Why It Can Be a Financial Mistake to Negotiate with a Landlord Directly
Contributed by Richard Neuman of Relocation Management Solutions, Inc.
When commercial tenants negotiate directly with landlords, they are often treated like captive markets. Without representation, tenants don’t know what they don’t know (for example, the ability to add early termination rights), and that necessarily results in unrepresented tenants leaving important terms, rights, and dollars on the table.
With tenant representation, it costs tenants nothing extra – only providing savings (often extensive), and the result is a financial document much more balanced in the tenant’s favor – plus the likelihood of securing a much better facility for the tenant’s needs than they can find for themselves, based on our comprehensive awareness of market options. Landlords know when the tenant is armed with extensive market knowledge, they cannot withhold any achievable concessions. Landlords also know the brokers may be negotiating with multiple landlords simultaneously.
Tenant Reps know the vacancy in buildings, but more importantly, the blocks of vacancy that are emerging in specific buildings soon, and what specific concessions certain landlords have granted recently. This knowledge is power for the tenant that they would not have or benefit from working independently.
So armed with this great information, why do tenants still insist on negotiating directly? Well, often what they are typically concerned about is the commission.
That issue, when addressed directly and transparently and explained in the context of the value of the brokers specific and relevant knowledge of his market, the competing Landlords current situation financial and otherwise (i.e., ownership structure, investment horizon) the knowledge of lease terms and the economic value of renewals, expansions, termination rights, market timed terms etc, should become much less of an impediment.
Keep this in mind. Tenant representation is what a tenant rep does. It is their business and one would assume that the tenant rep has the knowledge, experience and business savvy to negotiate a deal that is in the best interests of the client.
Here are some thoughts:
1. STRONGER NEGOTIATION POSTURE WITH LANDLORD
By hiring an experienced real estate broker to renew your lease, you signal to the landlord that you are keenly aware of competing office buildings and are prepared to relocate, which in turn will force the landlord to compete more fiercely for your firm’s continued tenancy. The more time spent investigating other space, the better the renewal transaction becomes.
2. BROKER’S EXPERIENCE IN SIMILAR TRANSACTIONS
A good real estate broker in today’s market is active day-to-day spending his time negotiating renewal transactions in a similar office market for his clients many of whom, may have the same office space requirements. Because of this experience, certain creative solutions and deal structures can be brought to your firm’s attention that would otherwise remain unknown. Those strategies used in renewing a lease are often times different from those strategies used in searching for new locations.
3. USING THE BROKER TO NEGOTIATE
By using a tenant rep, the tenant will not be required to directly interface with the landlord, who may be taken back by the aggressiveness needed for a successful negotiation. The broker may act as the “bad guy” while the tenant remains a “good guy” at all times, thus allowing for a more favorable long term relationship with the Landlord.
Start with the premise that the landlord (and/or the landlord’s broker) is only looking out for his/her own interest in achieving the best terms for the landlord. The tenant rep broker-without any conflicts of interest creates market competition for the tenant in a renewal. Taking a lease to market benchmarks other alternatives that should demonstrate the merits of a renewal vs. a move.
Sure they’ll save the tenant time, but more important they are skilled and experienced negotiators who clearly earn their fee in achieving the lowest costs and best lease terms.