Why it can be a financial mistake to negotiate with a Landlord directly.

When commercial tenants negotiate directly with landlords, they are often treated like captive markets. Without representation, tenants don’t know what they don’t know (for example, the ability to add early termination rights), and that necessarily results in unrepresented tenants leaving important terms, rights, and dollars on the table.

With tenant representation, it costs tenants nothing extra – only providing savings (often extensive), and the result is a financial document much more balanced in the tenant’s favor – plus the likelihood of securing a much better facility for the tenant’s needs than they can find for themselves, based on our comprehensive awareness of market options. Landlords know when the tenant is armed with extensive market knowledge, they cannot withhold any achievable concessions. Landlords also know the brokers may be  negotiating with multiple landlords simultaneously.

Tenant Reps know the vacancy in buildings, but more importantly, the blocks of vacancy that are emerging in specific buildings soon, and what specific concessions certain landlords have granted recently. This knowledge is power for the tenant that they would not have or benefit from working independently.

So armed with this great information, why do tenants still insist on negotiating directly?  Well, often what they are typically concerned about is the commission.

That issue, when addressed directly and transparently and explained in the context of the value of the brokers specific and relevant knowledge of his market, the competing Landlords current situation financial and otherwise (i.e., ownership structure, investment horizon) the knowledge of lease terms and the economic value of renewals, expansions, termination rights, market timed terms etc, should become much less of an impediment.

Keep this in mind.  Tenant representation is what a tenant rep does. It is their business and one would assume that the tenant rep has the knowledge, experience and business savvy to negotiate a deal that is in the best interests of the client.

Here are some thoughts:

1. STRONGER NEGOTIATION POSTURE WITH LANDLORD

By hiring an experienced real estate broker to renew your lease, you signal to the landlord that you are keenly aware of competing office buildings and are prepared to relocate, which in turn will force the landlord to compete more fiercely for your firm’s continued tenancy. The more time spent investigating other space, the better the renewal transaction becomes.

2. BROKER’S EXPERIENCE IN SIMILAR TRANSACTIONS

A good real estate broker in today’s market is active day-to-day spending his time negotiating renewal transactions in a similar office market for his clients many of whom, may have the same office space requirements. Because of this experience, certain creative solutions and deal structures can be brought to your firm’s attention that would otherwise remain unknown. Those strategies used in renewing a lease are often times different from those strategies used in searching for new locations.

3. USING THE BROKER TO NEGOTIATE

By using a tenant rep, the tenant will not be required to directly interface with the landlord, who may be taken back by the aggressiveness needed for a successful negotiation. The broker may act as the “bad guy” while the tenant remains a “good guy” at all times, thus allowing for a more favorable long term relationship with the Landlord.

Start with the premise that the landlord (and/or the landlord’s broker) is only looking out for his/her own interest in achieving the best terms for the landlord. The tenant rep broker-without any conflicts of interest creates market competition for the tenant in a renewal. Taking a lease to market benchmarks other alternatives that should demonstrate the merits of a renewal vs. a move.

Sure they’ll save the tenant time, but more important they are skilled and experienced negotiators who clearly earn their fee in achieving the lowest costs and best lease terms.

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1 Comment on Why it can be a financial mistake to negotiate with a Landlord directly.

  1. No monetary incentive exists for the tenant rep broker to negotiate for lower rent. He gets paid by the landlord in an amount that increases proportionately along with the rental amount that tenant pays.

    At some point, does the amount of the commission, when it’s received and the degree of impact it may have on brokers household cost obligations affect his level of aggressiveness in the negotiations? Has it ever led to premature roll over or caving on certain provisions? Each additional lease clause objected to by the broker on behalf of his tenant client delays the final execution date and increases the chances that the deal might die altogether.

    Since when did going to the mat on verbiage in the notice provision become a higher priority than feeding ones family? Loyalty to ones clients at the expense of personal financial gain is a tough pill to swallow. Continuing to refuse to accept landlords continuous operations clause could mean the wife has to settle for a Geo instead of a Lexus.

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  1. Weekly CRE and Retail Article Round Up – September 14th, 2012 | Retail Rocks In The Mid South
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