Having a “Good Relationship with the Building” Doesn’t Mean You Should Negotiate Directly
Why run your own project to lease office space? By working with an experienced commercial lease negotiator, you can avoid the risk of a bad result and achieve your optimal office lease.
I feel so strongly about this because of what I’ve learned over 35 years in the business and over 900 client projects. The idea of “do-it-yourself” for your office lease is a huge lost opportunity for the tenant. I can only imagine someone making that decision because, on the less negative side, they just don’t know what might be accomplished. And, on the more negative side, they don’t know the many ways they could come out a loser, instead of a winner. So I want to share some thoughts on the undertaking that might save you a lot of time and a lot of money.
Negotiating your own office lease is like what Donald Crowhurst did, as told in the book The Strange Last Voyage of Donald Crowhurst. He embarked on a circumnavigation sailing race in a boat that wasn’t yet finished. A bold idea? As it turned out, a very bad idea.
Imagine setting sail with your cabin full of boxes containing the component parts for your navigation & communications system, yet to be built. Only one of his problems was having left some of the parts back on shore. His trimaran was found adrift in the Sargasso Sea. Donald was never found.
Obviously, running your own office lease project is much less dangerous. But it might be just as strange a decision as Donald’s. Here are some reasons why I say that.
A Little Known Specialty
Within real estate brokerage, there’s a specialty called office tenant-rep. The services that tenant-reps provide are generally free of charge to their office-tenant clients. That’s because the industry norm is for building owners to pay a commission to their own broker and to the tenant’s broker. Similar to how it works in a residential purchase, in which the seller pays the commission even to the broker representing the buyer, the office tenant-rep’s commission is paid by the building owner. That’s right, a tenant pays nothing for all of the services their tenant-rep provides as their fiduciary.
In my experience, there is nearly always a broker representing the landlord. Even if a landlord is not represented by a third-party brokerage company, that landlord does this for a living, you do not! They have a natural advantage over an unrepresented tenant. And, if the landlord does have a broker as their fiduciary, a tenant without a broker-fiduciary will be at an even bigger disadvantage. That’s because the landlord’s broker also knows the market and what tenants might accomplish at competing buildings. That tenant will be “brokered”, in the pejorative sense, by the landlord’s broker. Your broker is your fiduciary and will advocate for your interest. The building’s broker is the opposite and will do the opposite to you. Note that I specifically refer here to a broker-fiduciary, as distinct from one’s law-fiduciary, one’s attorney. Your attorney and your real estate broker do very different things.
The landlord’s agent is not the tenant’s fiduciary. In fact, it’s illegal for the building’s broker to represent the tenant if they are representing the building. Even if you, the tenant, agree to a disclosed dual agency, the most you can expect, or legally receive, from your dual agent is simple courtesy and information that the landlord wants you to have. But don’t worry, because it will never happen. The landlord will not agree to allow their own broker to act as a dual agent. The building owner wants their broker to advise them. And that owner hopes you will allow their broker to, well, broker you. As we are reminded every two years in the continuing-ed courses for license renewal, dual agents can, legally, only act as a messenger between the two sides. A dual agent is prohibited from providing advice or advocacy to either side. And that is not a recipe for a good outcome for you.
Tenants are well served to consider this before relying on the “great relationship I have with my building manager.” There seems to be a tendency, especially with a possible lease renewal negotiation, as opposed to getting a new lease at a different address, to let down your guard, to confuse courtesy and professionalism with fiduciary duty.
If you know as much about negotiating an office lease as building owners do, and if you know as much about the market as they do, then the only thing you have to lose by representing yourself is a lot of your time. Even if you wouldn’t rather use that time tending to your actual business, you will come out on the short end by running your own office lease project. Tenant-reps know the market and each new deal they handle delivers up-to-date market intel. That’s critical, because things change.
This market intel results from identifying multiple competing alternatives that satisfy your specific agenda. True, a tenant can visit multiple buildings and solicit a proposal from each one. But a landlord’s proposal should not be confused with what they might accept. Of course you won’t accept the initial proposal. You’ll negotiate to improve it. But, it’s a fallacy to equate an improvement of the proposed terms with achieving optimal results. Did you get a deal that was better? Or did you get the best possible deal and not leave money on the table?
