Commercial real estate is about building relationships. The conventional brokerage model focuses on building these relationships by representing both sides of a transaction, assisting both tenants/buyers and landlords/sellers. The tenant representation model uniquely focuses on building relationships with tenants to eliminate conflicts of interest. As a decision-maker for a company, you may want to consider, “Will my broker protect my interests, even if it puts their relationship with the landlord at risk?” The tenant representation model protects companies’ interests more than the conventional model – here’s why.
1. It comes down to priorities – in the conventional brokerage model, the majority of revenue comes from representing landlords, and the remaining revenue comes from representing tenants.
This disproportion forces an unfair bias towards the landlord’s interest. As a result, tenant transactions are held at a lower priority than landlord transactions. Even if a client is working with a proclaimed “tenant rep team” from a conventional brokerage firm, these brokers will typically not decline a landlord listing. In contrast, buyer/tenant-exclusive firms allocate 100% of their resources to buyer/tenant transactions. Firms that specialize in tenant representation allocate more time towards extended services, such as lease administration and lease auditing.
2. It eliminates the conflict of interest.
Brokerage commissions are usually paid by landlords, not tenants. Let’s say a landlord/tenant broker is working with a tenant to find a new space to lease, and is also listing a space for lease for a landlord. Under this scenario, there are potential pitfalls:
The broker attempts to represent both parties in the transaction to increase their commission.
During the site selection process, the broker shows the tenant the listed property of the landlord client, hoping to increase their commission by representing both parties. It is important to note that when a real estate broker enters into a written agreement with a landlord and a tenant, they are legally obligated to be a fiduciary to both parties. It is difficult to offer both loyalty and confidentiality to both parties in this situation.
The broker first looks at internal listings within their company instead of the marketplace.
The tenant decides that the landlord’s property is not a good fit. The broker continues to search within their company for other listings in order to further their internal reputation and bring additional revenue to the firm, rather than expanding the search to external firms. The tenant‘s time is wasted and viable opportunities are missed. The broker expands their search as a last resort.
The broker tries to keep both parties happy once the property is selected, resulting in a less aggressive negotiation for the tenant.
After touring countless sites that didn’t work, the tenant has finally settled on its dream space listed by an external firm. It just so happens that the landlord of this space is a potential client for the broker. As a result, the broker is less concerned about negotiating an aggressive rental rates and lease terms for the tenant, and more concerned with keeping both sides of the transaction satisfied.
In contrast, if a broker who worked within the tenant representation model was representing the same tenant in finding a space, this conflict of interest would not exist.
3. It levels the playing field and saves tenants from falling into costly “lease traps“.
There are several “standard” lease terms that may obligate tenants to unexpected or unfavorable commitments. Sometimes these terms may cost a tenant almost as much as its base rent! Firms that specialize in tenant representation are experienced in discovering these “lease traps” and protecting their clients’ interests.
Before searching for your company’s next property, we ask you to consider who will be best suited to represent your company’s interest. Can you be sure that your broker’s highest priority is maximizing your bottom line?
McKinney Advisory is an integrity-driven team of corporate real estate advisors specializing in tenant representation and corporate strategy to enhance each clients’ bottom line. Click here to learn more about what sets us apart.