Don’t take bad advice from the Landlord’s broker

In Colorado, landlord brokers generally do a great job representing landlords.  That’s what they’re paid to do, and it isn’t easy.  But you shouldn’t be surprised to find that the advice landlord brokers are accustomed to offer doesn’t serve your interests.  Here are the eight worst kinds of advice you’re likely to hear from a dedicated landlord broker: 

1.  “We can get you the best deal because we know the market.”  Bad leases are signed not because a tenant some how misses a great space but because the  leases are poorly negotiated.  All brokers have access to Class A space and probably 98% of Class B space.  Landlords must pay their mortgage, and they never know which broker might bring in a tenant, so they let everybody know about availabilities directly, through frequent mailings, as well as through real estate databases which brokers subscribe to. 

Leases go wrong because costs soar higher than bargained for, because the leases didn’t stipulate adequate performance standards for a landlord’s performance in such areas as heating, ventilating, air conditioning, electricity and other services, because leases restricted a company’s flexibility, imposed costs beyond those bargained for, and many other reasons – every one of which arise from the way the lease was negotiated.  A badly negotiated lease often turns a “great space” into a bad deal.

 2.  “We can get you a great deal because we have a relationship with the landlord.”  If your company has the creditworthiness which suggests you can meet your lease obligations, then any landlord would love to have you as a tenant.  The suggestion that you need some kind of “in” to do a deal is ridiculous.  Landlords need the business of paying tenants!

What your company really needs is a broker who will represent your interests – not the interests of some landlord with whom they have a relationship or hope to build one.  This is because many landlord draft leases offer blatantly anti-tenant terms, some buildings have a high level of tenant dissatisfaction, some landlords routinely violate lease terms, and there are landlords whose financial troubles could impair their ability to perform as provided in a lease. 

When a broker entices you with claims of a special relationship with the landlord, you must ask whether such a relationship is consistent with an obligation to represent you.  Will such a broker be free to offer full disclosure of all costs in a proposed lease?  How about management practices that will affect you?  Will a landlord broker be able to negotiate forcefully on your behalf if this means opposing a landlord from whom they hope to gain lucrative agency business?  Of course, you want lease negotiations that are conducted amicably.  This means insisting upon a professional approach, not trying to buy goodwill.

3.  “We can provide great service because we have a lot of branch offices.”  One doesn’t need branch offices to identify spaces in another city, because landlords list their availabilities through brokerage networks and databases.  Landlords want everybody to know about what they have, so they can start getting revenue as quickly as possible.  If branch offices are serving landlords, then they face a serious conflict of interest in their ability to protect you.  After all, every landlord is a current client or a prospective client, and aggressively protecting tenants jeopardizes lucrative landlord business. The key to signing a good lease is having good site analysis, good lease analysis and good lease negotiation and good follow-up.  These depend on the caliber of the tenant representative, not the location of their offices.

4.  “Don’t rock the boat and upset the landlord.”  Landlord brokers often advise tenants not to negotiate aggressively, not to demand that landlords comply with lease terms and, once a lease is signed, not to insist on the rights provided in the tenant’s lease.  In a recent situation in Denver, a tenant was been paying $400,000 in annual escalations, and the landlord is prevented the tenant’s representative from auditing the billings as provided in the lease, yet the tenant’s current broker – a landlord broker – has repeatedly advised the tenant that continuing to demand a proper audit would alienate the landlord.  Tenants seem to be afraid a hostile landlord might become more difficult to deal with.

Yet in my experience, landlords respect tenants who know their rights and pursue their interests in a business-like way.  While it’s true a tenant often needs a landlord’s cooperation, it’s also true a landlord needs a tenant to help pay the mortgage, and it’s generally cheaper to keep a current tenant satisfied than to incur the cost and possibly lost income resulting from a dissatisfied tenant moving out.

5.  “Hurry up and get the deal done.”  More than anything else, landlord brokers push tenants to get a deal done.  These brokers will tell tenants that if they don’t quickly commit to a space, somebody else will take it. Such pressure is especially intense in a “hot” market favoring landlords.  One tenant, a major accounting firm, told us of being shown space by a nationally-known landlord broker.  At virtually every location shown, the broker was mum on details but advised, “you’d better hurry up and make a decision, this space is going to be gone soon.”  The tenant soon decided that the landlord broker was not providing the service they sought, despite its branch offices, large staff and national reputation.  The tenant moved on and selected a tenant representative to help them find a space that will serve their needs.

