Broker representing a tenant asking me for 6%

22 Replies

I have a commercial rental unit that I showed to, and have been in discussion with, a regional sales rep of a large corp who is needing some warehouse space. I am a small minnow in the ocean of commercial property and generally rent to local small business owners. He finally got approval to lease the unit from his supervisor. Today I got a call from a broker who was representing the corp. This caught me off guard because it hadn't been mentioned to me previously that a broker would be involved BUT I have been reading bigger pockets and studying the processes, terms and lingo so I recovered myself quickly and began answering his questions about rent, length of lease, terms etc. The negotiations for the lease had pretty much already been agreed to by myself and the company sales rep so there wasn't much to discuss. At the end of the call he brings up his 6% commission on the lease and tells me that I will need to pay that. RED FLAGS start going off and I said that I hadn't hired him and I didn't feel I should pay him. He mentioned that I could pay it upfront and then add it to the rents over the term of the lease so that the tenant would pay it back but I am not really comfortable with that because I gave someone my word on a monthly rent price and that would contradict what I promised.

 Long story short this didn't feel honorable to me - him coming in at the end of a deal and asking me to pay his commission after all the work was already done. I told him I would get back with him after talking to my partner, which I did. I simply told him that we were not willing to pay his commission and that the corp he was representing would have to pay for his services. I really want them as a tenant but and I hope it doesn't throw a wrench in the deal.

Any thoughts? Is this common or were my instincts correct???

Thanks

Brad

agents typically do get paid from the leasor...check your state for specifics.

kudos,

Mary

Originally posted by @Mary B. :

agents typically do get paid from the leasor...check your state for specifics.

kudos,

Mary

 Check my state... are you saying it's state law determining who pays?

thanks

Brad

In the one instance where a buyer and I worked out a deal, then I found out they had an agent, the buyer paid the agent.  Not me.  I told the buyer they could either pay the agent or add the agent fee to the cost of the home.  They paid the agent themselves.  This was residential, commercial may be different, but an agent is supposed to disclose representation to an unrepresented party before material discussions begin.  Our deal was already in place, without agent fees disclosed, so I felt no obligation to pay the fee and would have rather walked than taken less than was agreed.

So you are looking for free service? The broker needs to get paid for his time and efforts and just like in residential deals the seller/lessor pays not the buyer/lessee.  

Where did the 6% figure come from? 

You say it's the end of the deal... doesn't sound like it to me. You may have an understanding as to material terms but if there is no lease this is far from done.

Hi @Brad G. ,

It sounds like in this instance the large regional company has their processes (it goes to here for preapproval, then to this group, then it gets handed over to a company that handles their real estate). They changed your "verbal" terms by adding 6%. Which is fine, they handed it over to someone else to do all of the paperwork and make sure all of the requirements were met. Figure out your new price with the added cost and have them submit it. The regional guy you spoke with will not be contacting you any more because they have brought in the agent.

When the paperwork goes back higher it will get about 3 seconds worth of review "Why is this higher than we anticipated".... "We renegotiated the terms to cover the brokerage fees"... "Ah gotcha".

That is just my guess though. @Joel Owens can most likely give a better explanation as he is in the commercial space.

No legal advice given.

Most tenants have a tenant rep broker they use. If they do not have that they have a commercial attorney negotiate the LOI and then the lease.

On commercial deals if a landlord lease broker and a tenant rep broker exist on a deal then 6% is typical total that seller pays. This is mainly for retail properties I do not know about warehouse. Fees might be higher for rents compared to lower for warehouse as rent is much less per sq ft but space tends to be much bigger that is leased. If there is just one broker for landlord or tenant rep then usually 4% is paid.

When you pay,if you pay, and for how long is negotiable. Tenant rep brokers will try to get their fee all upfront at lease execution and then additionally try to get something again at the option period renewals. As an owner you do not want to agree to getting paid on options because when you sell it is a cost to the buyer and they will offer you a lower purchase price because of it. In fact when the payment is going to be made to the leasing broker company there is a form signed and notarized saying they have been paid in full and there are no other claims past,present, or future for additional compensation owed.

If you have just this one tenant for your space then the value of the property is linked to the guarantee of the lease and how long it is for primary term. You want things such as ongoing quarterly updated business and personal financials. Guaranty personally and with their business across all locations not just a remote entity they set up for this property that they can easily bankrupt and walk away from.

You could put a stipulation in for tenant owed leasing commission that say out of 20,000 owed 5,000 would be paid upfront upon lease execution with non-refundable good faith deposit from the tenant and then remaining 15,000 would be paid out as monthly installments over the primary term of the lease. The payments would only be paid out each month when tenant pays rent and upon tenant default the payment gets suspended. If tenant does not cure default in XX time then tenant leasing commission goes completely away.

