    • 2 RealStrat May 10, 2010 at 10:37 pm

      In some markets, average commission rates are increasing, not decreasing. It all depends on the quality of the service providd by the broker, and the perceived needs of both landlord and tenant. I always tell brokers “if you’re worth more, then charge more! If you provide a no frills bargain basement service, then expect to be paid accordingly and don’t complain.”

      Markets don’t decide how much value a broker will contribute to his occupant customer, or how much indirect value the landlord will derive. Neither do markets decided how much anyone should charge for his or her services.

      Thanks for your post!

  2. 3 Doug May 10, 2010 at 8:36 pm

    I was having a nice quiet lunch with some Major Mall Landlord Excutives one day, when I was told by one of their Executives in passing that if I had a broker the conversation would end about their ideal sites. I told them that I did have a broker and I would pay the .10 PSF extra to ensure they were paid their commission (My broker worked his butt off to get me the site, put the intense site book together with all the right data and photos my Real Estate Committee needed to approve it). They said “No Way…I can’t believe you are being represented by a broker”, and got up from lunch and left, and stuck me with the bill.

    I was speachless. I called my broker to tell him what happened and he was shocked. I never did business with that Landlord.

    • 4 RealStrat May 10, 2010 at 10:33 pm

      Yeah…you go get ’em! What jerks…AND, THEY STUCK YOU WITH THE BILL! Shows you how nervous some landlords get about doing business with tenants who are properly advised and represented…with a solid broker or advisor out in front, those landlords can’t take advantage of their prospective tenants. Better landlords don’t play these games. Good for you that you opted not to do business with them! And, thanks for writing in!

  3. 5 James May 10, 2010 at 10:11 pm

    Brokers are market makers. Today the market is troubled and brokers can do little to turn that sutuation around. It is very difficult to be a ‘market maker’ under these conditions, figuratively you can put your sign on the property but the fact is no one is reading it. Many brokers will argue against this fact, but today the numbers are working against them, declining rents and declining values make transactions very difficult. I jokingly tell brokers that when the market is good, I don’t need them, when the market is bad, I can’t afford them!
    I have been tempted in the past to amortize out a broker’s commission. When a broker brings me a skinny tenant deal, with what I percieve as an unacceptable level of risk the temptation grows.
    I have never done it, but it is troublesome when we spend a great deal of money on deal incentives, commissions, and tenant improvements, and then a year later the tenant walks or files bankruptcy. That’s when I wish I either had some of that commission back or the brokers B-lls in my hand so I could squeeze real hard!

    • 6 RealStrat May 10, 2010 at 10:41 pm


      I truly appreciate your perspective and your frank post. Thanks. And, while I understand the challenges that tenant bankruptcies cause landlords, risk is big part of the landlord business. That’s why when landlords make it, they make it very big…and, rightfully so! Landlord bears the risk, he should enjoy the spoils.

      Brokers, on the other hand, are only fee based, and don’t enjoy any of the landlord’s upside benefit. When landlords begin to share the upside potential associated with their investments, I’m sure many brokers, especially those who represent landlords, would consider bearing additional risk in exchange for some of the future potential winnings.

  4. 7 jfloring May 12, 2010 at 12:31 am

    As a rookie 4+ years in the industry I’ve gotten sucker-punched by LL’s that end up stiffing me on part of a fee. I make a mental note of it and will remember those specific LL’s for the rest of my career;) Will they see all the deals in the market? Probably not.

    • 8 RealStrat May 12, 2010 at 2:06 am

      Wow! Now, you’re an honest man! Remember that YOU decide how much you are willing to accept, and that you are not at the mercy of anyone who believes they can dictate your worth or your compensation. Provide outstanding service to your buyers and tenants, and you’ll be entitled to the compensation levels you seek. And, do a superb job for yoru clients, and they will back you up in commission negotiations with sellers and landlords…mine do!

