Ignoring the Elephant in the Room?
From “March 2008 Issue XXIII
DUAL REPRESENTATION BROKERAGE IS THE REAL ESTATE BROKERAGE INDUSTRY’S “ELEPHANT IN THE ROOM.”
Dual agency occurs when one commercial real estate company represents both the tenant and the landlord in a lease transaction. Sometimes it is one individual on both sides. Other times it is two individuals within the same firm.
When you use a dual agency, there’s an elephant in the room that you should not ignore. That is questioning where the agency’s or individual’s loyalties truly lie—with you the business owner or with the landlord?
A Southern Arizona Example
In Southern Arizona, a professional services firm that occupied 15,000 square feet of office space was approached by its building’s listing broker and landlord.
This dual-loyalty broker and his landlord client focused on the great relationship they and the tenant had shared over the past 10 years. They told the firm not to hire an outside broker to represent the tenant’s interests and offered the tenant “a below-market deal.”
The dual-agency broker promised the tenant that it would save the cost of a commission and that savings would be reflected in reduced rent.
Someone from an affiliate office, which exclusively represents tenants in lease and purchase negotiations, contacted the tenant and happened to ask if we could review the landlord’s “wonderful terms” based on our recent experience in the building and in the surrounding area.
What happened next shocked the tenant. The tenant rep from our affiliated Commercial Real Estate Group of Tucson showed the tenant that the deal was below the belt, not below the market.
This was a bad deal, we discovered, because
- the proposed rent was actually $4 per foot higher per year than recent new deals we had finalized in the same building
- the landlord wasn’t going to change the tenant’s base year for operating expenses
- the tenant would pay an extra 40 cents per square foot per month in expenses
- that increase would have continued for another 10 years.
The tenant was offended by the deception. We moved the company out of the building to higher-quality space in a better building and saved them almost $2 million.
Conflict of Interests
Every year tens of thousands of businesses are misled by brokers whose true loyalty is to the landlord. This costly mistake translates to higher rent, more overhead and less profits.
Yet many tenants negotiating a lease for office space, retail space or industrial space ignore the elephant in the room. They don’t talk about how a major component of their future is affected by people whose loyalties lie across the negotiating table—the dual rep broker and his true client, the landlord.
The commercial real estate market has tried to hold the lid on this dirty little secret—it’s called conflict of interests— for decades. But a growing group of tenants is realizing that in the world of big commercial brokerage houses, the house wins. That house is always the landlord because that is where the money is!
The landlord’s goals and objectives clearly conflict with the tenant’s. Landlords are in the business of leasing and operating office buildings. They are pros at it. They know every trick in the book. And their soldiers are the landlord’s brokers.
A broker who has a listing on a building also has a fiduciary responsibility and contractual obligation to the landlord. How can that broker fairly and adequately also represent the tenant?
The answer is that the broker can’t, no matter how much marketing spin they might use to justify it.
An unsuspecting tenant doesn’t stand a chance when standing alone against a dual-agency broker and his landlord.
Commercial tenants aren’t in the real estate business. Their focus and experience lie in maximizing their profits and minimizing expenses.
One sure way to minimize expenses is to hire a specialized tenant representation firm. An exclusive tenant rep firm like affiliated Commercial Real Estate Group of Tucson represents only space users, never landlords. A tenant rep levels the playing field when negotiating a
- space expansion
- lease renewal
- business relocation
- space contraction
- commercial real estate purchase.
Let’s look at another example: A tenant was renegotiating his firm’s lease directly with the landlord and the landlord’s broker. Without a tenant representative in his corner, the tenant was at a disadvantage.
We stepped in and reviewed all the correspondence as well as the existing lease. The landlord was threatening to re-measure the space per BOMA 1996 standards. This would have increased the tenant’s core factor by more than 7%.
However, we pointed out that the tenant had a favorable extension option that the tenant hadn’t yet exercised. The lease was specific: The landlord had no right to re-measure the space. We helped the tenant go to arbitration and saved the tenant $1 million in rent – money that would not have been saved had the tenant used a dual-representation broker.
Dual-representation brokers serve landlords in securing additional listings or management contracts from the landlords or to market their success to other potential landlords.
When I started in this business over 23 years ago, everyone worked for landlords. We made our money by filling landlords’ building with new tenants and retaining tenants on lease renewals. It wasn’t until the mid-1980s that exclusive tenant representation started to emerge as a realistic business model accepted by corporate users.
A tenant broker wants to do a good job, develop a long-term relationship with the client based on trust and win referrals to other tenants in their market in the process.
The choice is yours! Let’s send the elephant packing!
Commercial Real Estate Group of Tucson will serve as your tenant broker serving only you, never the landlord. Contact the tenant representation company to learn more.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States. For more information call 520-299-3400.