I’ll think very few, if any, users of large space, if they lack an in-house real estate department, even know what they might accomplish in the market, much less how to go about achieving it. I don’t have statistics on this, but would bet that large organizations with a dedicated facilities department usually use a commercial real estate broker. That’s because it takes a lot of time to conduct this kind of project the correct way. By correct, I mean being in the strongest negotiating position, being fully informed, having a strong offensive position and, maybe even more importantly, having a strong defensive position. By defensive position, I mean having more than one good alternative so that, if your first choice becomes unavailable, your 2nd choice automatically moves into first place. Note that I said good alternatives, to distinguish from what might be simply a “stalking horse” used purely for negotiating psychology. Ideally, you want to be able to reject proposed terms if warranted. The alternative: having no good choice but to accept terms that are not optimal for you.
Knowing It When You Find It
Anyone can try to negotiate anything. It doesn’t require a license. Looking for Chicago office space to rent is as easy as walking into any office building and going to the Office of the Building. Less easy is finding the best spaces that will satisfy your layout needs. And even less easy is achieving the optimal office lease. But why not take advantage of free access to all available Chicago office space, without even leaving your office?
But what will you negotiate? In the social sector or the commercial sector, the experience you’ve had over the years negotiating in your own arena has given you insight into negotiating, yes. But it tells you little of use when it comes to negotiating for office space.
Knowing what you might accomplish in the marketplace, whether a renewal is your preference or you want to evaluate relocating, is half of what you need to know when leasing or buying office space. How to organize your project is the other half because that’s how you increase the odds of achieving the best lease terms. Organizing your project to most effectively gather market intel and to maximize your negotiating position is critical., But doing it most efficiently is critical because timing is so often a factor. Usually, you will be prompted by the approaching expiration of your current lease. Or timing might be driven by your business plan.
A familiar saying in real estate is “location, location, location.” l want to add, “timing, timing, timing” – the time it takes to conduct your project for optimal results, the right amount of lead-time. Lead-time varies with the size of the project. If your space needs are smaller, you need less lead-time. For best results, you want enough time for the leasing process to unfold without drama and anxiety.
Lead-time is a factor because timing matters a lot to landlords. To illustrate, a psychiatrist needing a small space will not find landlords interested in holding a vacant space for very long. They’ll say, “call me when it’s closer to when you want to move in!” No great loss for the psychiatrist. That vacant space will likely be filled by someone else and the psychiatrist will likely have other spaces to consider at that same address, when the timing is right.
There’s a decidedly negative effect from having too little time. What is too little time? That’s what tenant-reps know well and office users don’t. How will you know if you’ve achieved the “deal” that you should get, given overall market conditions and the market at a specific address, whether it’s a lease for the same space you already occupy or different space? The best way is by having multiple proposals for spaces that actually give you what you need and want.
Unlike poor Donald Crowhurst, your life won’t be at stake. Your money will be.
Your Time & Money
Having less time than would be ideal almost always means you will have fewer alternatives. And running out of time might mean that you become a holdover tenant. Your lease probably specifies a holdover penalty that includes, among other odious things, a penalty rent of 150% to 200% of the monthly rent if you holdover for even a single day.
Running out of time if you are negotiating a relocation that involves a build-out might mean you’ll need to agree to pay for construction drawings to be prepared, at the same time that you are negotiating the lease document. While that can be a useful mechanism to save some weeks, when you have no choice, it should be avoided because it has the potential of reducing your negotiating leverage. If you haven’t agreed to a security deposit, often the last financial item to deal with, but you are on the hook for thousands of dollars in fees if you fail to consummate the lease, you might be stuck with a higher security deposit than you otherwise could have negotiated.
You could be led by an experienced guide who is your fiduciary and whose services are free to you.
I’m a commercial real estate broker, an office tenant representative. And 900+ times I have guided our tax-exempt and taxable clients to their optimal lease for the office space of their choice. They tell us the experience is relaxing. They love their experience, the controlled process, the results. Some of them have even thanked us for the fun! Since 1985, I’ve specialized as a commercial lease negotiator, representing always and only the office tenant, exclusively. At the risk of tooting my own horn, I’m really good at putting all of that knowledge to work to get the best results for you.
Our services are not only free to our clients. We also save them a load of time, money, and anxiety. And after we’re paid the commission by your landlord, MAP will remit 10% of the total to Investing In Communities® for distribution to a charity or school of your choice. We’ve given over $550,00 of our commissions to charities chosen by our clients.We call it doing business doing goodsm.
I’m convinced it’s the best way to do the most of both. We love doing business this way and we would love to be of assistance to your organization!