Posts Tagged 'conflict of intrest'

Dear Mr. Landlord: We Both Know You’d Rather Deal Directly with the Tenant! Part Two

Q&A on Tenant Representation with a Commercial Landlord
Part Two of a Three Part Post

Most commercial landlords understand the role of tenant representation brokers and welcome the benefits they derive when tenant representation brokers properly educate and advise their tenant clients.  However, some landlords, mostly old-school die-hards, continue to maintain very negative views of all things about the tenant representation process.   Some actually get offended by the very idea of a tenant representation broker.   Offended!?  What’s that about?

In a recent Q&A conducted via email with a prominent commercial landlord, I had the opportunity to hold a completely frank and open discussion about his views about tenant representation brokers.  And, while some of the conversation was challenging at times, both of us came away having learned from each other.

I invited the commercial landlord to provide me with his views on tenant representation, tenant representatives, and how he’d prefer to conduct the business of leasing his properties.  The conversation got so good, that it took me three posts to include it all.  Be sure to go back and read Part One, and then check-in again next week to read Part Three!  Following is Part Two of that dialogue:

Read Part One of this three part post

5. Landlord: I have to put up all the cash and take all the risk!  I don’t appreciate that tenant representatives won’t share my risk.

RealStrat’s Response: Tenant representatives are well aware of the many challenges that landlords face, especially in the current economic environment.  A large part of what landlords must contend with is how they can effectively manage their risk.  Landlords bear a lot of risk in leasing transactions, and in most everything they do.  However, with risk comes the potential for upside reward.

Tenant representatives, and brokers in general, are also in the risk / reward business, but only to the extent of investments of their time and resources prior to, and during, the execution of a transaction.   Brokers pursue tenants and bear the risk of not winning those assignments.  Then after being engaged, brokers risk that their tenants might not complete transactions that would yield compensation commensurate with the broker’s investment of time, resources, and risk.

Beyond that, specifically after landlords and tenants execute transactions, brokers are not in the business of managing the same risks as landlords.  Nor are brokers entitled to the same upside rewards as landlords, including equity and portfolio appreciation, tax advantages, debt and equity financing, and more.

So, regarding compensation and risk participation, like every industry, landlords and tenant representatives bear their own risks.  When engaged in transactions, tenant representatives are not participants in landlord’s risk (nor in landlord’s upside benefits) for very simple reasons, because participating in landlord risk would:

A) Align the interests of tenant representatives with that of landlords, which would pose a clear conflict-of-interest in relation to tenant representatives’ obligation to act solely in the best interests of their tenant clients.

B) Unfairly affect the compensation of tenant representatives by virtue of their acceptance of landlords’ risk without the benefit of the quid pro quo associated with the upside opportunity afforded landlords.  Again, if such upside were provided to tenant representatives, it could align tenant representatives and landlords posing  conflicts-of-interest between tenant representatives and tenants.

C) Unfairly force tenant representatives into a compensation model other than that of generating fees

D) Place tenant representatives in the position of acting as guarantor of their tenants’ ability to perform under their leases

None of the above fit into the tenant representation model too well.  Frankly, landlords and tenant representatives have their own risks which should be kept separate from each other and from those of tenant representatives.

6. Landlord: It is wrong that tenant representatives want to be paid up front when I don’t know if the tenant will uphold its lease obligations or pay its rent, especially after I put up all the transaction costs and have to wait until all the free rent expires.

RealStrat’s Response: This is a similar discussion to the one above about risk.  Waiting for an extended time period before getting paid creates real challenges.  As tenant representatives, we completely understand that.  Remember, that it typically takes three to nine months for landlords and tenants to complete  transactions, plus many months or even years for tenant representatives to build relationships and win a tenant’s business.   So, by the time tenants close their deals, tenant representatives have typically been working without compensation for at least a year, and in many cases, longer.

But, let’s get to the real issue of the relationship between a tenant representative’s service and its compensation.  When a landlord and tenant execute a transaction, as far as the landlord is concerned, the job of the tenant representative is done.  After that, it’s then up to the landlord and tenant to perform their obligations under the terms of the lease they executed.

Prior to executing a lease with a tenant, one would expect that a professional landlord would have assessed the tenant’s creditworthiness, and determined whether the tenant was an acceptable risk and whether or not the landlord should even conduct business with the tenant.  During the lease term, it is the tenant’s responsibility to make rent payments on a continual and timely basis and follow the rules defined in the lease.  If either the landlord made a bad assessment (or, didn’t conduct one), or the tenant fails to perform, neither of the above are controllable by, nor the responsibility of, the tenant representative.  Accordingly, tenant representatives are not in the tenant credit guarantee business.

Like the plumber who installs a sink in your home, if you select the sink because you’re satisfied with its quality and then you pay the plumber because you’re satisfied with his installation, if the sink fails because it was manufactured poorly or it cannot perform the way the manufacturer said it would, then you should pursue the manufacturer, not the installer, unless of course the installer provides you with a written guarantee for the product, too.  Few commercial real estate brokers are in a legitimate position to guarantee a tenant’s performance under a lease.

