Suite Deal Page 6

  Do It Yourself (or Almost) Publishing

  Sometimes a slim budget, a deadline, or the relatively good quality of office printers brings a printing job in-house. In the event you print your own materials or photographs, remember to play with the resolution to get a true idea of output quality. Also, you may need to adjust the color, as photographs appear lighter in print than they do on a computer monitor. And if you are working with an online service that will print materials (rather than a traditional printer’s run), try to get a sample of the published product so you have the opportunity to proof and correct it prior to the completion of the entire job.

  Chapter 4

  Work with Brokers

  “At the end of the day, I believe integrity and relationships are everything in this business.”1

  —Bill Wilson, founder, William Wilson & Associates

  Goal: To Cultivate Strong Relationships in the Brokerage Community

  Leasing success, especially over the long term, depends on strong brokerage relationships. Whether you represent the landlord yourself or enlist others to provide those services, understanding a broker’s role informs most lease deals. This chapter discusses how to understand, build, and maintain relationships with the brokerage community.

  Recognize the Brokerage’s Evolving Role

  Ken Auletta, longtime columnist for the New Yorker, argues that technology, with its wealth of market information, threatens a broker’s traditional role. Auletta cites the disappearance of superfluous middlemen who failed to couple content with service.2 Successful real estate brokers must analyze data to create informed, fair deals for clients. In addition, clients require curated tours, proposal management, and documentation. Providing reassurance for some tenants and savvy negotiation for others, brokers employ a range of skills to procure the best deal for their clients.

  Ironically, today’s technology illuminates the benefits quality brokers can provide. With such a large amount of market data available, wouldn’t those with industry experience provide valuable insight? Brokerages extol their ability to analyze—not just regurgitate—data. Moreover, experienced professionals bring a nuanced understanding of local markets.

  Still, industry expectations can pressure brokers to justify their commission expense, sometimes creating tension in the deal. Professional landlords understand the dynamics that underpin commissions and often seek to strengthen relationships by appreciating brokers and creating a collaborative atmosphere through their communication and attitude.

  As a leasing director and property manager, I sometimes had advance information that spaces might become available. I kept a log of brokers who were looking for certain types of spaces (for example, an office with a view or a 10,000 square foot already-constructed open plan) and might call to let them know of a pending opportunity. A personal shopper of sorts, I tried to add value by helping brokers source inventory and to minimize my own potential vacancy period. Shaving time from the leasing process becomes a boon to landlords eager to collect rent and to tenants anxious to occupy functional space.

  Understanding Broker Roles

  Although brokers may specialize in either tenant or landlord representation, many brokers represent both (although not usually in the same deal). Here are some of the various roles played by brokers.

  Listing Broker: The Landlord’s Representative

  When a landlord employs a broker to represent a property in the marketplace, the broker becomes the listing agent and the contract is referred to as a listing agreement. A listing broker’s duties include preparing a marketing plan, creating marketing collateral (brochures, fliers, etc.), hosting open houses, coordinating tours, analyzing financial statements, preparing proposals, and negotiating lease terms on behalf of the landlord. In addition, brokers educate landlords on local markets and keep them informed on the leasing progress. Listing brokers add value to these daily leasing tasks with their knowledge of the marketplace and professional relationships.

  A Broker by Any Other Name

  Listing brokers (who represent the landlord) are also known as inside or in-house brokers, and these terms are used interchangeably. On the other hand, procuring brokers (who represent the tenant) are known as outside or tenant or cooperating brokers. Listing brokers represent the lessor while procuring brokers represent the lessee.

  Procuring Broker: The Tenant’s Representative

  On the other side of the equation, procuring brokers represent tenants in parallel aspects of their property searches, from market education to tours to lease negotiations.

  With tenant representation, the extent of broker involvement varies depending on the tenant, the individual broker, and the landlord. For instance, if a broker has a national relationship with a substantially sized tenant, the broker may introduce the property and then let the in-house tenant real estate team run with the deal. Other brokers will manage every detail of the leasing process. And still others, secure that the landlord will pay the broker a commission and play fair, feel comfortable letting the landlord and tenant reach a certain point in the process and then relinquishing some involvement (particularly when it’s a landlord’s existing tenant).

  Opportunity Costs

  Time and elbow grease play a role in any deal. Why negotiate with a difficult landlord who demands a fifty-page lease and takes weeks to respond when others answer immediately? Responsive, pleasant landlords often enjoy brokers flocking to their properties where they can get a deal done.

