|November 23, 2018||No Comments|
17 Hidden Conflicts of Interest in Commercial Real Estate
Looking to hire a commercial real estate agent and you want to ensure you are aware of all of the conflicts that he or she may encounter? You have come to the right place. Here is the list:
1.Representing both the tenant and the landlord
Ok, this one is not so hidden ? most tenants are aware of this one. But beware of a landlord who hands out listing work and has provided a listing to your agent, but just not on the building you are negotiating on.
2.Vying for future listing work from the landlord
Your agent may be a tenant-only broker at a full-service brokerage and perhaps has never solicited a listing in his career. But could change. Many landlord-listing agent relationships develop because a real estate agent brings a tenant to the landlord.
3.Representing competitors in your industry
Not to accuse your agent of corporate espionage, but it would be perhaps better if your advisor wasn’t close to any of your secrets on how you operate. Conversely, perhaps you can find an agent who has worked with your competitors and may be a source of valuable information!
4.Representing tenants that want the space that you want
While you want an agent that is active in your area and knows the spaces in your size range, what happens if she is representing one or more clients with the same requirements? Particularly in a hot market, you can be competing for spaces and your agent may be representing you and a third party on the same space at the same time.
5.Being paid bonus commissions on certain buildings
Some landlords will offer bonus fees on buildings that need more leasing activity. This is also very common on sublets. Brokers are very hesitant to talk about their commissions to begin with and most bonus fees are not disclosed to tenants. Listing agents typically have two sets of marketing flyers ? one set that has commission structures (for brokers) and one set that does not display commissions (for the general public).
6.Asking for bonus real estate commissions
There are plenty of brokers that have learned that just about everything is negotiable. Particularly on small requirements in which they feel they are not making enough money for their efforts, there are agents that will ask for a bonus commission even when the landlord is not offering one. The tactic can be quite successful.
7.Landlord incentive programs
The largest of landlords have regular programs that reward corporate real estate brokers. Dinners, tailgate parties, golf trips, etc. Some landlords go so far as an annual golf getaway trip for every agent that completed a lease with the landlord in the year. It is about a $5,000 expense for each agent that attends.
It is no secret that we all want to work with people we like. When you trust your agent to come up with the list of available options to tour, you never see what was dismissed. Particularly in a market that has enough options to keep you perhaps satisfied, your agent may eliminate buildings based on who she does not want to tour with or negotiate with.
9.Landlords that don?t pay commissions
Those are the first options dismissed! An agent will always be willing to risk being fired rather than put options on a tour list in which the landlord will not pay a fee. This also applies to landlords that will eventually pay a fee. Agents hate having to persistently follow up for commissions.
10.Buildings that pay below market real estate fees
This is common when you are searching for the kind of space that is not well serviced by the mainstream databases. The agent starts to look on the local real estate board and discovers that the commissions are brutal. Most of them are listed by residential agents that are dabbling in commercial. Full-time commercial agents tend to avoid these listings altogether.
11.Internal commercial real estate brokerage bonus structures
The default commission structure is 50/50 ? 50% to the agent and 50% to the brokerage. But once an agent starts to perform at a high level, she can start to make a higher percentage at the tail end of the year.
For example, if the split goes to 60/40 at the $300,000 mark and she has earned $299,000 then there is extra incentive to push all current deals over the goal line before the end of the year. Tenants tend to get very biased advice in November and December!
12.Working with part time partners on a file
Most ?teams? in corporate real estate are not full-time. They are assembled to maximize the odds the brokerage will win the account. Or they are structured that way simply because more than one was calling you and rather than fight over your business, the agents decided to team up. The problem is that the agents are now splitting the commission and the responsibilities. They may be playing hot potato with your account if neither wants to do the heavy lifting. They also may have more lucrative project they are each working on, on the basis that even projects that are smaller could be more profitable since they are not splitting the commission.
13.The need to prospect in commercial real estate
Being a commercial real estate agent is tough. There is a ton of prospecting required. Most of the successful agents do not drop everything to service clients. They spend their days prospecting and then tend to client matters during off-peak hours.
You want someone who is successful but what happens when you are a small fish for them? You will have someone who has the technical capability of doing a great job for you, but will you have their time and attention? Unfortunately the size of the real estate commission is proportionate to your square footage…and the smaller your square footage, the less your real estate broker will care about your project.
15.High industry turnover in commercial real estate
Commercial real estate agents will not admit it, but everyone thinks about leaving the industry at some point. You are not going to have a focused agent if she is wavering on whether or not this is the industry for her.
16.Compensation is not tied to performance in real estate brokerage
The hardest part about commercial brokerage is getting the client to sign the mandate letter. Once engaged, the broker?s objective to ensure the deal gets done. The client?s satisfaction is often secondary to that goal. Most markets have a commission structure that is based on a percentage of the rent. Therefore the worse the job the tenant?s agent does negotiating the rent, the more that agent is rewarded. Likewise, in markets with flat fees (for example, $1 per square foot per year), the agent is rewarded for convincing tenants to rent too much space and for committing for longer terms.
17.Not letting you know about last minute space options
In just about every commercial real estate search a great option comes up right when everyone can see the finish line. Your agent is just waiting for the last signback from the landlord and this happens?
Your agent says to herself ?Huh. I could forward along this option as it is part of my fiduciary responsibility to the tenant?or I could pretend not to see that email and forward the offer to my client and make thousands of dollars??
For more questions, you can refer to www.huntkloffice.com