When you're reading tips for commercial leasing, you'll quickly find that experts frequently recommend hiring tenant representative brokers. Reps can get you access to spaces that you would otherwise never have an opportunity to lease and can help you select the office or building that is most in line with your needs. Plus, tenant reps assist during the negotiation process to get you the most favorable lease terms possible.
The benefits of having one by your side throughout the search and negotiation process are undeniable, but you're likely to think to yourself, "Just how much will I have to pay to receive all of these benefits?" Read on to learn more about the cost of using a tenant rep broker.
Although rates may vary, most tenant representative brokers receive commission that is equal to 5 percent of your total gross rent for your entire lease. To calculate this, you take 5 percent of the base rate plus the operating expenses and then multiply that figure by the lease term. As an example, if you have a seven-year lease on a 50,000 square foot office rented at $40 per square foot, the commission that a tenant rep broker would typically receive is $700,000.
Commission rates may vary due to different factors. In areas that have a surplus of office space, brokers may receive higher commissions to entice tenants to particular properties. Brokers may also get varying commissions for office, retail and industrial spaces.
Who Pays Fees
Here's the good news: in most cases, the landlord is the one who covers the fees paid to the tenant representative broker. Although tenant reps are incredibly helpful for companies looking for commercial real estate to rent, their services also benefit landlords, as they help fill vacancies. Because brokers allow landlords to quickly turn over empty space, they are willing to pay for their services. As a result, you can usually enjoy the services of a tenant rep without having to pay anything.
It does need to be noted that in very rare circumstances, landlords may refuse to pay the broker's fees, leaving it up to the new tenant to cover the commission. Normally, this only happens when the tenant rep broker has angered the landlord with unreasonable concessions or has acted unethically. Working with a tenant representative broker with a good reputation and extensive experience can greatly reduce the small risk of this occurring.
Additional Costs to look for
There are additional costs to look for when using the service of a tenant rep. it is essential to point out that just because you are not responsible for the payment of the tenant rep costs doesn’t mean that the entire leasing process is free of cost. Here are a few additional costs that you may want to pay attention before considering a new space:
The first additional costs you should pay attention to are the legal fees. Not only are they important, legal fees can be extremely expensive when you are in the middle of commercial lease negotiation. Commercial real estate lease agreements are legal documents and should be reviewed by an attorney. Hence, you should work with an attorney who will help you proofread the lease agreement for clauses that may put your business in legal trouble. Legal fees rise when they lease negotiation process extends for too long.
Construction/Build Out Costs
Tenant improvement allowances are often included in a lease agreement. However, tenant improvement allowance may not be enough to cover all the costs involved in remodeling an office space to become ideal for your business needs.
Hence, construction or build out costs are additional costs that you may want to pay attention to. For instance, common costs such as internet charges and furniture can be unusually high. Therefore, it is advisable that you engage a project manager early on in your office search and lease negotiation process if you seek to have the best possible lease. Working with a tenant rep broker will help you in getting a better understanding of the estimates of all additional costs and which ones you are responsible for.
If a representative for the landlord approaches you and encourages you to do a direct deal without a tenant rep broker, proceed with extreme caution. The landlord's broker will likely tell you that you will save money by eliminating the tenant rep fees, but the truth is that the landlord is likely to pay the same amount to their own representative even if you forgo a tenant rep. Plus, not having a broker to advocate for you during the negotiation process could mean ending up with a higher rent rate and less than favorable lease terms.
How a Tenant Rep Saves You Money
Despite providing corporate clients with incredible benefits, corporate clients are not responsible for their fees. Landlords are the ones responsible for paying the fees. This is because landlords benefit when a tenant rep bring tenants to lease space in their buildings. Most landlords have budgets for the tenant reps who they pay commissions. Despite the fact that the landlord is responsible for paying the tenant rep, you should rest assured that the tenant rep is working for your best interests. This is because they don’t get paid until you find a great deal.
Not too long ago, a businesswoman realized that she needed new space if her venture was going to continue growing. Some of this was related to her business outgrowing its home office, but at the same time, her nearby Class C flex space had major issues -- including roof leaks and non-functioning air conditioning. She knew that she had to move.
This businesswoman did what many people in her situation would do. She didn't pick up a phone and call a tenant rep. Instead, she picked up her car keys and started driving major thoroughfares to look for new spaces. Luckily, there was a lot of vacancy in the area, and she found four choices that seemed good.