Everything is negotiable. If you have been having discussions with corporate tenant by phone or e-mail and not even to LOI stage yet then you have nothing. Until that formal lease is executed everything can change. See if they are asking for any TI or free rent as well.

I have found in the retail space maybe only about 20% talk directly to you and if they do most still have a relationship with a local tenant rep broker they want to use. So from now on you might want to factor that as a given cost into your leasing expectations. If it doesn't happen then icing on the cake but if it does it is par for the course and not a shock to you.    

I've stood on smaller hills fighting more my rights before. Last year I was willing to let a 3 month long  house sale fall through for $120 I thought the incompetent buyers agent and lender were costing me by unnecessary delays putting me into a 4th month. Absorb or discard what I say knowing that.

Awh hell nah. The occupying tenant you were negotiating with knew you are a mom and pop and should have mentioned this. I don't like $120 extension surprises due to apathy, I'm sure not standing for a 6% one.

Add the cost to the rent and let the lessee pay over time or walk would be my firm stance. What does 6% of the lease represent? Thousands right?  Teach them not to ambush you! Corporate bullies suck. My coin.  

@Joel Owens great summary.  Fee structure on warehouse and retail very similar in my market.  Industrial rental rates are lower per sq ft but suites are generally much larger.  

I have been both broker and landlord in this scenario many times.  Corporate types know broker as part of process will add cost to a transaction.  However, sometimes the broker will ask for 6% if he can get it and when the rent comes back higher they won't really do the math and see that it is 6%.    He may only be entitled to 3% under their typical arrangement because if property was listed with broker that is likely what he would get.  i would start by suggesting this if you don't think it is too late.  If you pay him, be sure to add it to lease with interest (we add 2% on top of our cost of funds).   As landlord with unlisted property and they cut deal and then send in their broker, its not reasonable to expect that you would give up what is approximately 2-3 months of rent on a 3-5 year lease and then slowly get this money back on top of the previously agreed rent without interest.   Also need to feel good about tenant credit that they will actually be there long enough for you to get money back.  In any event, make sure you aren't obligated to pay commissions on renewals.  This should be pretty easy to get broker to concede.  Don't turn broker relationship adversarial.  If this person is part of their process, odds are they still will be when its time for renewal and you don't want to give extra motivation for broker to yank them out of your building.  

And of course all of this depends on how bad you need the tenant, their other alternatives in the market, how long you think they will stay, their credit, etc etc.  

I'm guessing from your post that the tenant is a big name company we would all recognize? possibly fortune 1000? if thats the case then the tenant rep broker is likely from one of the big shops (JLL, CBRE, C&W, Colliers) and the most likely have a national representation in place. Those agreements are negotiated at a very high corporate level and are often 3 - 5 year engagements that insert the tenant rep brokerage firm on a national or even global level.

You have a few options:

  • Refuse to pay the fee outright and hope your deal doesn't blow up. Unfortunately this will cause heartburn for the tenant and at some point you run the risk of them finding space elsewhere.
  • Pay the fee as requested. The tenant rep broker is correct, you can pay the fee and amortize it over the term of the lease there fore making the tenant pay for it. If they ask why the increase in rent tell them its due to having to pay unexpected broker fees. It is their right to use a broker if they want, but it may result in a higher lease rate. This is not your fault and its a common occurrence with larger companies.
  • Negotiate a reduced fee. 6% is high, I have worked as a commercial broker in both Denver and Seattle and "market" rates for tenant rep brokers was 4-5% in both locations. Because you "found" the tenant and the broker has had a reduced roll is reasonable to request them to take a reduced fee; looking at it from the brokers perspective if my client has already find and approved the location + negotiated the majority of deal points (rate, term, TIs etc) I would be happy to accept 3% in order to make sure the deal gets done. 

In the end, do you want to risk losing what sounds like a high credit tenant to save a few bucks in the short term? If this deal blows up over some fees and the tenant leaves what is your opportunity cost and time to lease up the space? In the end negotiating a reduced fee and baking it into the deal is probably your best option.

Good luck

Originally posted by @Brad G. :
Originally posted by @Mary B.:

agents typically do get paid from the leasor...check your state for specifics.

kudos,

Mary

 Check my state... are you saying it's state law determining who pays?

thanks

Brad

well, some regulations are national however, real estate licensing rules are majority state by state. I've had agents in PA look for rental property for me in the past and they assured me that the owner gets the bill. In NY they typically look to the renter for payment. that's why I recommend that you look to your state for specifics on who pays the broker regarding leasee/leasor agreements. 

kudos,

Mary    

Brad,

For commercial deals a commission should always be expected. Did he bring the tenant to you or did you find them on your own? I highly recommend always paying brokers because they are a main source of deal flow at your commercial property. Owners who do not pay leasing commission quickly get a reputation in the market and tenant rep brokers will exclude your property from tour lists if they know they are not going to get paid.

