Tenants hire brokers for different reasons. Some tenants have significant real estate knowledge and strong negotiating skills of their own. What they lack is knowledge of the local leasing market. These tenants may simply want their broker to help find them space and perhaps provide some information about recent deals. After the broker helps identify an acceptable building, the tenant wants the broker to get out of the way so the tenant can negotiate their own real estate deal. In essence, the tenant wants a “space finder”, not a “tenant advocate” who runs the deal and takes responsibility for the negotiations and deal structure. Other tenants lack the in-house real estate expertise, resources or time to lead the real estate search and negotiations. They are looking for a true “tenant advocate” to take the lead and get them the best deal possible. As these diverging brokerage roles clearly require very different skill sets, how can a tenant identify which broker is best for their real estate transaction? While most brokers claim to be able to provide all necessary skill sets, their engagement letters often reveal a more limited value proposition.
Before starting any assignment, a broker is required by law to secure an engagement letter with the tenant that sets forth the terms of the engagement and the fiduciary obligations of the broker. While these agreements contain a lot of boiler plate language and look very similar, there is one subtle provision in these engagement letters which provides unique insight into the broker’s true value proposition and, therefore, signals what the tenant can ultimately expect from the broker.
Before discussing this important provision, a brief discussion of the history of brokerage is required:
Traditionally, most tenant brokers were merely space finders. Their primary function and “value add” was (1) introducing tenants to different buildings which fit the tenant’s space requirements and budgetary parameters and then (2) getting out of the way as the landlords and tenants worked out their economic deal. The broker either worked for the landlord or both the landlord and tenant. Because of his contractual relationship with the landlord and fiduciary obligations thereto, he could provide no real advocacy for the tenant.
True tenant advocacy, where the broker works exclusively for the tenant and is responsible solely for promoting their economic interests, is a relatively new profession. Advocacy requires unique skill sets that mere space finders don’t have. They need to be keen negotiators, skilled deal managers and have a strong working knowledge of real estate concepts and leases. They must also have purity of purpose; specifically, no financial relationships with landlords which could jeopardize their objectivity and allegiance to their tenant clients.
Clearly, as tenant advocacy has grown, traditional “space finders” have attempted to promote themselves as something more in order to compete effectively. Unfortunately, while their marketing materials may look the same, they simply cannot provide the same value as a true tenant advocate as they lack the skill sets and have irreconcilable conflicts of interest. How can a tenant protect itself and ensure they are getting a true advocate? The answer can often be found in the broker’s engagement letter in a subtle provision.
Most engagement letters contain a “tail protection” provision. This section deals with the post termination rights of the broker in the event the tenant enters into a lease within some period of time after the engagement letter expires or the broker is otherwise terminated (the “post protection period”). A typical provision will entitle the broker to a fee if, within the post protection period, a certain type of transaction is concluded by the tenant. The broker wants to be protected and receive his fee if he has provided the value he was hired to provide but, for reasons merely of timing, the deal gets executed after the engagement expires. These “tail protection” provisions fall into two distinct categories and, which one your broker’s engagement letter uses, provides a telltale sign as to the broker’s true value proposition.
The Mere Space Finder Provision
The first type of tail protection provision typically states that the broker is entitled to his fee if, within the post protection period, the tenant enters into a lease “for a building which was physically shown or introduced to the tenant during the engagement.” In these provisions the broker has earned his fee solely by virtue of his having identified the property to the tenant. It is irrelevant what economic terms the lease ultimately contains or whether the broker ever attempted to negotiate any economic terms with the landlord. It is clear from these types of provisions that the broker views his value as a “space finder” and not as a “tenant advocate.” Simply put, it is the broker’s position that he completely earned his fee once he introduced the property to the tenant.
The True Tenant Advocate Provision
The second type of tail provision protects the broker’s fee only if the lease subsequently entered into by the tenant (1) involves a building which was identified by the broker and (2) is “upon substantially the same terms as those obtained by the broker during the term of the engagement.” Clearly, in these cases, the broker’s value proposition is not merely finding space but actually negotiating favorable deal terms. If the tenant is subsequently able to materially improve the economic terms negotiated by the broker, the broker did not complete its job and is not entitled to his fee. Here the broker’s value proposition is negotiating the most favorable economic terms for the lease, not merely finding the space.
Brokers have very professional marketing materials. As a result, it can be difficult for tenants to distinguish among them. However, brokers have very different skill sets and value propositions. An easy way of cutting though the propaganda and identifying your broker’s true proposition is to look at the tail protection language in their engagement letter before selecting a broker. As these provisions ultimately go to the broker’s fee, his true value proposition will often be revealed here.
For more information contact Glenn Blumenfeld