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Why “TENANTS” Need Written Tenant Representation Agreements!

…because only with a written representation agreement can a real estate broker or advisor represent the interests of a tenant or a buyer! Absent a written agreement clearly stating that the broker represents the tenant or buyer, under common law the broker likely has an obligation to protect the interests of the landlord or seller. That’s right! This is true even if the landlord or seller already has a broker representing it!

What corporate executive in his or her right mind would work with a real estate broker whose job is to negotiate against the executive’s company? Besides, don’t landlords engage brokers via written agreements? Don’t companies engage executives via written employment agreements? Employment agreements, representation agreements, and the like serve, among others, one very important purpose…they set down the terms of a relationship between employer and employee, service provider and client, or otherwise. So, why wouldn’t a company “employ” its broker or advisor, especially given the risks of not doing so?

The process of engaging a broker or advisor to represent the interests of your company is very simple. First, select the right commercial real estate broker that is qualified to address your company’s specific objectives. Then engage the broker via written agreement that clearly states that the brokerage company is obligated to protect your company’s interests. Address all the terms that are important to your company, including how the broker will be compensated (most often through commissions paid by landlords) and any other terms that are important to you. Then get to work on your real estate project knowing that your company will have an objective real estate representative authorized to advise it and negotiate on its behalf. It’s that simple!

By formally engaging a broker, your company will send a clear message to landlords, sellers, and others that it is serious and has thought-out its real estate project. Landlords and sellers also benefit when tenants and buyers engaged brokers, as doing so clarifies the relationships between the tenant, landlord or seller, and brokers.

There’s a lot more to this discussion. But for now…Enough Said!

The above is based on guidance I have received from numerous legal experts. I am not a legal expert. The above may vary from state to state or province to province. So, you may wish to validate how this works in your area.

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CFO Studio spotlights New Jersey based senior finance executives, providing them with the opportunity to share their knowledge and communicate their perspectives on current economic, financial, operational, and business issues. By invitation only, CFO Studio promotes select finance executives, their ideas, experience, and insights, in a professional, tasteful, and low-key interview setting. Topics include current and future trends in accounting, banking, business, corporate strategy, employment, finance, IT, operations, real estate, risk management, the economy, and more. Watch interviews with noted area finance executives and learn how your peers are creating sustainable value for their companies! Join the conversation or just watch, listen, and succeed! We welcome your ideas for future interviews. If you would like to appear on CFO Studio, please email or call our CEO, Andrew Zezas, at 732 868 0000 x111. Visit www.CFOstudio.com

About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.

In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Follow CFO Studio at http://www.Twitter.com/CFOstudio.

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The Tenant Doesn’t Need Representation! said the Landlord’s Broker

Amazing! In a recent conversation, a landlord’s broker actually suggested that our client, a tenant in the building represented by the broker, should only have engaged our firm to represent it if they elected to relocate out of the building. What he meant was that in dealing with the landlord, the tenant should have no representation. Is this guy nuts? Did he assume that I just fell of the monkey truck? (I know, this should say “turnip truck” but I thought “monkey truck” better fit the story!)

This broker actually said that our representation of the tenant for both a relocation and a stay-in-place transaction would be unfair to the landlord, because the landlord should be given every opportunity to retain the tenant. Did this guy think EVERYONE works for landlords? Did he not get the concept of tenant representation, the service model that’s been around for over 25 years, and the benefits that tenant representation creates for both sides of a real estate transaction?

Question: If the landlord is represented by a broker then, why shouldn’t the tenant engage an advisor to give it access to equal information and expertise?

Answer: Because an unsophisticated or dishonest landlord thinks it will be better off if the tenant is not represented.

Tenants engage real estate advisors because they most often don’t have the internal resources, expertise, or inclination to plan and execute real estate projects. However, even companies with real estate expertise often engage real estate advisors because their executives’ greatest value is not in negotiating real estate transactions but, in sustaining their companies and generating revenue. More importantly, in a world of transparency and conflict avoidance, tenants prefer to receive objective advice from knowledgeable service providers who will be indifferent as to which property the tenant selects, so long as the property best suits the tenant’s needs. Lastly, most executives, recognizing that landlords are experts in their field, prefer to even up the sides by engaging their own experts.