Grant

I would think this falls under procuring cause? I am no RE attorney but if he is to get paid he has to have done some work, most likely why he is trying to get paid on the side. Just my .02 though :)

The broker has not added any value to this situation. He didn't bring the tenant, the tenant found me via a Craigslist ad, contacted and met with me twice in addition to multiple phone calls. I am not trying to get anything for free but I expect something for my money. The reality is that he is not providing any value for me and he is going to cost his client more money because I am going to raise the cost of the lease to pay his fee. So, it's a lose lose for the landlord and tenant and only the broker wins.

 Thank you all for your responses and opinions. I am learning a lot.

Brad

Brad - I mean this sincerely, but something does not sound right here. It would not be common for a regional sales rep or his supervisor to have any authority within a large corporation to make any real estate decisions regarding site selection, business / deal term negotiations or lease negotiations.  When you say the 'negotiations for the lease have pretty much already been agreed to..." can you provide more details on what exactly this means? Does this mean you negotiated a lease in written form or verbally agreed to the business terms?  Also many larger corporations have tenant rep brokers and a sale rep or his supervisor out in the field may not even be aware of this. As someone previously stated you can hold your ground and may lose the deal. Keep in mind many corporations are protective of their brokers. The most practical solution is to negotiate the fee and get a good tenant. 

@Brad G. I can sympathize with your situation.  From reading through the thread, it seems like it may have gotten off track somewhat from what you are really asking.  Let me see if I can answer the questions as I see them being asked...

It sounds like you had already worked through details as principals, when an agent from the company approached you with their hand out to be paid to see it through.  Is that correct?

First, do you know how the principal (sales agent) found your space?  Is it possible that the company agent sent them some possible listings to explore?  The reason why I ask is I am trying to see if there is procuring cause.  Realtors need to be able to prove procuring cause in order to demand a commission in a dispute.  If there is any way that this agent can prove that THEY were the procuring cause of this employee securing a lease with you, they could be owed a commission.

What is more likely (unfortunately) is that the employee took initiative and then brought it to the company, who then insisted that their agent contact you to sure up the details and secure the space.

You are not required to pay the agent a commission.  Furthermore, it isn't written in stone that it has to be 6%!  You could offer to pay a typcial 3% co-broke, or even less, citing that alot of the work has already been completed without their assistance.  However, if you don't agree to pay anything, just know that you run the risk of losing the tenant.  If that is a risk you are willing to take, then I don't see an issue with you holding your ground.  I understand the principal of it, and can appreciate that.  

Others here who go off on the fact that you should expect to pay the commission in your situation are missing the point of what you are saying, which is that you believe on principal that you shouldn't have to pay it IN THIS circumstance.  I totally get it.

Cara, you are correct.

The sales rep told his boss that he needed a warehouse space. His boss told him to find one and bring him the details. The sales rep saw my ad and contacted me. I showed him the property and we discussed rent, length of lease etc etc. I gave him my best deal because I wanted his business - having no idea that I would have to pay someone working for his company.  He told me up front that his boss would make the final decision on the property so I expected to go over the final lease with him. 

 I have a current lease in another property with a large international corporation and the whole deal was made between myself and a regional manager. No broker needed nor involved.

Imagine that you were selling a car. A buyer contacted you, asked questions and test drove it. You like the guy and offer him your very best price. He said he liked it and that his wife would make the final decision. Now you get a phone call from another guy who tells you that he represents the wife and that she wants to buy the car for the agreed upon price. Great! Then he tells you that you will need to pay him 6 percent. WTF??? 

I understand that I may lose the deal. I offer quality property at a good price. There is high demand here and not much inventory. It won't bankrupt me. 

If I had to do it over I would handle it differently thanks to all of your help and information but I would still feel like the broker was inserting himself into a situation where he hadn't added any value and I would pay him but add his fee plus interest into the lease. (If this deal goes through that's how it will be as well)

Brad

Originally posted by @Brad G. :

Cara, you are correct.

The sales rep told his boss that he needed a warehouse space. His boss told him to find one and bring him the details. The sales rep saw my ad and contacted me. I showed him the property and we discussed rent, length of lease etc etc. I gave him my best deal because I wanted his business - having no idea that I would have to pay someone working for his company.  He told me up front that his boss would make the final decision on the property so I expected to go over the final lease with him. 

 I have a current lease in another property with a large international corporation and the whole deal was made between myself and a regional manager. No broker needed nor involved.

