By Jeff Shepard
In the 2010 movie “Knight and Day” starring Tom Cruise and Cameron Diaz, one of the most memorable scenes is when Tom Cruise’s character tells Cameron Diaz’s character that her life expectancy is much higher with him than without him. Cruise uses his hand and sharply cuts the air in front of her at her waist level saying “without me” and then cuts the air again near her shoulders saying “with me.” “Without me…With me,” he repeats again, cutting the air to drive his point home.
The decision point in this scene is analogous to the choice executives make whether to approach commercial real estate transactions alone or with the help of a real estate specialist focused exclusively on protecting their best interests. With professional leadership and guidance, the results can be exceptional; without professional leadership and guidance, the results can be much less favorable for the company and the executive. Allow me to provide some context and real life data.
For almost five of my 30+ years in commercial real estate, I worked for a very well respected and successful real estate developer. While there, I learned how the partners analyzed every prospective tenant seeking to lease space in one of their projects on the basis of the financial return to the partnership. The costs for the project and the concessions granted compared to the amount of rental income to be received over the lease term were taken into consideration, resulting in a percentage return to the partnership. It was based on this return that the transaction and prospective tenant were either approved or disapproved.
About a year into my tenure at that company, I decided to analyze how those returns to the partnership measured up when tenants were represented by real estate professionals compared to when they approached the landlord on their own. In tracking over 100 transactions over the next three to four years, my analysis showed that the average return to the landlord partnership (and hence the overall economic structure of the transaction agreed to by the tenant) was 16-18% higher when tenants negotiated directly with the landlord than when they were professionally represented by a broker looking out for their interests. Given that occupancy expenses are typically the second largest fixed monthly expense for a company behind salaries and benefits, this additional 16-18% over five years added up to a lot of lost profits for these companies!
Why was there such a disparity in the results? Mostly because the hired real estate professionals created a more highly competitive negotiating landscape and forced the landlord to dig deeper and accept lower returns on those deals in order to earn the business of those tenants. This manifested itself in terms of the rental rates charged, the amount of tenant improvement funds provided, and the amount of additional free rent included in the deal, among other things. On their own, most tenants are just not experienced enough to know what can and should be negotiated within a transaction, nor how to use diplomacy and analysis to extract extra concessions and protections from landlords.
Of course, within the commercial real estate industry, not all brokers and firms are created equally. Many firms derive a huge percentage of their overall income from services they provide on behalf of landlords, while only a small portion of the industry (the sector specializing in tenant representation) is focused exclusively on protecting the end users of space, whether they lease, buy or build buildings to satisfy their operational space needs. It is highly advisable for companies to work with tenant representatives versus full-service commercial real estate firms if they want a broker who will put their interests ahead of their landlord’s.
Moreover, with the amount of money that successful commercial real estate brokers stand to earn, whether they primarily represent landlords or end users, it is also critical to partner with someone who is guided by a strong set of values and ideals, and is committed to placing the client’s best interests in front of their own. Regretfully, there are many unscrupulous brokers who think nothing of creating side agreements to financially benefit themselves at the expense of their client. It is always painful and disturbing to witness the lack of ethics that many of our professional counterparts display.
In the end, that is why selecting the right leader for your project…someone who is committed to always doing the right thing and honoring the trust that you give them…is so critical. The difference can be Knight & Day.
Jeffrey Shepard is a senior vice president of Hughes Marino, an award-winning California commercial real estate company specializing in tenant representation and building purchases with offices in San Diego, Orange County, Los Angeles, San Francisco and Silicon Valley. Contact Jeffrey at 1-844-NO-CONFLICT or firstname.lastname@example.org to learn more.