Many businesses will be familiar with leasing brokers or ‘leasing agents’ if they have leased commercial premises, whether office, retail or industrial space. Fewer will be familiar with an independent property adviser. How do these roles differ and who is best placed to represent you, as the tenant?
For someone who’s worked in the property industry for more than 25 years, it occurred to me recently that the distinction between what brokers and advisers ‘do’ is probably confusing for many people. Who acts for who? Who can I trust? How do they get paid?
To help lift the lid on this issue, I thought I’d step through the typical leasing process and highlight the differences between how a traditional leasing broker operates and what an independent real estate adviser does and explain why these differences are so important.
Leasing premises: how hard can it be?
When embarking on the journey to move to new premises, we often find clients have already browsed listings and made contact with one or more leasing brokers to walk through what’s available – usually before they’ve really validated what they need or understood the process and timings involved in relocating their business. In many cases, they’ve been offered a ‘no obligation market update’ which is simply a marketing ploy to showcase all of the current listings.
Before they know it, they’re getting calls and emails from leasing brokers with ‘new listings’ or ‘hot properties’ that they need to ‘quickly act on to secure’. While well-intentioned, this quickly becomes exhausting, confusing and time is wasted.
Sometimes, we even find that clients (often a senior member of an executive team) plan to sign a new lease and, while seeking Board approval, are asked awkward questions like “where’s the independent property adviser’s endorsement of this proposal, how do we know it’s a good deal and meets our needs, what’s the seismic rating of the building?”. When we are engaged at this point, we often end up taking the client back a few steps to make sure they truly understand ‘what they are looking for’ and, more importantly, ‘why’ this initiative will support their core business.
Good news! There’s a better way
The following table outlines the different steps in the leasing process, if following a robust client-led process. It also highlights the roles of each of the key participants.
A key insight is how little – if any – involvement is needed from the ‘traditional leasing broker’.
What are the downsides of using a leasing broker to lease premises?
First and foremost, think about who pays.
In a standard ‘agency’ model, leasing brokers receive a payment from the landlord for leasing a property – typically known as a ‘commission’. The commission is a scaled fee that increases depending on the lease term, amount of space let, and the rental paid.
Advisers, on the other hand, receive a fee from the occupier/tenant generally unrelated to these metrics. Their fee is often calculated on a time and attendance basis, much in the same way a legal adviser charges for their expertise.
Given who pays the fee structure, which arguably disincentives the broker to drive the best commercial deal (for the tenant), the traditional broker is less likely to be working in the tenant’s best interests because they’re being paid by the other party! In our view, the commission model creates a fundamental bias in the process that prevents you (as the tenant) from getting the best deal.
As an adviser is remunerated by the tenant, they are agnostic about the preferred solution. Their job is to take a clinical view of the options based on the facts at hand, including helping the client undertake prudent due diligence, with the support of technical advisers where required. Too often we find clients prepared to enter into long-term lease commitments and significant contingent liabilities, without having undertaken adequate due diligence. We see an alarming number of businesses being prepared to agree to significant financial commitments based on limited information.
Needs analysis – developing a robust brief
As advisers, the first job is to help the client determine their premises/workplace/property needs by intimately understanding their immediate and future business needs. This requires a set of tools and processes to help businesses work through the process of understanding their business requirements and how these might change over time. This is a deeper conversation than simply “where to you want to be?”, “how much space do you need?” and “how many carparks?”!
Leasing brokers may seek information about your business, but it’s more likely to be focused on marketing the available spaces based on a limited understanding of the occupier’s requirements than a detailed understanding of how the business operates now and in the future.
We call the process we use as “asking the right questions of the right people in the right way” to ensure we get a rich and robust brief. We are prepared to question and challenge in a respectful way to ensure our clients consider the wider issues in play before launching into a property search process.
As we are not driven by a leasing commission (we get paid anyway), we are more open to exploring alternative solutions – less space/no space – whatever solution will ultimately work best for the client, after taking all of their requirements into account. In our experience, occupiers very rarely have a clear view of their own needs and will find substantial benefit from expert help to validate their requirements. Small changes in the key requirements can often create a multiplier effect and achieve a better commercial outcome, even before considering the wider business benefits of aligning any real estate decision to core business objectives.
Managing a structured process with the client at the centre
As leasing brokers are paid by the landlord – and therefore seek to secure the best terms for the landlord – you would expect leasing brokers to try to create competition between interested parties (i.e. multiple tenants) to reduce time and quickly progress the deal to ‘the highest bidder’.
In our experience, it’s better for the occupier to ‘control’ this process, without undue pressure to make snap decisions that the business might have to live with for potentially several years. As advisers, we advocate for a process that puts the tenant’s business needs at the centre, instead of being what we call ‘Option Chasers’. As advisers, we help the tenant manage the process by designing a deliberate procurement and communication strategy, leading the engagement with the market and helping navigate the often-daunting process.
A key part of our process is maintaining competitive commercial tension through careful communication with the market.
Leasing brokers only get paid if a deal goes ahead. We often sense the tension of ‘having to do a deal’, which, in our experience, clearly influences behaviour.
The commission structure available to the agent may vary between each site, with some landlords offering higher commission as an ‘incentive’ (for the agent, not for the tenant). We also have experienced situations where an agent may have their own ‘hidden agendas’, such as pitching to sell the building which may attract for the firm a bigger pay day. These dynamics motivate the agent to ‘do a deal’ as quickly as possible (or not as the case may be) rather than ensure it’s in the tenant’s best interests.
An adviser’s motivations are different. Their obligation will always be to the tenant, with consideration to the wider business context, to help you understand what you need, ensure the solution is either future proofed in some way, or has the ability for exit (tenure flexibility). They lead the entire process, from scoping/developing the brief, searching and uncovering all options (not only the ones the brokers have), undertaking an objective evaluation of the options against pre-agreed criteria, undertaking thorough due diligence to ensure you ‘know what you are leasing’ and getting any issues ‘fixed’ ahead of the lease starting, negotiating the best commercial terms based on market intel and acute financial analysis, working with your legal adviser to ensure all risks and obligations are clearly documented and ultimately helping you deliver the final solution. That’s a lot!
This not only minimises the burden on you by coordinating all third-party technical experts but ensures you have someone alongside you who has ‘got your back’.
An independent adviser’s aim is to achieve the best result – the best commercial terms for you as the client and to deliver a solution that best meets your business needs now and in the future. The ultimate aim is a long-term solution over a short-term fix.
The next time you decide to lease premises, think about ‘who you want on the team’. The earlier an independent adviser is involved, the better the outcome. Leasing brokers can play a role and are often appointed by landlords to be the interface with potential tenants. But remember, they are not acting for you. You are their ‘customer’ but the landlord is their ‘client’.