If you are a business owner or manager searching for an office or warehouse, you should ask yourself an important question: “Will I save money if I do this myself, without using a commercial real estate broker?” Let me clarify that this article is directed to the “Corporate Occupant” – the business owner looking for space where the employees will be working each day, such as a law office, medical office, or distribution warehouse. This is not a discussion of investment real estate.
First, let’s address the direct cost – the brokerage fee. The buyer or tenant does not typically pay their own broker. The seller or landlord normally pays all of the brokers in a transaction. But does the landlord or seller charge you more if they have to pay your broker? Typically not. The asking price for the property is the same, whether you come to the table with a broker or without a broker. How far down can you, as buyer or tenant, negotiate your costs? Do you even know what all the costs are? If the seller or landlord has a broker, don’t count on them to help you – they do not represent you. If you are not an expert in commercial real estate costs and negotiations, you’re better off hiring an expert broker to be your fiduciary agent and negotiate for you.
There are many deal points when the Corporate Occupant is negotiating to lease or buy commercial property. There are economic terms, and non-economic terms. A good commercial real estate broker will point out and negotiate all of those deal points, give you choices and advice, and help you make sound decisions. Your broker will save you money and time and protect you far better than you would on your own. Below, I explain these deal points, and give examples of how I’ve helped clients to negotiate them.
The Process Involves Many Complex Decisions, All of Which Affect Your Economics
The lease rate or purchase price is the most obvious focus of negotiations. A landlord or seller will seek the highest price they can achieve, and you will seek the lowest. Without a commercial property professional representing you, the other side will assume you are uneducated on market pricing, and may try to take advantage. And unless you do in fact know what lease rates or sale pricing should be for that particular property in that particular submarket, you are negotiating from a position of weakness here. A good broker will have market comps and experience negotiating on similar properties, and will negotiate a fair market price, or even better.
The analysis doesn’t end there. You must consider much more than the lease rate or sale price. For example, when leasing, what will be the annual increase in your rental rate? I recently represented a medical doctor in renewing his lease. Although his lease rate when he negotiated initially (without a broker) was somewhat reasonable, his rate had skyrocketed over 7 years because he agreed to above-market, compounding annual increases in his rate (we all know the power of compounding!). I let the landlord know that the rate was out of line, and we needed to bring the rate back to a reasonable level with lower future annual increases if the tenant was to remain. I negotiated a 31% reduction in his rental rate – saving the client $240,000 over the new term – as well as reasonable annual increases to avoid a repeat of the unreasonable run-up in rate.
Other areas where I see unrepresented tenants lose money is on the cost to build out their space, and the cost to repair, replace, and maintain equipment in the space over the lease term. Renovating the space before you move in, or building out the “Tenant Improvements,” can be a huge cost. The cost to build out a 10,000 s.f. office, at just above most landlords’ “standard” finish level, can be well over $600,000 today. In most instances, I am able to negotiate that the landlord performs the construction work, that the landlord pays for most or all of it, and that the tenant won’t start paying rent until they can move in. Think about the cost savings if you don’t pay for much of the $600,000, and if you don’t have to start paying rent until the landlord finishes construction, even if they finish late. Shifting cost and risk is critical.
Further, I see many tenants stuck with the cost of replacing air conditioning units or plumbing systems (even having to dig up the concrete floor slab to do repair work). This is a negotiable responsibility that I’ve shifted fully or partially to the landlord for many of my clients. I recently negotiated a right for one of my clients to pay a fraction of HVAC replacement, depending on how many years are left in their lease term. Would you want to fully replace an HVAC unit when you have six months left on your seven-year term? No, of course not. Would you think to negotiate a way to deal with that before signing your lease? Probably not, but your broker would.
Renewal, expansion, contraction (or termination), and relocation rights are other terms that I negotiate prior to lease signing to ensure that my clients’ interests are protected and their costs are minimized. There are several others – too many to discuss in detail here.
In a purchase contract, there are similar issues other than price that can help or hurt you monetarily, such as protecting your deposit, dividing costs for closing, surveys, title work, time to inspect, what allows you to cancel and get your deposit back, cost of documentary stamps/recording fees, and credits for repairs and improvements, among many others. These and other items should be negotiated long before the contract is signed, as they can cost you dearly if you don’t address them, or if you allow the seller to dictate terms.
In Part 2 of this post, I’ll discuss the non-economic aspects where a broker can help you, and they can be just as compelling as the “hard dollar” items!