Please Rotate Your Device
The most obvious conflict in commercial real estate: when real estate brokerages represent landlords, promise that they will find tenants and negotiate the highest rent possible for the land owners?then they find tenants and promise them they will do a great job at finding them space and achieving the lowest rental rates.
The industry has evolved to a point where ownership structures are more complex than what we have historically conceptualized as the ?landlord?. The term landlord is very singular.
It conjures images of some old crusty rich guy who comes by the property once a month and doesn?t want to spend any money on the property for upkeep.
Modern ownership structures are more like mutual funds. Or rather multiple mutual funds.
The larger the building, the more likely it is owned by a REIT or pension fund and many properties have more than one pension fund as part of the ownership group.
This structure has allowed the ?visible? landlord to really be the property manager with an ownership stake, and the real owner is an institutional player who approves the leases, but is not actively involved in day to day operations.
So when you see that ABC landlord ?owns? 50 buildings, it is likely more that they may own 100% of 10 buildings, 50% of 20 buildings and 25% of 20 buildings, or something like that.
And this is where the conflict in commercial real estate arises.
In representing a 20,000 square foot office tenant for their relocation, their shortlist came down to two credible buildings. Renewing was simply not an option for multiple reasons.
Both options were with the same landlord.
But in one case, the landlord was the actual owner (100% ownership), and in the other case the landlord was only the property manager, without any actual ownership.
Now let?s do some simple math here. The leasing agent for this company was forthright with the fees they make on property management. They stood to make $0.80 per square foot as their property management bonus on Building A.
So $0.80 x 20,000 = $16,000.
To provide some context, this is a company of 100 employees.
On building B the payoff stood be:
20,000 square feet x ($15 net rent + $12.93 additional rent) x 10 years. A cool $5,586,000.
I can?t help but put in a pie chart just to show how ridiculous the difference is:
But here is the most interesting part.
In their unique position they were double agents. Not only did they know what the competition was doing, they were advising the competition! Normally for larger deals there are only so many choices and it?s a small world so with some reasonable assumptions a smart landlord can figure out who they are competing with.
But in this case they were the puppet master, advising their own competition on how to sign back.
Guess what happened? Landlord A was:
1. Not as accommodating on lowering the rental rate.
2. Slower to respond.
3. Required a larger tenant deposit.
4. More picky about the parent company indemnifying the lease.
5. Was more particular about the commencement date being sooner than later.
In short, they were not the same deal makers as Landlord B. The leasing agent?s boss had taken over the negotiation on Building B to help keep up appearances, but it was obvious that they were working against their client, Landlord A.
In the end, we wished we could have had more viable relocation alternatives for our client and we did not let Landlord B know that we were only talking to them.
Our client ended up being very happy with the negotiated deal ? I just wonder if Landlord A ever found out how their property manager helped swing a deal away from their building.
There can be quite a few hidden agendas surrounding your commercial lease, so whether it is a commercial real estate brokerage, real estate lawyer, or an online commercial lease review company, ensure that you have advice on your side of the table in commercial lease negotiations.