Recently I was contacted by two different small businesses asking me to review commercial real estate contracts that they were considering signing. Given that I'm a lawyer, the requests were not unusual. However, in both cases, the potential clients were pursing properties without the benefit of a commercial real estate broker which I generally view as a bad idea.
In one case the prospective client was considering leasing space in a multi-tenant industrial building that was used primarily as a warehouse. After meeting with the landlord's representative and being presented a 27 page lease, the prospect had been referred to me to review the lease. What became apparent during discussions with the prospect was that there were issues with his use which could present a problem for the landlord. As a result, the landlord was going to insist on provision in the lease which might limit the tenant's future plans.
Shortly after first talking with the prospect he informed me that a friend had contacted him about another property which might provide more synergy. Even though this property was 30 minutes further from his house, he thought this property might better fit his needs. When I checked with him a month later, he still had not completed a transaction.
The second prospective client called asking that I review a real estate purchase agreement. After discussing the prospective use with the prospective client, I suggested a couple of changes to the document. Two weeks later the deal fell apart as the property was unsuited for the proposed use.
In neither of these cases had the prospective clients used the help of a commercial real estate broker which might have saved them both money and time. It also caused me to wonder why.
My time spent working with commercial real estate brokers taught me the value that they bring to a transaction. Many laymen have the mistaken belief that using a commercial real estate broker will unnecessarily cost them money. That is typically not the case except in the most unusual circumstances.
In the case of the prospective tenant, the principal of the company had spent time driving neighborhoods and business parks looking for space until calling a landlord when a sign indicated that there was available space for lease. In my conversations with the prospect it was suggested that this was the only available space that would meet the tenant's needs. In truth, the prospect didn't really know that to be true.
The Atlanta market has millions of square feet of space of all types. Most commercial real estate brokers specialize in certain types of property. Indeed, in some brokerages, specialties themselves are divided between tenant rep and owner rep brokers. Further, brokers often specialize, or work, certain geographic market areas. A large firm like CBRE or Newmark Knight will have brokers with specialized knowledge of every segment of the market. The individual broker may not know of a specific building, but he or she will have access to someone that does.
Whether the landlord's lease proposal was on the most favorable terms the tenant might have anticipated is a complete unknown since the prospective tenant had very limited information. He hadn't really shopped for space since he didn't know what space was available that would meet his needs. Further, he didn't have advice from someone familiar with the landlord and market as to concessions he could expect in that submarket.
The question that has to be asked is why the tenant hadn't first sought the advice of a broker? I suspect that in many cases it is because of a misconception of the cost. The tenant believes that if it doesn't have a broker, the commission will be rolled back into a more favorable deal. While it is true that brokers representing tenants will be paid a commission by the landlord, it is almost always false to think that the tenant will save that money when not using a broker. Typically, the money paid to the landlord's broker is split with the tenant's broker. If the tenant is not represented, generally the landlord's broker will get a higher commission and there is no saving.
I suspect that a second reason that the small companies don't hire brokers is that due to lack of experience they don't know who to hire. My advice would be to take the plunge and talk to several brokers. Discuss your needs and ask if they can help. Certainly there are requirements that are too small for very experienced brokers. But in most cases, those same experienced brokers can refer a prospect to someone that can help.
The client that contacted me about reviewing a purchase agreement might have been better served to first contact a broker. Indeed, in that case the client had contacted the broker representing that particular piece of property. Had the client closed on that transaction, the broker would have been paid a commission based upon the sale. Had the client employed its own broker to help in the search and negotiate the sale, that same commission would have been split between the brokers, but the prospective buyer would have the benefit of the broker's market knowledge. In other words, there would have been no cost to the potential buyer for the service.
Brokers provide a valuable service that is too often overlooked. Because of the number of proposals they've presented, even if a transaction was not completed, they have accumulated a lot of market knowledge and information that is difficult to replicate. Certainly there are efforts to catalog and document transactions which is very imprecise at best. Sales data can be obtained by reviewing property records. Even so, the price paid is dependent on a myriad of factors that are not a matter of public record, things that are usually known by the brokers familiar with the property. Conversely, there are no public records for leases. Landlords are loath to disclose more than cursory details for public consumption for competitive reasons. However, the agents involved in the transactions will know the details and use it to a client's advantage in future transactions.
The bottom line is that too many small and unsophisticated businesses fail to make proper use of the services of good commercial real estate brokers. Failing to do so can cause them to spend needless time on issues which the agent could more properly handle and spend more money than they might have if they had more complete information. My advice to these companies is to spend time up front in becoming acquainted with a good commercial broker that can handle the needs of your business.
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