A Level Playing Field

This week we’re writing about an old topic that surfaces every now and again, usually when we come across a tenant who has chosen to negotiate a lease or lease renewal on its own.  Why would a tenant do so?  I think the most common reason is perceived savings.  This scenario seems to play out most often in buildings owned by private investors (e.g., not institutions).  Buildings where the landlord calls the tenant directly and proposes to renew the lease at a discount if the tenant negotiates without a broker. 
 
But how does this work, in practice?  Let’s say the tenant leases 10,000 sf and is contemplating a 5 year extension of the term.  The broker fee would be $100,000.  So in order for the landlord’s contention that it will credit the fee back to the tenant for negotiating without a broker, the ultimate transaction value has to be $100,000 less than the value otherwise achieved via an arms’ length negotiation.  So how can the tenant quantify this value?  Was it given in the form of a $2/sf/year discount to the “market” rental rate?  Is it an additional $10/sf in landlord funded tenant improvements, above the market amount?  Is it $100,000 more in free rent?  Perhaps most importantly, how can the unrepresented tenant know the fully leveraged market value; or, how can it know what the landlord would be willing to accept in a fully leveraged negotiation?   
 
Whenever I hear that a tenant chose to renew its lease without a broker, I don’t think of savings, I think of cost.  How much more did the tenant end up paying for this lapse in judgment?  The fact this still happens is indicative of how poorly tenant advisors communicate their value.  For a 10,000 sf space priced at the market average ($72/sf), the leasing fee represents <3% of the total transaction value.  Even a mediocre broker will create at least 10% in cost savings.  That’s a layup.  Even if you pay your advisor directly, you’ll come out ahead by doing so.
 
Take the time to talk with a few brokers to understand how they collect market data, what their data shows about the current and projected market environment; and, how they create and utilize leverage to decrease cost.  Ask them how the value they create correlates with the fee they earn.  Finally, consider that landlords are in the real estate business every day.  It’s their business to know the exact value of their asset and to do everything possible to increase that value for their investors.  They come to the negotiation armed with knowledge.  Good tenant advisory, among other things, levels the playing field and permits tenants to access fully leveraged (discounted) values.