Once she found spaces that she liked, she began calling landlords. The best space? No one from that professional owner ever called her back. The second best space was owned by another sophisticated owner who sent out a junior level person who told her that space already had two offers and that her business wouldn't qualify to rent in the building but that if she really wanted to try, she would have to submit an offer within the next week. The other two spaces were owned by private landlords. Both met her at the building and took their time showing her around. They told her that they already had offers for their spaces but that if she quickly submitted an offer (before the weekend!) that they would see if they could "squeeze her in."
Both private owners asked her if she was working with a real estate broker or a tenant rep. She said that she wasn't, and both congratulated her on her wise choice.
Instead of submitting offers, she requested that each landlord tell her what they could offer her business on a three year lease with a personal guarantee. The responses were:
Building 1 (professional owner; most attractive building): No response
Building 2 (professional owner): $14.00 per square foot plus $11 CAM. No free rent or TIs
Building 3 (private owner; across from an asphalt terminal): $12.75 per square foot plus $10.50 CAM. No free rent or TIs.
Building 4 (private owner): $15.50 per square foot plus $9 CAM. $4000 in TI allowance.
Upon looking at these offers, this business owner realized that she needed help. She found a tenant representative with a well-respected firm in town and engaged him to assist in negotiations with the potential landlord. Building owner 3 -- the first private landlord -- declined to work with her tenant rep, and building owner 4 repeated his initial offer with no change. However, the owner of the second building responded and added two months of free rent to his offer.
Interestingly, though, the ownership group of the first building -- the one she really wanted to occupy -- responded to her tenant rep. Their offer was $12 per square foot in rent with $12 in CAM charges. They also offered 4 months of free rent and $8,000 in TI allowances. This was the lowest total occupancy cost of any of the four buildings. With her tenant rep's help, she executed the lease and was open and operating within two months.
Today, her business has roughly doubled in sales. Her customer base has doubled. And her operation is well known in the neighborhood. Most importantly, she accomplished this with the lowest cost of any of the four offers, thanks to the help and support of her tenant representative.
Benefits of Using a Tenant Rep Broker
While it may be tempting to conduct your commercial office lease process alone, it is advisable that you work with a tenant rep. This is because they offer immense benefits at zero charges to you. If you are on the fence as to whether a tenant rep broker will help you in your next lease process, here are some of the ways a tenant representation broker could save you money and time during your real estate lease process:
1. A Tenant Rep Broker Helps You Find You the Ideal Location
One of the major responsibilities of a tenant rep broker is to ensure you have the best location for your business. They factor in your budget and possible space needs. When creating a customized office space search, here are a few things that they consider:
The importance of securing an ideal space cannot be overemphasized.
2. They Give You the Best Terms
Tenant rep brokers have years of experience in the industry, so they know the lease terms that give you an advantage at the negotiation table. They understand how best to negotiate lease renewals and have a deep understanding of the commercial real estate market. Hence, they can use detailed market information like trends and comparable rental rates to help you get the best deal.
3. They Give You Access to More Properties
Tenant brokers have a large database of professional contacts in the commercial real estate industry. These are contacts of valuable and trusted relationships they have built over time. Access to these contacts allows you to check more properties and give you a better chance of finding the best location for your business.
4. They Help You Understand Lease Terms
Lease terms can be very difficult to understand, especially with the complicated legal details. A commercial office lease is complex because there is a lot of legal and financial clauses at stake. A tenant rep will explain the lease details to you in plain business language that you understand. This will help you in understanding the clauses, especially with how they affect or help your business. Hence, you will be able to communicate effectively with the landlord.
5. They Will Save You Time
A lot of time is wasted perusing the office listings or checking buildings. Tenant reps will help you do all these works. Hence, you are able to focus on the crucial aspects of the office search and negotiation process, such as the costs and the location of the building. In addition, this will help you to focus on your business.
6. They Help You Make The Best Decisions
Tenant reps think long term. They help you figure out what your current needs are and what your possible future needs may be. Here are a few questions that a tenant rep may ask to help you make the best decisions when leasing office space:
Is your workforce moving towards an open plan or co-working?
What is your company’s projected growth?
A tenant rep works hard to ensure that the space you choose is the space you actually need.
Leasing office space is often a complex process because of the immense financial and legal implications. A Tenant Rep Broker will help you through the process, guiding you to ensure you avoid critical mistakes when negotiating a lease.
In addition, they help you find the ideal location for your office by leveraging on their immense experience in the commercial real estate as well as their vast network of professional contacts.
At iOptimize Realty® we have over 30 years of tenant rep experience, learn how we can help you save time and money!