Hurrying into a deal risks neglecting comprehensive due diligence, overlooking costly drawbacks in a building, failing to properly analyze the risks and total costs of a landlord’s draft lease – and signing up for a transaction which can become a serious liability to your company.

6.  “Since you’re such a big tenant, you have very few alternatives.”   Some of the worst leases have been signed by big companies probably because top executives felt they had to be in a particular building.  While it’s true the number of large spaces in a particular area are limited at any point in time, this definitely doesn’t mean big tenants must accept whatever terms landlords care to offer.

Getting a good deal, however, means big tenants must gain every possible bargaining advantage.  Tenants must have a representative serving tenants exclusively – and not the interests of landlords.  It’s critically important for a large space user to start the site search early.  Starting early means you’ll be able to see more spaces and include options that require building from scratch as well as different options for leasing vs. owning.  There are almost always more alternatives for large space users than you might imagine, including existing buildings in the same area that can be repositioned, buildings in a different area once considered off limits, and build-to-suits.

By developing viable alternatives, objectively analyzed in detail, you will understand your true costs and trade-offs.  Only with this background can you know if a premium is being demanded for the solution you prefer, and whether it is a premium you think is worth paying.  Equally important, all this means you’ll be able to pursue preliminary negotiations, and if they don’t lead to satisfactory terms, you’ll have time to walk away and begin negotiations elsewhere.

7.  “The landlord’s draft lease is boilerplate, standard terms.”  So-called “Standard terms” invariably mean pro-landlord terms because leases are drafted by landlords which are naturally protecting their interests.  You wouldn’t expect them to do otherwise.  “Standard terms” often includes tenant budget-busters like operating expense loopholes, mark-ups on mark-ups, vague landlord performance standards and no audit rights.

Don’t be pressured into accepting “standard terms.” A lease negotiation should be driven by your business objectives, not by a landlord’s desire to avoid risk (and pass it on to tenants like you).    Your business needs must be translated into lease terms to be secured during negotiations.

8.  “Just focus on rent and workletter – let lawyers take care of the fine print.”  Many corporate executives imagine they’ve locked in their biggest costs by shaking hands on these two terms.

However, the rest of the lease is loaded with costs.  There easily are 18 or 19 significant non-rent costs in a typical lease, many hidden, and it’s contrary to the interests of landlord brokers to identify these costs – or do anything else that might jeopardize a deal.

As a lawyer, I can tell you that most lawyers don’t provide complete protection for tenants because they aren’t trained to analyze, nor have hands-on experience with, business issues which are responsible for so many excessive lease costs.  Lawyers don’t claim to know how desirable or undesirable a landlord draft lease is from the standpoint of the current real estate market.  Lawyers aren’t experts on the economics of building operating systems.  Lawyers aren’t expected to know how various ways of charging for electricity will affect costs.  Lawyers don’t audit landlord billings, so they don’t see whether particular landlords honor or evade lease terms – and what must be done about it.  Lawyers typically review a lease without ever visiting the building, and many problems are missed because a lease didn’t address certain things which must be seen to be appreciated – or avoided, as the case may be.

Best advice

Overall, the most common reason tenants seem to take bad advice from landlord brokers is that they’re impressed by the big deals such brokers have done.  But as talking points, big deals are meaningless unless they’re good deals for tenants.  The fact is that a substantial number of leases over 100,000 square feet have serious problems, even though these leases were reviewed by competent lawyers.

It’s shocking to see how many large leases have inadequate operating expense controls, high-cost electricity formulas, mark-ups on mark-ups, vague landlord performance standards, weak sublease rights, limited audit rights and so on.  In some cases, lease problems became so serious that heads rolled.

Best advice: when you’re interviewing a broker, ask not about what deals a firm has done but about how a firm has protected tenants.  You’ll probably find out all you need to know about the deals while discussing how a broker analyzes sites, evaluates landlords, negotiates leases, negotiates other kinds of real estate transactions, monitors build-outs, audits billings and in other ways protects tenants.  How else can you be sure that a broker and the resulting lease will protect your company’s vital interests?