Imagine that you were selling a car. A buyer contacted you, asked questions and test drove it. You like the guy and offer him your very best price. He said he liked it and that his wife would make the final decision. Now you get a phone call from another guy who tells you that he represents the wife and that she wants to buy the car for the agreed upon price. Great! Then he tells you that you will need to pay him 6 percent. WTF??? 

I understand that I may lose the deal. I offer quality property at a good price. There is high demand here and not much inventory. It won't bankrupt me. 

If I had to do it over I would handle it differently thanks to all of your help and information but I would still feel like the broker was inserting himself into a situation where he hadn't added any value and I would pay him but add his fee plus interest into the lease. (If this deal goes through that's how it will be as well)

Brad

 I think that sounds fair.  You should mention to the sales rep that the price you agreed to was based on NO agent commission, so the higher price reflects the added agent.  That way you won't feel like you changed the deal on them.

Funny that you mention that. I called the sales rep shortly after the broker called me and I told him that very thing. He was very understanding and he gave me his boss's contact info and told me to contact him if I needed to.

 As of now I have not heard from the broker since my offer this morning.

Brad

@Brad G. ,

You are certainly entitled to stand your ground for the good of you and the good of your tenant. I do feel as though you may be standing firm on an issue for the wrong reasons. I have worked very closely with several corporations and use to wonder why does all travel go through this travel agency, I could get a trip planned 5 times cheaper. Why are they using these union guys to put up walls, I know Tom down the street can do a much faster, cheaper job. Why do we only rent cars from XYZ company? They could just hire a full time cleaner and pay a fraction of what they are paying for this part time cleaning person to come in 3 times a week. 

Corporations assess risks and the tax implications of just about every decision. When the board meets and an agenda item is "We are looking at opening up a new warehouse location here". A board member is going to ask "Have we found a location that is suitable"

"Yes a regional manager found a nice place on Craigslist and already talked to the owner"

Heads are going to pop up and they are going to say "Send in our brokerage group to make sure it is worth the price and the terms meet our needs, they can ensure that the property belongs to who is claiming to own it, they can check for comps, they can verify city/county ordinances for traffic patterns. They can make sure we are allowed to have Trucks at such and such hours, they can talk to the building inspector to make sure there are not any requirements for fire suppression that we are not suspecting, they will verify usage is compliant, they will check the flood plan and make sure our insurances are adequate to cover it, they will line up local labor for the turn out, they will coordinate the HVAC inspections and due diligence. They will also verify that all of the boards concerns are addressed in the lease. They will need to check that operations are not going to cause an issue with the local population. 

So they are expecting the price to raise. You may feel that you have all of that covered in their best interest, but sometimes it's not just the dollar amount, there are many other terms that have to be checked and the board is going to want more than a regional manager and a guy from Craigslist before expanding an operation. They are going to want their people to sign off on it. I would guess that raising the rent to accommodate that is within their expectations.

Just my 2 cents and I hope it works out the best for you.

Even if there were no broker or agent involved there are typically going to be changes before a full lease is executed. All I do is commercial but on the transaction side. I deal with very expensive properties. A company generally does not sign a (blind) lease with no representation. They will typically use a commercial attorney.

On my deals we have a non-binding LOI that lays out the general terms of the deal but still there is an attorney and various terms are red lined with nuances back and forth until a PSA is negotiated. An attorney isn't going to review what a tenant has been discussing with an owner so far and go (yep nothing needs to be changed here just sign it!). They will recommend adding, deleting or modifying certain items. It is part of the process.

I look at less about the starting rent number and more about who is guaranteeing the lease, timing of rental increases annually or every five years, length of primary lease term, ongoing disclosure of tenant business and personal financials,etc. Resale value and equity creation is tied to the lease terms which lots of times can far outweigh cash flow metrics on these types of properties.

If the market is hot as you say then you should have multiple inquiries from potential tenants and hold most of the cards. If your property is not as great as you think it is and tenants have many options then you have less leverage in negotiations.

Next time a question upfront to ask might be ( Are you going to use a tenant rep broker for this lease negotiation?) If the answer is no then have them sign a form stating to the affect that no tenant rep broker is involved in this deal and if one is used the tenant will pay all costs associated with it.

We have a form in commercial transactions signed that only so and so companies are involved in the transaction and that buyer and seller will defend any outside claims otherwise.

I just wanted to follow up on this post. We signed a lease on this property yesterday. I offered the broker 4% upfront, nothing on the back end and raised the monthly rent to recoup the cost of the brokerage fee plus interest over the term of the lease (I am not in the banking business but if I must loan money I won't do it for free). I contacted the regional manager and explained to him why the rent had increased from what I had told him in our discussions and he was fine with it but glad for my clarification.

 So in the end it urned out OK and I learned a lot from the experience and from all of you fine folks here. Thanks again!

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