      Best of luck to you, and thanks for writing in. I hope to hear from you again!

  5. 9 Jason Fane May 12, 2010 at 11:20 pm

    Often, after a long negotiation in which both the landlord and the tenant, or the buyer and the seller have made many substantial concessions and they are close, but still apart by less than a brokerage commission, they think that there are three parties to the transaction and they wonder why only two parties are making concessions.

    I was in one negotiation that had stalled for six months in this situation. Then, I suggested to the broker that he go to the other side with the proposal that each of the three parties give something. The broker did this and we had a deal in less than 30 minutes.

    • 10 RealStrat May 12, 2010 at 11:29 pm

      Jason: Thanks for your post. While I do not agree with using commissions as grease for the skids when deals get stuck (because there is rarely a quid pro quo for the compensation forgone by the broker), this is a free country.

      • 11 James May 14, 2010 at 12:02 pm

        Maybe we could do another blog titled, “Would a Broker really let a deal die over Broker Fees?” LOL

      • 12 RealStrat May 15, 2010 at 2:01 pm

        Aha! Now, we’re getting somewhere! The answer to your question is Yes…with the cooperation of the broker’s client! Frankly, I wish more brokers would let deals die. Ask your clients if they would continue to work if their employers stopped paying their salary or insisted that the employee should accept less over a longer time period with greater risk passed onto the employee. Ask your tenants if they feel comfortable knowing their landlord must under pay the tenant’s broker in order to protect his own profits.

        Look at it this way: The broker client relationship should contain “some” elements of a partnership. I just heard a bunch of landlords scream “That’s what I say!” Read on. Remember that a partnership, no matter what the purpose, must benefit all involved. So, for those landlords who just said “Because the broker – landlord relationship is a partnership, brokers should take longer payouts, lesser commissions, and share the risk” my question is “What would those brokers receive in return for creating that benefit for you, Mr. Landlord? A partnership works both ways.” The answer is not the typical arrogant retort of many landlords, “An opportunity to close a deal.” because there exist too many high quality landlords who will gladly pay a broker’s compensation without discount, extended time periods, or increased risk transferred to the broker. What else? An opportunity for a long-term relationship with a landlord who chooses to under pay professsionals? Why would anyone want that? Besides, those of us who only advise tenants and buyers don’t derive direct benefit from landlord relationships.

        If a LANDLORD’s broker wishes to accept lower compensation over extended time periods with greater risk in exchange for other bona fide commitments from that landlord, then perhaps that broker should do that. For those brokers and advisors who don’t represent landlords, there really is no benefit the landlord can provide in exchange for the above that would not place undue burden on the broker or cause a potential conflict of interest.

        The most important part of this story is that if a landlord is having a hard time making a deal, and the margins are truly so tight that a commission of 2% to 7% (out of 100% of the deal!) is the only way to save the deal, either someone is making too much profit at the other party’s expense, or that deal is likely too thin and too risky for both parties. Perhaps, in that case, the deal should not be made. But, that’s not for a broker to decide.

        What IS up to the broker is the quality and depth of services he or she will provide and the amount of compensation he or she will accept for those services. The real challenge I have with this whole discussion is how, in many cases, brokers’ compensation becomes the last minute linch pin, thereby placing tremendous pressure on the broker to knuckle under. In those instances, it is apparent that the broker is being taken advantage of by someone.

        If, at the beginning of any project, a landlord is told that he will have to accept terms that are unacceptable to him, he is free not to puruse that transaction. Similarly, if at the beginning of a project, a tenant is informed that she will have to agree to terms she deems unfavorable, she will not likely pursue that transaction. So, if at the beginning of a transaction, not at the last minute or at the closing table, a broker is informed by either the landlord or tenant that he must accept compensation terms that he deems to be unfavorable, he can decide then and there whether he wishes to pursue that business.