  Understanding Brokerage Commissions

  Lease commissions are the central financial incentive for brokers and are set by negotiations between brokers and landlords. As such, paying commissions commensurate with the marketplace becomes all-important, assuming you compete with other properties for tenants (and you don’t have a monopoly or extremely special market niche). Just as you educate yourself on local rents, you must know what commissions other landlords pay. Remember to include incentives that might augment the commission—speedier payments, bonus payments, and the occasional raffle ticket for a new car!

  Broker vs. Salesperson: What’s the Diff?

  While all states require that real estate sales professionals be licensed by that state, brokers are generally required to complete more education and have more experience than a salesperson. Real estate salespeople hang their licenses under the brokers’ (a figurative, not literal term; although, a copy of the license must be retained in the office of employment). Commissions are remitted to the brokers who then pay the salespeople their portions.

  Typical Commission Structures

  Commercial real estate brokerage commissions are typically based on a percentage of rent or a flat rate per square foot. Often remitted in two payments, the first half is usually paid upon lease signature and the second half upon lease commencement (often when the tenant takes occupancy of the space).

  In a rent-based commission scenario, a broker is typically paid according to a percentage of the tenant’s annual gross rent, with a declining percentage as the lease term progresses. For example, if a broker says “5-5-5-4-4,” it means that the landlord pays a commission equal to 5 percent each of the tenant’s first, second, and third years of rent and 4 percent each of the tenant’s fourth and fifth years of rent. For longer-term leases, percentages likely extend to cover each year of rent, usually on a declining percentage basis. Many landlords like this arrangement because the commission remains somewhat tied to rental rates, so that a listing broker who negotiates a high rent reaps a benefit too.

  Another common scenario is basing the commission on a flat rate per rentable square foot leased by the tenant. When speaking of this structure, for example, landlords will say the commission is $5 a foot. Thus, a 2,500 square foot suite would generate a commission of $12,500 ($5 multiplied by 2,500 square feet) for a five-year term. In the event of longer-term leases, such as seven- or ten-year lease terms, landlords may adjust the commission to $7 or
$10 per square foot, respectively. Some landlords like this structure because of its straightforward calculation. Also, if the landlord offers a higher commission rate (via this square footage approach) than the percentage schedule allows, it can be simpler to communicate in advertisements.

  Next, there’s the issue of commission split, with a series of divisions. Typically, the listing broker’s share of a lease commission depends on the involvement (or not) of a representing broker. For example, when a tenant comes directly to a building without a representing broker, the landlord’s listing broker might earn the entire commission. However, if a representing—also known as the procuring or outside—broker brings the tenant, the landlord might pay a full commission to the procuring broker and then some additional amount (such as an extra half commission) to the landlord’s representative. By offering a full commission to these outside brokers, there’s little incentive for a broker to differentiate between buildings strictly on the basis of a commission.

  Next in the series of splits, individual outside brokers must split their commissions with their employing brokerage companies. These splits are arranged internally between company and individual, commensurate with the salesperson’s deal-making ability, experience, and so on. For example, newbie brokers might split their commissions fifty-fifty with their employing brokerage houses, while veteran rainmaker brokers might enjoy splits of 60 percent and higher. These internal company splits remain invisible to the landlord who pays the brokerage house. Whew, that sounds complicated, but keep plugging along, and you’ll deepen your understanding of brokerage.

  Learn the Lingo

  In industry jargon, 5-5-5-4-4 means a commission equal to 5 percent of the annual rent for each of the first three years and 4 percent of the annual rent for each of the last two years of a five-year lease term.

  Payment

  Payday! That sunny day when the celestial skies align and the lush golf course looms large. After the lease ink dries, landlords can expedite commission payments and deliver them to brokers. If presenting the check in person is not possible, write a note to accompany it. Even electronic transfers can be communicated to the broker with a telephone call or email. The point is to use the commission delivery to strengthen your brokerage relationships, rather than settle for a perfunctory payment that arrives in a stack of mail.

  On a logistical note, in-person commission delivery may entail coordinating with your accountant so that you receive the check rather than it being delivered directly to the brokerage house. Although it’s a little hassle, the payoffs of a better brokerage relationship are huge. And you avoid that awkward telephone call from the broker asking for payment and tainting the deal experience with administrative bother.

  A brief note should accompany the second half of the commission payment too (usually when the tenant moves into the space). The payment reminds the broker of your property months after the deal’s conclusion. If any of your interactions with the broker have become confrontational during the course of the deal, redeem yourself with an in-person commission delivery.

  Bang for the Buck

  Some landlords expedite commission payments and deliver them to the broker over lunch. The personal touch lets a broker know that you value the relationship.

