Whose Side Are You On?
Franchise tenants need to understand who the broker is working for
As "The Lease Coach," I am a magnet for leasing questions. In fact, I receive hundreds of questions from independent and franchisee tenants each year; I am approached after my seminars, e-mailed, and called. One telephone call that I received was from a woman who had recently purchased a franchise. She started by telling me that her franchisor had offered to do her site selection and real estate work for an extra $3,500. Not knowing much about commercial real estate, she had thought that was a great deal and had accepted the franchisor's proposal for help. According to the franchisee, she was to meet and spend the day with a local real estate agent looking at sites, which she did.
When she was later speaking with me, she wanted to know why the real estate agent showed her only his listings (those properties with his name on the "For Lease" sign outside of the building). I explained how there are listing agents and outside agents. I explained that if she leased one of the agent's own listings, that agent would then receive the full commission. However, if she leased a location not listed by this agent, then this agent would receive a substantially reduced commission.
The franchisee's next question was, "Well, who is the agent working for?" "Who do you think the agent is working for?" I asked. "He is supposed to be working for me," she responded. I asked, "How much are you paying the agent to work for you?" She said, "I am not paying the agent anything." "Who is paying the agent then?" I inquired (knowing full well the answer). "I guess the landlord is paying the agent a commission," she said, both in a questioning tone and with a sense of realization.
Prior to 1993 when I became a lease consultant working exclusively for tenants, I worked for landlords. I was a commercial leasing rep and a commercial property manager. It is not uncommon for a commercial leasing rep/real estate agent to represent a tenant but to receive a commission from the landlord. Therefore, the commercial leasing rep is very much deal driven vs. detail driven - meaning that they only get paid if, and when, a lease deal is signed. This brings into question whether having a commercial broker represent a tenant is truly in that tenant's best interests. One commercial broker once said to me, "Dale, as you know, commercial agents eat what they kill."
Deciding whether to let a commercial broker or agent represent you in your site selection process is a big decision. Ideally, the agent would represent the tenant's best interests - even if that means advising the tenant to walk away from a questionable location or a poor lease deal.
While giving a leasing seminar to a large group of tenants, I learned that there was a commercial landlord in the room. When I got to the appropriate place in the seminar, I acknowledged the landlord and asked for his input. He was more than willing to address the session. I asked the landlord how he found tenants for his building. He responded by saying that he gave a listing to a commercial real estate broker (or a listing agent) who then would look for tenants. When I asked the landlord who he thought the broker was working for, he replied - without missing a beat - that, "The broker better be working for me with all the commissions I pay him."
Now what if there are two agents involved, the landlord's listing agent and an outside agent? It is traditional for the outside agent to receive a hefty portion of the listing agent's commission. In other words, the landlord is paying both agents, presumably to represent his best interests. Agents are financially driven to get the landlord the highest rental rate, the biggest deposit, and the highest comprehensive personal guarantee - all while offering the tenant only the most minimum amount of inducements possible (including free rent, a tenant allowance, build-out assistance, and many other perks).
It is important to note that based on the way commissions are generally paid, the real estate agent will receive a higher commission if the rental rate is higher. If there are substantial tenant inducements, then the real estate agent's commission is reduced appropriately. Does this sound like a scenario conducive to getting the tenant the best lease deal possible?
With more competition for prime locations, the more sensitive you should be about letting one agent show you another agent's listings. The listing agent may want to protect their potential commission and show preference to tenants who approached them directly (as opposed to an outside agent who is looking for a piece of the commission pie).
In some cases, a real estate agent will attempt to represent both the landlord and the tenant through a dual agency agreement. This is a more legal understanding that the real estate agent will be working for both parties but typically receiving a commission or payment only from the landlord.
In some cases, commercial real estate agents will refer to themselves as "tenant reps." This term may mislead a tenant into thinking these agents are looking out for the tenant. Practically every tenant rep that I know receives their payment on a commission basis from the landlord. It is important for the franchisee or business owner to understand just because the real estate agent calls themselves a "tenant rep," it does not necessarily mean that they are looking after the best interest of the tenant. Professionals who work on commission should be viewed as sales people, not necessarily advisors. If you want to weigh your options and maximize your bargaining position, you should consider using a professional lease consultant who is being paid by the tenant to represent the tenant.
North American real estate laws state that the tenant is entitled to know if the realtor is being paid a commission, how much, and by whom. All a tenant has to do is ask. In most cases the agent commission will be 5 percent of the base or minimum rent (not operating costs). So, if you are leasing 3,000 sq ft. x $28 per sq. ft. for five years at 5 percent, the commission would be $21,000. That is a lot of incentive to get the tenant's signature on the offer to lease.
It is extremely important that business owners and tenants take charge of their own destiny. In leasing, franchise tenants don't get what they deserve, they get what they negotiate.
Dale Willerton is The Lease Coach - a Senior Commercial and Retail Lease Consultant who works with franchise chains and individual franchisees across North America. Willerton is author of "Negotiate Your Franchise Lease or Renewal" and he speaks frequently at franchise shows and provides real estate training to franchisors and chains. E-mail DaleWillerton@TheLeaseCoach.com, visit www.TheLeaseCoach..com / www.DaleWillerton.com / www.HelpULeaseFranchise.com or call 1-800- 738-9202.
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