Commercial Real Estate Investment/Commercial Rental Commission

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Question
Hi Jim,

I own an industrial/office/warehouse building (29,000 sq ft) that has been occupied by the same tenant for nearly 4 decades... they are now leaving and I have to list it with a Broker for the first time. The building is in Massachusetts, north of Boston, on the I-95 corridor, but not in the Boston market.

I had a reputable independent Commercial Brokerage company recommended to me along with a specific Broker in the firm. They have viewed the building and are anxious for the listing. The meeting went well with the current tenant, which is very important as they will be allowing access months before the Lease requires because they’re looking to leave as soon as we have a new tenant. I am located out of state and doing everything from a distance. The firm has a prospect who has requested a showing, and another with interest. Thus far I feel comfortable working with them and feel they will be more hands on than a large commercial firm.

They sent a listing agreement with a commission structure of 5% for the first 5 years, plus 5% on the 5 year renewal option. I thought that sounded very high, so I contacted the person who initially recommended them; he owns numerous commercial properties. He said the industry standard is a de-escalating rate: 5,4,3,2,1% for the first 5 years and 1% for the 5 year option.

I brought this to the attention of the Broker and they countered with a de-escalating rate of 5,5,5,4,3% and 3% for the 5 year option.

Their counter offer on the first five years is $12,000 over what I’ve been told is “industry standard”, but one month without a tenant will eat that right up.  

The renewal commission they countered with is absurd to me… over $25,000 to re-sign an in-place existing tenant without a co-broke. I can’t fathom paying that.

How do I determine what industry standard really is in my market? I have two very conflicting answers: 1, my long-term associate who owns many commercial buildings and has no financial interest, and 2, the Broker with whom I would really like to work with.  I’m paying him to represent me (and my research indicates that he is the best in the area) but his pushing for his high commission seems like a conflict of interest.

What would be your advice? Any tie-breaking expertise would be greatly appreciated.

Also, the tenant is, of course, obligated to pay for the five remaining months on the lease; I am considering offering a discount if we have a new tenant ready and if they agree to pay the discounted rent in a lump sum. This cash would enable us to pay the commission. Is this a good idea? If so, how much discount would be fair?

Many thanks,
Carolyn

Answer
Carolyn:

First you need to have a IMPARTIAL expert opinion of the current level of market demand for your kind of space and know what the realistic appraised sub-market rental is for your particular type of space.   If the demand for your specific space is strong you can afford to spend a brief amount of time in the market discovery process.

Second, remember that the amount of the net commission cost to you to complete a new lease transaction can only be evaluated through a net comparison of all the economic components that a likely new transaction will contain.    As long as you end up with a net market or above market revenue over the full lease term, your cost of the commission component is negligible.  Be careful how you address that concept with your prospective agent however because the "net revenue to seller" concept is overtly taboo.

The commission quoted by your prospective broker may be very fair or it could be too aggressive.  It all depends on the brokerage practices in your market area.   Brokers will often try to overcharge a property owner "in need".   You can contact the Commercial Board of Realtors in your area to get information on a reasonable commission structure for your space - including the renewal.  The best way to get accurate commission information is to contact competitive brokers in your market to inquire about a fair commission structure.   Any good broker is going to attempt to get your 29,000 s.f. listing themselves during your call so be open minded in your effort.

Regardless of the prospect interest existing today, ask any of your prospective listing agents (especially the one that you "really want to work with") for evidence of recent "comparable" transactions - including the associated build out costs, financial strength of each tenant, etc. - for space similar to your own that prove that their market advice to you is accurate.  A good broker will have such information available to show you on paper (No, they won't have copies of the comparable lease documents, but they should provide you with something that is convincing).  

Often you discover that an agents supposed prospective tenant interest will disappear once they have gotten a listing agreement from you, however, if you are listing your vacant space at realistic market terms, prospective tenants should come along in a reasonable amount of time.

Having said all of the above, if the demand for your specific kind of space is weak, consider carefully the wisdom of not paying a slightly higher than market commission and in so doing miss out on a revenue flow that will net a positive cash flow for your property.

Regarding a discount, make very sure that the rental income from your anticipated new occupant is guaranteed to commence before you make any form of a discounted lump sum "early out" rent agreement. As you know, there are many reasons that a move-in date can be delayed or, in rare cases, occupancy never develops.  

Please send a follow up if you have further questions.

Holiday Regards,  

-Jim  

Commercial Real Estate Investment

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Jim Avancena, CPM

Expertise

Best qualified to answer questions that involve commercial leases, that is, basic issues as well as the often unexpected effects of the complexities and inter-relationships of the provisions a lease may contain, explain how seemingly innocuous text in your lease can have a major impact on a Tenant or Landlord and their business operations, and the common practices utilized in the industry. I can untangle most matters that may come up from the time a tenant begins searching for a office or store space and the lease acquisition process, concerns related to remodeling/improving the leased premises, moving-in, subletting or assigning the leased space, and a long list of problems that may come up during the lease term and even after a tenant moves out. I have practical experience with most property management issues and resolving landlord and tenant disputes - especially those involving what may appear to be overcharges assessed for additional lease charges like CAM costs, operating expense reimbursement, real estate taxes, utilities, construction improvements etc. Note that I am not an attorney and cannot provide legal advice.

Experience

Thirty years active experience in the commercial real estate industry as a licensed real estate broker in the Washington DC Metro area (DC, Northern Virginia & Maryland). I have been admitted (approved) by the Maryland and DC courts to testify as an expert witness on the subjects of Commercial Leasing and Property Management in the area of standard industry practices. I have had a business for the last 14 years advising virtually every form of business entity from large national corporations to the smallest ma & pa new businesses regarding a wide range of commercial real estate matters in addition to property management and commercial leasing.

Organizations
Currently my three children keep me so busy that it is difficult to participate in organizations with continuing and specific time requirements.

Publications
I publish a local commercial real estate newsletter titled: "Tenants First". My firm was the subject of a high profile Washington Post business section cover page (2.25 full pages) feature story on January 13, 1993; titled "Overcharging Overhead".

Education/Credentials
BA in Political Science from Memphis University, and five years of study in the real estate development summer program at MIT. I was certified as a commercial property manager (CPM-IREM), and currently hold a brokers license in Maryland and the District of Columbia.

Awards and Honors
The same plaques and honors that most others in my industry have earned. I have none that I consider especially meaningful.

Past/Present Clients
Past clients include: The World Bank, George Washington University, National Association of Criminal Defense Attorneys, US Department of Commerce, The American Benefits Council, K-Mart Development, many law firms, a national union, other major organizations, and many, many small business firms and retail operators that I am most honored to serve. I estimate more than 1,500 firms/organizations.

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