And, NO! Mr. Landlord, you should not rely on claims made by a tenant representative as to a tenant’s creditworthiness.   Neither should tenant representatives make such claims.   Do your own homework and protect yourself from unnecessary risk.  If you foolishly rely on anyone to ascertain a company’s creditworthiness, especially one who is not qualified to make such a determination, then you deserve the added risk and the consequences.

Remember that plumbers don’t accept payment each time you turn on the water, because they don’t usually guarantee the manufacturer’s product, only their own work.  Correspondingly, tenant representatives don’t guarantee the ability of tenants to perform their lease obligations, only their own work.  If you’re not satisfied with the tenant representative’s work (remember that they represent the tenant!), then address that before completing the transaction (don’t do the deal!), not after the tenant defaults.  So, when the plumber and the tenant representative have completed their duties, they both expect to be paid in-full without the risks associated with accepting payments over time, tenant default or sink failure, or otherwise.

Choose any analogy you wish.  If you buy a new car and it doesn’t work, the manufacturer must stand behind it.  You don’t get to take back the dealer’s compensation.

Read Part One now.  Stop by next week to read Part Three of this three-part post.


About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations.  Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America.  By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate.  The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com.  Follow RealStrat at http://www.Twitter.com/RealStrat.

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Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

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Amazed and Perplexed!

Wasn’t there a movie in the 1980s called “Dazed and Confused”?  Well, I recently had an encounter with a property broker who said he was Amazed and Perplexed!

So, a few days ago, I got a call from this commercial real estate broker who demanded to know why we hadn’t presented to our client the two office buildings he represented.  The two buildings are located in a part of the country where our firm is representing a client in the acquisition of a 100,000 square foot office facility.  In that market, a lot of vacant space exists and few 100,000 square foot tenants are currently seeking space there.  The broker first emailed me saying he was “perplexed” at why our client hadn’t visited his buildings.  When I invited him to call me to discuss his concern, he aggressively opened his conversation by exclaiming that he was “amazed,” and was particularly strenuous when he loudly proclaimed “because every company that considers over 100,000 square feet looks at my buildings!” 

I did my best to explain to this guy that we and our client were aware of his two buildings and why those buildings didn’t meet our client’s criteria. Afterall, despite this guy’s distasteful manner, he was doing his job.  During my explanation, he talked over me and seemed much more interested in voicing his opinion than listening.  And, when I wouldn’t yield, he began to yell at me, saying that I didn’t know the market.  This guy had never met me, had never spoken with me before, didn’t know what I knew, and had no clue about my market knowledge.  If this was his lame attempt to draw me into a fight, he was not going to accomplish that.  When I disagreed with him, he called me a smart ass and began to yell at me again.  I don’t think his charm school teacher would have appreciated his actions.  By the way, this all happened during a three-minute conversation.  Talk about amazed and perplexed!

This guy contacted me in an effort to inspire me to present to my client the two properties he represented, despite the fact that we already had.  What a salesman!  What an inspiration!  How motivating!  If, in his initial presentation to me he acted so arrogantly, how could I expect him to treat my client?!  What an idiot this guy was!  I really felt sorry for this broker’s clients.  He was obviously alienating potential tenants and their brokers.  And, after making a few inquiries, I learned that this guy had a reputation for pulling stunts like this and commands very little respect in his local market.  No wonder his buildings are so empty!   Note to landlord: If you wish to fill your buildings, hire a more professional representative, and send your current broker to therapy!

I ended the call by saying “When you’d like to have a polite conversation, please call me.” and I hung up.  I immediately called our client to advise him about the incident and told him to expect a call from this broker.  Our client reiterated his faith in our firm and our market knowledge (not that I was concerned, but very nice of him).  Our client laughed at that broker’s ridiculous tactics, and said he’d be ready for him.  And, while our client is generally a soft-spoken and relaxed kind of guy, he is a very accomplished executive, and a serious one.  A preference toward being laid-back, and in both my case and our client’s, being polite, is not to be confused with weakness.  Accordingly, I am absolutely certain (from that gleam I’ve seen in our client’s eye), that while he’d prefer not to hear from that broker, he is fully capable of disposing of this knucklehead with minimal effort!

For the remainder of the day, I received a series of emails from the broker, each of which was more negative than the one before.  In one email, he reminded me that his state was still a member of the Union….huh? 

Now, I’m no gentle touch, and this is not the first time (and, unfortunately, I doubt it will be the last) that I’ve dealt with a broker or landlord who got lost in his own ego and self-importance.  I’ve written before about the personalities that are pervasive in commercial real estate, and how a focus on customer service (using honey, not vinegar) is the way to win the day almost every time.  Evidently, this particular broker, part of a dying group that still gives commercial real estate brokers a bad name, doesn’t read my blog.  As for his silly and futile attempt at salesmanship, I can only say that I was amazed and perplexed, and a bit disappointed, but not surprised!

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Check out ‘2010: More Business, Now!’

Copyright Real Estate Strategies Corporation 2010.  All Rights Reserved.

