Inconvenient Truths about Commercial Real Estate
By Stephen A. Cross, CCIM, CROSS Commercial Realty Advisors
Leasing and buying commercial real estate is an adversarial process, pitting parties with opposing interests against each other. Generally speaking, the side that has the most complete information and is best prepared receives the most favorable terms. The following truths are well known to industry insiders (property owners, property managers, real estate agents/brokers and advisors) but seldom revealed to outsiders: tenants and buyers. ‘MARKET RATE’ IS THE ASKING PRICE: The term “market rate” is merely the property owner’s asking price, i.e., “sticker price” for a car, not the amount fully informed tenants or buyers actually pay to lease or purchase property. The truth is that neither property owners nor their agents expect to get the asking price. CONTROL IS CRUCIAL: Real estate agents that list properties are taught early on to control as many aspects of the lease or sale process as possible. Common tactics include steering tenants and buyers to their listings and limiting choices. COMMISSIONS ARE PART OF THE DEAL: Most commercial real estate transactions include a commission, which is generally split evenly between the agents/advisors representing each party. DUAL AGENCY–The Industry’s Dirty Little Secret: To the delight of property owners and listing agents who have found a way to retain the full commission, many otherwise savvy business owners unknowingly, and to their detriment, agree to a “dual agency.” A dual agency exists when one or more agents from the same firm represent both landlord and tenant, or seller and buyer, in the same transaction. Because listing agents have a pre-existing fiduciary duty to protect the property owner’s interests (their client), it should be obvious that such an arrangement creates unavoidable and insurmountable conflicts of interest. My advice is to never agree to a dual agency, and refuse to deal with agents, advisors and companies who endorse this practice. FINDING TENANTS AND BUYERS IS DIFFICULT: There are thousands of properties for lease and sale that are represented by hundreds of real estate agents, all competing for a limited number of tenants and buyers. The truth is property owners need tenants and buyers more than the reverse. EVERYTHING IS NEGOTIABLE: It may sound like a tired cliché, but it’s true— every term and condition of a lease or purchase agreement should be evaluated and negotiated based on how it affects the overall cost of the transaction and the rights and obligations of the parties. LEASE RENEWALS: Many landlords assume their tenants think that the cost and trouble associated with relocating are reasons enough to dissuade them from moving, and will agree to overpay just to avoid the hassle. Regardless, savvy tenants go into renewal negotiations as if they were a new tenant—expecting concessions and incentives similar to those a new tenant could reasonably garner (i.e., free rent, tenant improvements and discounted rental rate). They also start the renegotiation process nine to 12 months prior to the expiration date and actively solicit proposals from other landlords. Many times it’s the possibility of losing an established revenue stream that creates the leverage tenants need to get favorable extension terms. WHAT’S MISSING? Ads and marketing materials rarely contain asking prices, and property signs typically have only the name and telephone number of the listing agent(s). Subscription-based databases, including LoopNet and CoStar, contain most of the active listings but generally don’t have complete pricing information or details about completed transactions and the motivations of property owners. This intentional scarcity of meaningful information available to the general public serves to keep the tenant or buyer under-informed and open to exploitation at every stage of the search, negotiation and renegotiation process. MANAGING EXPECTATIONS: Property management is arguably the most difficult job in commercial real estate because it requires balancing the wants of landlords and the desires of tenants. Truth be known, the principle job of the property manager is to manage the expectations of both groups. That said, don’t forget that property managers and listing agents are de facto employees of the property owner and have a fiduciary duty to protect the landlord’s interests, not the ‘tenants’ or ‘buyers’ … not ever. While it may appear they have the authority to approve terms, it’s the property owner who makes the final “yea” or “nay” decisions. CHARM AND DISARM: Tenants and buyers who make unwitting disclosures and innocently reveal too much information run the risk of diluting their negotiating leverage and should therefore refrain from disclosing their budget, business circumstances, strategies and choices to any property owner, property manager or listing agent—no matter how charming or persistent they may be. ASK ME NO QUESTIONS … When it comes to leasing or buying commercial property, real estate agents and property managers are generally required to answer only the questions that are asked, not the questions that should have been asked. Many times it’s the questions that are not asked (or fully answered) that end up costing tenants and buyers money, time and aggravation. TAKEAWAY: To borrow a quote from Benjamin Disraeli, “As a general rule, the most successful man in life is the man who has the best information.” Now that you know how property owners think as well as the steps they take to shield themselves and control the transaction and protect their interests, you should resolve to become a fully informed, knowledgeable tenant or buyer and seek objective, experienced and qualified representation to protect your interests.
Stephen A. Cross, CCIM, owns CROSS Commercial Realty Advisors and represents business owners, health care professionals and corporate decision makers in matters involving the lease and purchase of commercial real estate. Contact: 480-998-7998; firstname.lastname@example.org.