        Interestingly, We seldom experience this kind of challenge. Our clients understand the value we bring to them. They execute representation agreements with us that protect them and protect us and our ability to collect reasonable compensation for the high quality of services we provide. In many instances, our clients have stood up to their transactional opponents and have defended us and our compensation requirements. In more than a few instances, our clients have told landlrods that they will not sign their lease until they know we have received a bona fide commitment for us to be paid on reasonable terms.

        A number of our clients have elected to back away from deals with certain landlords when they learned that those landlords attempted to play games with our compensation. Our clients said that they viewed such actions by those landlords as signs of poorly-funded or greedy landlords…not landlords with whom they wished to enter into long term lease agreements. I always find those comments to be very interesting. In those cases, our clients elected, instead, to puruse transactions with those landlords who actually make up the majority of the commercial real estate industry…those who own great buildings, deliver tremendous service to their tenants, and know how to make profitable deals without doing so at anyone else’s expense.

        So, should a broker let a deal die over broker fees? YES…with the cooperation of the broker’s client!

        Thanks for writing in!

  6. 13 lynn June 29, 2010 at 4:02 pm

    I am a landlord myself and I have never turned some one down for broker fees, this is pretty stupid if you ask me. I trust everyone as long as their rental and criminal background comes back to m qualifications. I always do a Tenant Credit Check with the application to get the best results.

    • 14 RealStrat June 30, 2010 at 12:01 am

      Stupid? You’re darned right, it is! But, every once in a while I hear a story from a broker where some commercial landlord threatened not to complete a transaction because of broker compensation requirements. Are those landlords kidding? Kill a deal because of 3%, 4%, or 5% of a deal…and, lose the rest of it? Do brokers really take such threats seriously? Do those landlords think they operate in a vaccuum? Don’t they understand how negative actions such as these reflect badly on them in the eyes of prospective tenants? Don’t they think that if prospective tenants see those landlords being unfair to tenant brokers, that those prospective tenants will likely expect the landlords to be unfair with them? When that happens, those landlords won’t have to kill their deals, because the prospective tenants will kill those deals…trust me, I’ve seen it happen!

      I know, I know…landlord’s take all the risk, tenant’s default on their rent, landlords think they have a right to use commissions as guarantees for tenant creditworthiness…blah, blah, blah…we’ve heard it all before. In fact, I’ve written about most of it (see previous posts at this blog). And, as they say “That dog won’t hunt!”

      Here’s the reality: Anyone who threatens to kill any deal because of a 3%, 4%, or 5% margin, whether it’s a commission or something else, either doesn’t belong in the commercial real estate business, should stop drinking his own Kool-Aid, or should have his bluff called!

      In our company, we’ve called many such bluffs, and have typcially found them to be just that…bluffs!

      The best quality commercial landlords know how to make profitable deals, and they know how to make them without threatening to kill deals over commissions or other transaction costs.

  7. 15 Jasmine December 13, 2010 at 3:09 pm

    I hired a broker to find retail space to me. The commission is to be paid by the Landlord. The Landlord has not responded to our offer yet after over a week. I am sensing it is because he does not want to pay the $2000 on such a short term lease (1 yr gaurantee with a 1 year option.) Would it be wrong of me to agree to not use my broker if the Landlord will only lease to me if I agree to not use one? This seems really unethical being that my broker found the space for me. But I would hate to lose out on the best deal in town!

    • 16 RealStrat December 13, 2010 at 8:52 pm

      Would it be wrong of you to circumvent the professional who located the property for you? Follow your instincts…of course it would be wrong! You have another alternative available to you. If you believe that the landlord will not do business with you because the landlord does not wish to pay your broker, and if you absolutely must have that space, then instead of doing something unethical and possibly harming your broker, pay your broker yourself! That way, you will get the space you want, the landlord will get you as a tenant, you will have done the right thing, and the broker will be paid for his / her efforts. Case closed…simple answer.

      Thanks for writing in! Happy Holidays!

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