30 June 2015, by Paul Mautz
Over the last 20 years, an increasing number of New Zealand property professionals have focused their attention on providing advice specifically tailored to tenant and owner-occupiers of commercial property. This move came in the wake of recognition that tenants had not previously been well supported when making decisions on property and premises, often leading to poor and ill-informed outcomes. Here we give an overview of tenant advisory services in New Zealand and some of the issues currently facing advisers.
It’s interesting when talking with people both within the property profession and generally how few really understand what a tenant adviser does and the value offered in comparison to the roles of, say, agents and valuers. The question ‘Why should I use a tenant adviser?’ is commonly asked, but often poorly explained.
In a nutshell, a tenant adviser provides a tenant with professional advice, information and a sound process to work through to achieve a preferred property decision, having already helped in many cases to identify the problem to resolve. In the commercial property market, their role typically involves some or all of the following:
The term ‘adviser’ often seems to be used interchangeably with ‘advocate’. In the true sense, the difference is that someone acting in an advisory role for a tenant may just be providing general advice on a matter and not necessarily supporting or advocating a particular position. In practice however, these roles tend to converge so that the adviser – simply by the nature of the advice provided – ends up supporting a favourable outcome for the tenant.
The adviser is normally an experienced property professional with a background of professional training from a valuation, property management or agency environment. They may also have worked in a consultancy role providing advice and services to many clients in various industries, giving them a large knowledge base from which to develop their skills and expertise as an adviser. Interestingly, the role is not one that many new graduates are aware of. It only seems to get exposure once someone has come across it in the course of business or had it explained. Clearly, there is a need to further promote tenant advisory services as a professional in the industry and educate wider and earlier on in a graduate’s career what it involves.
Any tenant adviser who undertakes ‘real estate agency work’ as defined by the Real Estate Agency Act 2008 needs to be licensed by the Real Estate Agency Authority (REAA). What is classed as real estate agency work? The Act defines it as “any work or services provided in trade on behalf of another person for the purpose of bringing about a transaction”, but certain exclusions do apply.
The Act defines ‘transaction’ as including the sale, purchase or other disposal or acquisition of both a freehold and leasehold estate or interest in land, other than a residential tenancy. Anyone providing advice or acting for a third party that facilitates a commercial leasing transaction must therefore be licensed. As most tenant advisers provide services to external clients, the licensing regime is likely to apply to them.
To become licensed – usually a standard salesperson’s licence – the adviser has to be engaged by a company with a real estate agency licence, requiring at least one person in the company to obtain and hold an agent’s licence. The requirements of the Real Estate Act 2008 has had a significant impact on people currently engaged in tenant advisory work, many of whom had not previously been subject to a licensing regime and then found themselves having to apply for a licence that, by all accounts, is getting increasingly difficult to obtain.
The Act does allow for certain classes of persons and activities to be exempt from the licensing requirement. The Property Institute of NZ is working closely with its members to put together an application for exemption for a certain class of member and class of activity (yet to be determined). At the time of writing, this application has yet to be formalised and lodged with the Ministry of Justice.
Many companies provide tenant advisory services, but only a small number of specialist tenant representatives – such as TwentyTwo Independent Property Advisers and Parallel Directions – focus exclusively on services to tenants and owner-occupiers. Many valuation firms provide general property advice on top of valuation services, but typically for both landlords and tenants. This is seen as a natural extension of the valuer’s knowledge and understanding of the property market and often an important source of income in a smaller market. However, there has been much discussion and debate in the valuation community about the perceived conflict in providing expert valuation advice and general property advice on the same issue.
Many bigger agency firms have also established occupier services divisions as an extension of their offering to the property industry. These provide tenant services from workplace design through to fitout management, lease negotiation and portfolio management. Often, these divisions provide revenue generation opportunities to other areas of the business including agency work – such as leasing and sales – property management and research.
The main users of tenant advisory services tend to be larger organisations, mainly due to cost and the value derived from engaging professional advisers in larger transactions over using more inexperienced in-house services or local agents. Businesses with over 50 employees fall into this category.
The government has been a major user of tenant advisory services, both through individual agencies and the recently formed Property Centre Management of Expertise, known as the PMCoE. The Centre has used tenant advisers to undertake negotiations for major office leasings in Wellington and Christchurch and to help develop best-practice guidelines for the leasing and fitout of commercial property in the government sector. Individual ministries and agencies have used tenant advisers for many years to identify lease possibilities, negotiate commercial terms and resolve lease-related problems. Often, the role has extended to workplace strategic design and running a procurement process for architects, project managers and other property consultants.
So why use a tenant adviser? At some point, firms will want to make changes to their existing premises, need to secure new or alternate space, want to renegotiate an existing lease, or resolve some other property-related matter if they lease space. For most, the advice and assistance they need is not available in-house and needs to be contracted in. The tenant adviser has the expertise to resolve these sorts of matters. They will take the client through a process – a proven series of steps to get to the right solution or one that is as close as commercially possible to the desired outcome. The adviser will be well-practised in using these processes for other clients. They will also have been refined over time and through experience be the most effective way to get the right result.
The debate goes on as to whether tenant advisers paid on a commission basis – a finder’s fee from the landlord or working for a multi-services company that also provides advice to landlords – are able to offer ‘unbiased’ advice to tenants.
Commissions have the potential to drive skewed outcomes when the fee is determined by the length of the lease term negotiated, the rental rate agreed and the size (area) of any leasing. Similarly, when an adviser finds themselves having to negotiate against a landlord they have previously acted for (sometimes in relation to the same building or premises), then the best interests of the tenant may comprised in order to maintain future relationships.
The description ‘independent’ has been incorporated in the name of a number of companies in a bid to differentiate themselves from those paid on commission and/or acting for both landlord and tenants. Typically, these independent advisers are paid on an hourly rate or a fixed fee. The fee for negotiating a small lease can often come out at a similar cost to a larger lease transaction, depending on the time involved. By being paid on this basis, the independent adviser avoids the perception of being swayed by any particular option or outcome that would result in a higher fee if calculated on a commission basis.
However, in spite of these perceived conflicts, many advisers have succeeded in positioning themselves to work successfully in this role and achieve good outcomes for both landlords and tenants. How they do it is simple – by being clear and forthright about their existing relationships, declaring any conflicts of interest early in the process, and avoiding commissioned based fees where possible.
Tenant advisers therefore play an important role in ensuring tenants receive professional advice when making important property-related decisions. The competent adviser offers the skills and experience required to provide the right advice across a variety of areas from workplace strategy though to fitout implementation and lease negotiation.
However, the introduction of the Real Estate Agents Act 2008 has had a significant impact on advisers providing transactional advice to third parties. The requirement to now be licensed – and the current difficulties in achieving that – will mean that many advisers will continue working outside the requirement of the law unless it is amended or an exemption is granted under the Act.
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