Understanding Your Commercial Lease Agreement | The Value of Hiring a Broker
If your business is seriously thinking about leasing new commercial space, you will need to identify the space, negotiate the terms of a deal, enter into a letter of intent, and then negotiate a commercial lease agreement to define your rights in your new space. This process can be complicated, and it can also be relatively simple. Whether it is complex or simple depends on factors such as your intended use, the term of the lease, the size of the space, the availability of space in the market, and other factors. Usually it is somewhere in between. Regardless of the size of your lease, you can benefit from the services of a licensed commercial real estate leasing broker.
A broker can be a useful ally, as brokers have insight into many different leases and have the benefit of seeing terms for many different tenants and landlords. Therefore, a broker will have insight into what tenants are able to negotiate in the market. A broker is also helpful as an intermediary who can facilitate more open communication between a landlord and tenant. A broker generally has access to research and information that can be critical to getting the best deal. Your broker should be the type of person who has demonstrated an ability to build an extensive network, as those network connections can help you secure the best space (and terms). And your broker should be someone who helps you better manage time throughout the leasing process. A tenant who employs a broker is more likely to get a better deal on the space, and a broker can take a lot of the hassle out of leasing a space, particularly if you are new to the leasing process. Put bluntly, a broker can help you save considerable time, effort, and expense in negotiating a commercial space.
A good commercial leasing broker will be someone (i) who has a solid understanding of your particular type of real estate market (e.g. office, retail, industrial, etc.), (ii) who can clearly explain the leasing process, (iii) who knows and has a good working relationship with other brokers, (iv) who is up to speed on your market, and (v) who understands your goals and how to shape a leasing strategy to meet them. You will want to shop for a broker appropriate for your specific business; you should choose someone you like working with, as you may spend many months (and sometimes years) working with the broker to secure your space.
Though the relationship can vary widely, commercial leasing brokers are normally paid by the landlord and are not paid unless and until you sign a lease,. This gives the broker a powerful incentive to help you get a deal done, as they work for “free” until the deal is finalized. However, this incentive also creates an incentive for the broker to close the deal, perhaps even when doing so might not be in your best interest. You should understand the relationship you have with your broker, as some brokers work for both the tenant and landlord. You will want to know if the broker you think is working for you actually works on multiple deals for the landlord, and generally you will want to steer clear of a broker who does not represent solely your interests.
Understand that a broker is someone who can help facilitate a relationship and broker a deal with the landlord, but be careful to avoid the urge to allow the broker to dictate your business terms. What may be a very important deal term to you may not be as important to the broker, particularly when pushing on the term might mean the deal (and your broker’s paycheck) will fall through.
While you will likely benefit from hiring a broker, there are also advantages to going it alone. If you already have a good relationship with a landlord, you may be able to forego hiring a broker and save money. If you do not hire a broker, you should ensure that the landlord provides some discount, increase in tenant improvement allowance, or some other benefit as an exchange for the landlord not having to pay your broker. (Keep in mind that even if you do not have a broker, the landlord may have to pay its broker regardless of that broker’s involvement. That is, most listing contracts provide that the listing broker (the landlord’s broker) will be paid for all leases regardless of whether you go straight to the landlord and no brokers even work on the deal.)
In most situations, it is advisable for tenants looking for space to hire a broker. The broker’s expertise, network, and tools can help you secure a better deal. But be aware of the rules governing the brokerage relationship, and do not substitute the advice of a broker for your own common sense. While brokers are valuable allies in getting the best deal on a lease, a broker is just one part of your commercial leasing team. Your broker’s advice is not a substitute for sound business judgment, advice from a CPA, or advice from an attorney.
If you have any questions about hiring a broker, your brokerage agreement, commercial leasing, or business law generally, please comment below or contact us. And stay tuned for the next post in the Understanding Your Commercial Lease Series.