Help with a commercial lease deal? Start by knowing who’s on your side

This article first appeared on LinkedIn.

This is a guide for any commercial tenant looking to find a new site, change their office footprint, or just understand how lease negotiations work. As a business, it’s crucial you know who to trust.

Knowing who your interests are aligned with can give you the leverage you need to get the best property deal as an occupier. And on the other hand – what are conflicts of interest, and how do you spot them as a lessee? For businesses navigating the trying conditions imposed by the COVID crisis, these questions are more important than ever.

For example, consider a business executive looking for a new premises: commercial agents working for landlords have an obligation to show them the specific property they are tasked with representing – whether or not that site is the best for the prospective tenant. The agent is commercially bound to serve their client’s (the landlord’s) interests by pushing the vacancy they have been tasked to fill and getting the highest possible price and the most profitable lease terms for it. While they may claim to help tenants with site selection and lease negotiations, in the end they are paid to find clients to fill space – not the other way round. A commercial landlord agent in this case has a ‘conflict of interest’ when advising commercial tenants.

So, who should you talk to as a business owner or senior executive looking for support with lease negotiation or other commercial property advice? Let’s break down each of the key players in the commercial property world, to understand who may be best to contact for your specific real estate needs:

● ‘Tenant reps.’ who play both sides of the fence;

● Exclusive, independent, tenant-only representatives;

● Commercial landlord property agents; and

● Owners/landlords.

 

‘Tenant reps.’ who play both sides of the fence

Then there are those ‘tenant reps’ who are employed by the large real estate firms (and may sit within ‘Tenant Services’ departments): while they may claim to represent tenants, their remuneration actually comes, either directly or indirectly, from building owners. These sorts of ‘tenant representatives.’ may be better described as ‘landlord representatives’. The large commercial real estate players now often now have, in addition to asset services, project management, and investment services, a dedicated department for ‘tenant representation’ services. ‘Representatives’ in this position have a conflict of interest because their employer’s principal commercial arrangement is usually with supply-clients (owners), rather than demand-side clients (tenants).

These representatives are ultimately representing the landlord’s best interests.

Working with a landlord rep. will almost certainly put you in a weaker negotiating position when it comes to sorting a lease for your premises. They are employed by owners to fill vacant space on the terms most favourable to those owners, not the tenant. Commercial tenants are likely to suffer financially in this arrangement, as the priority for these ‘representatives’ is to optimise the rent extracted from tenants.

 

Exclusive, independent, tenant-only representatives – it’s in the name!

By contrast, ‘exclusive, independent, tenant-only representatives’ exist solely to protect and advise in the interests of commercial tenants. This is where Tenant Leasing Group fits in the picture! Our remuneration comes solely from the tenant – not from landlords, developers or agencies. We don’t receive commission from the opposing side of the negotiation for finalising a lease deal – as real estate agents do.

And since we, like other independent tenant-only representatives, work for commission from the tenant (receiving a percentage of the money that is saved through the negotiation), we directly benefit when the tenant saves money.

This is the direct relationship between tenant savings and representatives’ success I mentioned earlier.

Put another way, since the tenant is in charge of paying our bill, our incentive is to get them the best deal. Since tenant-only reps. only represent tenants (it’s kind of in the name), their job is to represent the tenants’ interests only. This removes any potential for conflict of interest.

We have no contractual obligations with landlords, giving us the freedom to negotiate independently and effectively, solely on behalf of the tenant.

Independent tenant-only representatives work to protect and advance the tenant’s interests in all dealings with real estate agents, landlords and other property professionals.

As the old adage goes – ‘every landlord has an agent, so tenants need one too.

In the case of us here at Tenant Leasing Group that means securing the best sites, rents and lease terms for retail, office, industrial, healthcare, and large format retail (including e-commerce and food distribution) properties that meet our tenant’s needs – not the landlord’s’. We work closely with tenants – including retail stores, restaurants, bars, professional services firms, large format retailers, healthcare providers and other businesses – to get them the strongest possible package of leasing terms, rents and incentives. Our sole commercial responsibility is to the occupier.

Independent tenant-only representatives run all lease negotiations and conduct site searches themselves. It’s in their interests – working for the tenant – to find them fit-for-purpose property at the sharpest price so that they can maximise the tenants’ savings. Furthermore, independent tenant reps.’ responsibilities don’t stop after the transaction is done – they support tenants through all leasing procedures and interactions with other parties. They are effectively the tenants’ dedicated professional commercial property representatives, paying undivided and unbiased attention to the tenants’ business needs.

