Three Strikes

A new client came to us the other day.  They had been working with one of the large, national real estate brokerage firms but for several reasons were starting to feel uncomfortable with the direction their deal was taking.  First, the broker seemed to be pushing one particular building option on them and, even though there were numerous properties that would have addressed the client’s needs, the broker was resisting showing them more than a few other options.  Second, while timing for a potential move was certainly tight, the broker was pushing the client to move forward quickly with the recommended building without first obtaining relative test fits to measure efficiency, without subjecting this option to any competition and without any real negotiation of the initially offered terms. Third, the broker was insisting that the client engage the brokerage firm’s “in house” project management team to start getting the construction process under way.

Unfortunately, this client’s experience was not unique. And, given the increasing pressure on large, publicly traded brokerage firms to grow revenues each year, it may become even more prevelant.  Let’s review each of these three client concerns and analyze the possible broker motivations.

1.  Get the client to focus on one alternative: Ideally one of your other client’s buildings. As it turned out, the building which the broker was strongly recommending just happened to also be represented by his brokerage firm.  Thus, if the client went to that building, his firm would make 50% more commission than if the client went to another building (i.e., the firm would get both a tenant fee and a landlord listing fee).  As an added bonus, by steering the tenant to its other client’s building, the broker would win the gratitude of the larger, landlord client.  By limiting or even eliminating competition for the tenant’s requirement and foregoing test fits and a space planning evaluation, the client was going to take about 20% more space than it probably needed and at a very rich rental rate; a very bad result for the client although a much higher commission for the broker.

2.  Do the Deal as Quickly as Possible.  One way to increase a brokerage company’s revenues and profitability is to do more deals each year by accelerating the process and spending less time on each deal. Certainly there was not a lot of time to get the deal done in this case given the pending expiration date on the tenant’s existing lease.  However, rather than panicking and allowing time to become an enemy of the client, the broker could have tried to alleviate the problem by securing a short term extension from the client’s existing landlord– which is the first thing we actually did.  By buying more time, we were able to vet many more options and conduct a competitive procurement process thereby driving the total cost down.  We could also complete our due diligence so the client had all the relevant cost information before committing to a decision.  The downside?  There is no downside to the client. Of course, the deal will take a lot more time to complete and probably result in a smaller commission.

3.  Try to cross sell as many ancillary services to the client as possible.  This client was not a sophisticated real estate consumer and had no business taking over a significant construction project. Nevertheless, the broker attempted to structure a deal where the landlord would provide some improvement allowance (it was never fully vetted) and the tenant would then be responsible for building out the space. The problem with such an approach is that it forces the tenant to take on both timing and pricing risk even though it has no expertise in construction projects.  While this was not a great outcome for the client, the brokerage firm would receive additional revenues for project management services as the tenant would need to delegate construction oversight to them.  This deal should never have been structured that way.  Given the client’s skill sets and risk tolerance, the deal should have been structured as a “turnkey” deal where the landlord agreed to build out space to the tenant’s specifications, at the landlord’s cost, for a stated rental rate.  With this structure, the landlord would do the construction and take on the pricing and scheduling risk as opposed to the tenant. Because “in house” project management professionals constitute overhead for the brokerage firm, there is a lot of pressure to sell their services in order to cover the expense and generate a return on the investment.  Typically, the project management and other ancillary service teams are dependent on the brokerage teams to sell their services as they do relatively little work for non brokerage clients.

Look at the securities filings of virtually any large, publicly traded real estate brokerage firm.  The constant theme being  hammered home by CEOs is to grow revenues and market share. To achieve this goal, the firms know they need to constantly increase broker productivity (i.e., growth in year over year commission income).  Productivity can be enhanced in many ways including: accelerating the lifecycle of deals so brokers can close more deals in a given time period; doing “dual agency” deals where the firm is representing both the landlord and tenant on the same deal; and cross selling additional services to generate more transaction fees. There is nothing wrong with trying to grow your revenues and profits.  However, when pressure is put on brokers to increase their productivity, it may encourage behavior that goes against the interests of the tenant.  If something doesn’t feel right about the way your deal is going, it may be time to stop and ask some pointed questions.

For more information contact Glenn Blumenfeld https://tactix.com/team.php#Glenn

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