  I came to appreciate the tough realities of a commission-based job when an older broker called me to pick up his commission check. The gracious broker mentioned that he’d be in the area . . . and drove the half hour from San Francisco’s financial district to our offices. I doubt he wanted to visit the suburbs; more likely, he needed the cash. That incident made me consider the uneven stream of income for brokers, particularly in down markets. Since then, I expedite the commission checks through accounting, tell the brokers when the checks will be ready, and when possible, deliver them myself. It’s extra work, but the resulting positive relationships are priceless.

  Building Relationships with the Brokerage Community

  A Word on Culture

  Real estate is a relationship-based culture and attracts extroverted, charismatic people. Examples include Roger Staubach, Heisman Trophy winner, Super Bowl champion, and founder of his eponymous commercial real estate firm. While few of us are celebrated athletes, you can cultivate your own style of interaction with others.

  I once heard about the managing partner of a law firm, a consultant to renowned companies, who returned every phone call within twenty-four hours. I resolved to do the same. Some crazy days, that meant I dashed off an email saying I’d received the message and would respond the following day (or at a named future date). I found brokers (and tenants) flocking to do business with our office, perhaps in part because of this responsive service.

  The commercial real estate industry offers numerous communities for education, collaboration, and contribution. By joining one (or more) groups, many of which offer a professional designation, you deepen your industry knowledge and build relationships.

  Real Estate: An Industry That Loves a Good Acronym

  BOMA: Building Owners and Managers Association (offers the Real Property Administrator designation)

  CCIM: Certified Commercial Investment Member

  CREW: Commercial Real Estate Women

  IREM: Institute of Real Estate Management (offers the Certified Property Manager designation)

  NAIOPL: Commercial Real Estate Development Associations

  NAR: National Association of Realtors

  SIOR: Society of Industrial and Office Realtors

  ULI: Urban Land Institute

  USGBC: United States Green Building Council (offers Leadership in Energy and Environmental Design designation)

  Trust and Attitude

  While leasing mechanics are important, it’s the softer attribute of trust that makes a relationship work. Put bluntly, your integrity matters most. Should you treat someone unfairly, expect to be cocktail conversation for a long time thanks to real estate’s robust grapevine.

  As it happens, chemistry might inform both our trustworthiness as well as our instincts to trust others. Paul Zak, author of The Moral Molecule, indicates that the chemical oxytocin may play a significant role in why some people are trustworthy and others are not. Chemicals aside, Zak’s studies also imply that actions can trigger behavioral responses. Zak explains that it’s “another way of saying that the feeling of being trusted makes a person more . . . trustworthy.”3 The bottom line? Treat others as worthy peers and you may engender the same behavior in return.

  “The feeling of being trusted makes a person more . . . trustworthy,” says researcher Paul Zak.

  When applied to real estate, an intuitive leasing person appraises the breadth and strength of a broker’s influence in every deal. A broker with whom you’ve completed many deals will usually cast your property in a favorable light. In contrast, other brokers may simply shop the market, presenting your property as an undistinguished option. Regardless, treat every broker with respect, even when you sense the tour might be an exercise in market education rather than authentic interest in your property.

  Swipe Right for a Hot Property

  Some brokers use mobile devices to display floor plans, photographs, and building information, all of which can augment a tour. Make sure your local brokers have accurate information along with the best photos of your property by updating online listings regularly.

  Market Information: A Delicate Dialogue

  Market information, arguably a broker’s greatest resource, constantly permeates the real estate community. By building strong broker relationships, you avail yourself of the type of factual deal data that allows your available space to be most competitive and makes you knowledgeable about the industry.

  Brokers and landlords use comparable information to justify rental (and other deal) numbers to owners, prospective clients, and other brokers. It’s the analysis of such data, however, that adds real value and nuance.
The evidence contained in signed leases provides the support for your leasing proposals and the ensuing negotiations.

  Exchanging lease comparables presents a classic dilemma of wanting information without giving away the house. While this topic has been discussed earlier, the subject is worth revisiting. Real estate professionals can become tight-lipped when information gives them a competitive edge. While comparable information can be exchanged in nearly every interaction with a broker, it’s usually woven into informal conversation. This type of casual exchange also requires an underlying vocabulary of real estate terms and market information from the participants.

  It’s a bit of an art to learn to trade information in a conversational way. As an example, an exchange might be as casual as this sample script:

  Property manager: “Congrats on the XYZ lease.”

  Outside broker: “Thanks, it was a bear.”