‘Tenant-only’

Working with tenants-only, as opposed to working with tenants and landlords (as some commercial agents or non-independent ‘tenant reps.’ do) has several important implications. One way to see these is to consider lease negotiation: the contested process by which the tenant and landlord reach an agreement about the rent, terms and incentives for a site lease. Tenant-only representatives can create competitive tension and negotiate hard and in good-faith with landlords on their tenants’ behalf. It’s clear whose interests they represent, and they aren’t vulnerable to the leverage landlords may have over representatives or agents who are beholden to them commercially.

By working only on the tenants’ side, a representative can be uncompromised.

Independent

Being independent means not being subservient to a larger agent or beholden to any non-tenant commercial interests. Many larger commercial real estate agencies won’t show tenants a property because it’s not part of their portfolio or set of connections. This is indicative of a limited, one-sided knowledge of market and off-market opportunities that is not premised on what’s best for the tenant.

Comparatively, an independent tenant-only representative without allegiances to landlords, or responsibilities to a given property portfolio, can offer a broader view of commercial properties across the market and evaluate them for their value to the tenants business only.

By working independently of larger commercial real estate agencies, a representative can make recommendations freely.

Exclusive

Tenants working with either multiple independent brokers, or indeed a broker who represents the landlord, will almost certainly receive biased advice. In the case of contracting multiple independent brokers, the tenant falls victim to the fact that each broker is incentivized to promote and secure the deal they are proposing above the rest, often meaning they downplay hidden costs or issues with their opportunity (as well as potential advantages of alternative options).

Exclusive tenant representation is valuable because it is driven purely by the commercial relationship between the tenant and their representative – not by multiple brokers each attempting to win business. The only object of recommendations provided by exclusive representatives is to allow their tenant to make an informed decision about the best deal available.

By working exclusively with their client, a representative can be effective and perform to the best of their ability.

 

Commercial landlord property agents

Most commercial real estate agents work for owners, and are responsible for property management, leasing and sales.

Their principal clients (and therefore the principal sources of their income) are building owners (landlords) – not tenants.

While they may agree to provide certain services to tenants (like site search and lease negotiation) along with a basic standard of care, in the end it’s the landlord who signs their checks – meaning they represent their interests first and foremost.

Some commercial property agents may claim to act in the best interest of both landlords and tenants, and may receive a fee from the tenant as well as the landlord. Representing both parties within the same transaction causes conflicts of interest – ultimately only one party can be prioritised when interests are opposed. And generally, it is the commercial occupiers who are underserved in these cases, due to agents’ allegiance to landlords. Property agents often give jargon-packed advice and may not be fully transparent about negotiation details. Since the overwhelming majority of property agents’ income tends to come from providing advice to landlords and helping increase commercial property values, they almost always put tenants second.

 

Owners/landlords

Also known as landlords or ‘lessors’, owners of commercial property tend to be investment trusts, institutional owners and high net worth individuals in most markets. They develop or acquire properties and collect rent from tenants through leases, which are generally structured for rental increases over the term of the lease. Given that the owners’ commercial imperative is to maximise the rents they collect from tenants over time,

their interests can be said to be opposed to those of tenants.

Negotiating on behalf of the tenant to protect their interests against the interests of owners is what independent tenant-only representation and commercial property advisory is all about.

 

Conclusion

Given the complex web of commercial relationships that characterise the commercial property sector, you might expect more tenants to be choosing independent tenant-only representatives. After all,

the reason independent tenant-reps exist is to professionally represent commercial tenants.

And the way they succeed commercially is by getting tenants the best deal – whether that be finding a cheap new site, negotiating a lease (or re-negotiating a lease, which is particularly important during COVID times), renewing, downsizing offices or relocating.

Some tenants do try to represent themselves, or simply take advice and recommendations from landlord agents. But as I’ve explained above, there are downsides to self-representation or reliance on landlord representatives – these arrangements can be confusing, exploitative, time consuming, or simply ‘not a great deal’. The key advantage of partnering with an independent tenant-only representative is that

they share your interests – saving money on rent, finding the best location and getting the best lease terms.

Hopefully this post has made things a little clearer for commercial tenants out there navigating the property world at this trying time.

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