When Will Commercial Leasing Recover?

Again and again, we’ve been asked “When will commercial leasing recover?” Brokers, investors, developers, lenders, and reporters, are all desperately searching for the answer.  While this is a reasonable question, especially given how much of the global economy depends on the success of commercial real estate, the answer is uncertain.

A better question would be “When will the economy truly recover and achieve balance?”  Because commercial real estate is so dependent on economic drivers (purchasing, hiring, growth), the answer to the real question can be found in the speed and depth of the economic recovery.

Job growth directly correlates to demand for office space.  Specifically, experts anticipate increases in demand for commercial office leasing to occur when companies stop laying-off employees and other companies begin hiring again.

Demand for leasing of distribution and warehouse space will occur along with an increase in demand for consumer and business goods.  When businesses and consumers begin to spend on a consistent and growing basis again, the need for distribution and storing of those goods will increase. Correspondingly, demand for distribution space will also grow.

Spending will certainly have a positive impact on retail real estate leasing, as well.  Although, some believe that the retail real estate market in some parts of the country, as a whole, may have excessive over-supply, such that it may not be absorbed for a long time after a recovery takes place.

Consumers will increase spending when their jobs appear to be more stable, when their futures begin to look bright again, and when the economy shows signs of consistency and stability, again.

So, it’s really all about jobs, isn’t it?  A lot must take place in order for companies to begin hiring again.  Important issues like the availability of capital and credit, the interplay of global economies, taxes, healthcare, geopolitical matters, and more, must show light at the end of their respective tunnels before confidence can returns to companies, investors, and consumers.

 “When will commercial leasing recover?”  Simply put, commercial real estate continues to be a lagging indicator of economic conditions.  As such, we expect increased demand for commercial real estate leasing to occur three to nine months, or more, after the overall economy strengthens in earnest.

What do you think?

Copyright Real Estate Strategies Corporation 2009.  All Rights Reserved.

Some Commercial Landlords Just Don’t Get It…Still!

Why do some landlords think that because they receive rent from tenants, they’ve got great relationships with those tenants?
 

Why do some landlords hire property managers who cycle in and out of their jobs?  And, why should tenants receive calls from their “New Property Manager” every few months? 

   

Why do so many landlords “Yes” their tenants and not follow-through on promises?  Do they believe that if a tenant stopped complaining, they forgot about what they needed and no longer require service? 
What steps can landlords take to build mutually beneficial relationships with tenants, and not just provide lip service? 
The best landlords don’t need to answer these questions, because they figured this out long ago! 
Here’s an idea or two for those old school landlord types: 

  

Start by changing how you engage in lease negotiations.  Lose the “stick it to them before they stick it to us” perspective still held by some old-fashioned entrepreneurial, and even some institutional, landlords.  That doesn’t mean give away your profits!  It means that you will likely benefit by viewing tenants, both existing and prospective, as customers…Yes, CUSTOMERS!  Take a customer focused approach to negotiating.  Transform your organization to focus on words like “Service” and “Excellence”.   I know, for some of you, this is a real novel idea!  Remember…you’ll get more flies with honey!  

Build two-way relationships with your tenants.  Do that on an enterprise-wide or institutional-wide basis.  Don’t leave building good tenant relationships to a seemingly friendly property manager after the damage has already been done through uncomfortable negotiations.  

In order for such a major shift to take hold, those tenants who attempt to beat the hell out of landlords must also change their negotiating approach. Change must occur in both directions.  

Treat your existing tenants like new customers.  They’re more important than new ones anyway, since they’ve already created value for you, and likely will continue to do so.  Prospect your existing tenants – treat them like they’re not yours, court them, build and sustain real relationships with them.  When treated well, existing tenants can be more profitable customers and easier to please than new ones.  

Seek to understand how you can support your tenants’ business objectives. Don’t simply consider your tenants as meal tickets.  That kind of attitude shows, and no one likes to be treated that way, no matter how slick you think you are.  Follow the lead of some of the most successful landlords around the country…they’ve been running their businesses like this, and succeeding, for a very long time!  

Create an excellent “experience” for all of your tenants.  Don’t simply permit them to occupy your building.  And, that doesn’t mean just buying them ice cream once a year.  Find ways to become a partner to your tenants.  

Considering the challenges that so many companies, even landlords, are experiencing in the current economic environment, now is the time for landlords to forge solid relationships with their tenants.  And, NO!…that doesn’t mean agree to lease terms that don’t make sense.  Afterall, landlords are entitled to weather this storm, too!  

In hard times like these, some people take advantage of others who need their help and some turn a deaf ear.  Others step up to recognize that by helping others succeed, they’ll likely pave the way for their own greater success when the recovery kicks in.  Remember that companies, and the people who work for them, have long memories.  Give your tenants a lot of good things to remember about their relationship with you.  

The best landlords practice these ideas, and as a result, they often achieve greater success than their slower-to-learn competitors.  Now is the time for those other landlords, you know who you are, to benefit by doing the same.  

Copyright Real Estate Strategies Corporation 2009.  All Rights Reserved. 


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