|November 26, 2018||No Comments|
This is a story about a smart lawyer and how he did not understand how the commercial real estate game is played.
At 2,000 square feet, the lawyer was a below average sized tenant, in an A class building in a financial core district. His landlord offered a golf trip every year for every broker that completed a deal with the landlord (the landlord had deep pockets).
That incentive program intensified the already-competitive commercial real estate brokerage market. The lawyer not only received many calls from real estate brokers who want to represent him, but the phone started ringing three years prior to his lease expiry.
To provide some context, the commission on the deal was going to be RM10000 if he renewed for 5 years. If two agents work as a team and work for a firm that provides a 50/50 split on commissions (industry norm), the agents would each make RM2500. The trip was typically a RM5,000 value, and a lot of fun a weekend away with your industry peers and some recognition that you belong in a club of elite corporate real estate rain makers.
The lawyer was insanely intense. He met with just about any broker that would call in order to extract any details possible to help his position on his next renewal. Whether knowingly or not, he also goaded each agent into providing as much market intelligence as possible. He would come to meetings with a stack of reports produced by other brokerages. Where do you see the market going, he would ask while pulling out a bar chart of projected rental rates from the competition.
He also had a problem this was him on his floor:
And this was him in his office building:
He was the smallest fish in the pond.
The sum of the real estate agents had collectively scared him enough to worry about whether he can actually stay in the building or if the landlord was going to prefer to expand another tenant into his space. With the illustrations above, that was a legitimate threat.
Now, he did have a right to renew in his lease. It was poorly written and ambiguous. It stated he could renew on the exact same terms and it did not specifically mention the rental rate.
Therefore it could be argued that the renewal will be a mirror image of the last 5 years, and the landlord could also argue that a lack of talking about the rental rate is meant to imply fair market value, which is the industry norm.
The lawyer finally decided on a real estate brokerage to work with. He asked the two agents to construct an offer to amend and extend the lease.
The agents arrived at the first meeting, and recommended lowering the rental rate. The lawyer was taken aback.
Why would the landlord agree to lowering my rate?
He glanced down at his file, filled with competitor reports
Never in a million years would they actually lower my rate. I’m totally fine with a modest bump in the rate and I want to focus on getting another right to renew. That’s the main point here.
The brokers persisted. We feel that this is a good starting point. It is not insulting. We work for you and it’s our job to push the envelope with the landlord. The lawyer was used to being in control. He didn’t really know how to respond.
After staring long and hard at the agents with a very puzzled look, he finally shrugged his shoulders and said, Well, you guys are the experts. One week later the agents came back to the lawyer’s office with the landlord’s response.
The landlord agreed to lowering the rental rate and agreed to the right to renew.
This is tremendous! I don’t know how you guys pulled it off, but I’m glad I trusted you. He said. Now let’s be clear about one thing: the brokers added value here. They renewed the tenant at a lower rental rate than what he would have renewed at.
They also secured the further right to renew something the lawyer may not have been able to achieve. He already thought it was an uphill battle to get that.
But to the brokers, there was no magic at all. They already knew what was going to happen even before the lawyer signed the offer.
Once the brokers were appointed, they called the landlords rep before crafting the offer. They explained that the rental rate and the right to renew were the important elements. They discovered that the neighboring tenants were not interested in expanding one was going to vacate at the expiry of their lease and the other was a big financial institution interested in downsizing their real estate.
With respect to the big tenants in the building the biggest one just renewed and took two more floors of expansion space.
Through their relationship with the leasing rep, they talked about finish line deal terms before they crafted the offer. The rates in the building had actually declined a bit since the lawyer did his last deal and the lawyer and his residential agent also didn’t get the greatest deal last time around. So there was room to lower the rates.
When the lawyer was suggesting to the agents that the offer should have higher rental rates, they had an ethical dilemma. They could either :
What they didn’t want to do is tell the client Well, we already talked to the landlord’s rep and he is already in agreement with these rental rates and the right to renew.
Again, the agents took all the right steps:
They just skipped ahead and did all that work before the client signed the offer.
It should be noted that not all commercial real estate agents go ahead and talk turkey with the landlord’s rep prior to a tenant signing the offer. There are agents that believe there should be a wall of confidentiality until an offer is signed and then the agent can go to work.
There are also a lot of agents do not even bother to negotiate they think their job is to get the offer from the tenant and email it to the landlord and just wait for a response. It saves them time and effort and the client never knows just how much energy was expended by them in the negotiation.
In this case the agents were looking out for the client’s best interests, but did so in a way to ensure that they managed the expectations of this demanding tenant. They didn’t want to give the lawyer an inch, because he certainly would take a mile.
It also allowed them to prepare the best offer on the first draft. They admitted that if they had not called the leasing agent before drafting the offer, they actually would have led with a higher rental rate. It was the landlord’s leasing rep that actually suggested that he could get a small reduction in the rental rate approved.
Not all real estate brokers play by the same rule book. Some act in ways that you may not agree with, but their methods can be effective. Others can be overly honest and transparent and create no value for you. If you are considering hiring a commercial real estate broker, ask them specifics about how they operate and will actually create value for you.