By following the suggestion of the landlord’s broker, all of the benefits of engaging an advisor would be lost to the tenant. The advisor would be reduced from an objective representative to merely a salesperson competing against the current landlord for the tenant’s business. This would put the tenant at an extreme disadvantage. The tenant would be suspect of the advisor turned salesperson’s recommendation to move, because the salesperson would only be compensated if the tenant moved. The tenant would have to challenge the landlord’s assumptions for the same reason. The tenant would be forced to expend considerably more energy in assessing, comparing, and negotiating with both the landlord and the salesperson thereby, forcing the tenant to fend for itself in a competition where both landlord and salesperson would have access to more real estate knowledge, market intelligence, and expertise. This approach would yield no benefit for the tenant, would only create opportunity for the landlord, and would likely shift greater risk and cost to the tenant.

The reality here is that in real estate, as in other transactions, corporate executives rarely appreciate being sold or pressured into any deal, especially by landlords. They typically prefer to even the sides by engaging advisors who will consider every alternative and present the most viable opportunities in a fair and balanced manner. By engaging an advisor to plan both a relocation and a stay-in-place transaction, and then to execute the preferred choice, the tenant can be assured of receiving objective guidance, access to timely intelligence, reduced risk and time, favorable terms, and typically lower cost. Interestingly, in this manner, the landlord’s interests, too, are better served because of the obligation on the part of the tenant’s advisor to present the landlord’s proposals on an equal footing alongside those of its competitors.

Some landlords ask why a tenant needs an advisor if a good tenant / landlord relationship exists. First, most landlords incorrectly assume that because a tenant pays rent and doesn’t complain too much, that a great relationship exists. Ask commercial tenants if they have a relationship with their landlord and most will shrug their shoulders and say they haven’t spoken with the landlord since they negotiated their lease. Second, and perhaps, more importantly, tenants don’t typically have access to the same real estate information, resources, and expertise as do most landlords. So, prudence would suggest, along with most stakeholders, that tenants should even the sides by engaging qualified advisors.

So, while the landlord’s broker argued his position, the landlord, despite being directed by the tenant to conduct business through our firm, did everything he could to attempt to negotiate directly with the tenant. Instead of strengthening its position, the landlord angered the tenant, and did a lot of damage to its negotiating ability. This happens more often than you can imagine. The real result is that a landlord who plays these games typically erodes whatever relationship might have existed with the tenant and risks driving the tenant to another building. This typically occurs not because the landlord’s building or services aren’t up to par but, because the landlord attempts to stack the deck in its favor by working to disengage the tenant’s advisor and by trying to unfairly influence the tenant’s decisions.

Attempting to circumvent a tenant’s decision to work through a real estate advisor is not the mark of a high quality landlord, nor a sophisticated broker, for that matter. This landlord and its broker represent an ever-reducing segment of the commercial real estate market. Too many professional and ethical landlords exist today, representing high-caliber organizations, for tenants to have to deal with this type of silliness. High quality landlords don’t need to devolve into playing these wasteful games, as they know how to negotiate intelligently and provide great service and affordable transactions to tenants…that’s what wins the day almost every time!

So, what’s this really about?

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When Great Credit Can Be Bad!

Every day, well-run companies strive to improve their credit ratings. Banks search for companies to whom they wish to lend, based on their credit and many other factors. Investors, landlords, business partners, companies selling products or services, rating agencies, and information consolidators, all spend countless hours analyzing the creditworthiness of companies, searching for the best and often deciding not to conduct business with those companies with poor credit.

So, great credit will put your company in a position of strength, right? Well? Great credit and a solid financial footing will certainly open doors that may otherwise be locked. When acquiring real estate through lease transactions, great credit is what attracts landlords to certain tenants and affords those tenants better terms than their less creditworthy corporate brethren. If your company has great credit, banks, investors, and others will race to do business with you at lower rates and on better terms than for other companies…right? Interestingly, the answer is: “Not always!”

When could great credit get in your way? That same great credit can become a 100 foot high obstacle when companies seek to sublease surplus real estate or assign leases that they no longer require. With the growing amount of space offered for sublease or assignment, creditworthiness becomes a major issue.

A large focus of landlords is credit risk. Since fewer and fewer companies actually have great credit these days, when a creditworthy tenant seeks to get out from under a lease by assigning it to another company, landlords will weigh the original tenant’s creditworthiness against that of the potential assignee. Unless the incoming assignee’s credit matches or exceeds that of the original tenant, the landlord will likely do everything in its power to retain the original tenant in the liability chain and will not readily permit the original tenant to absolve itself of its obligation. In fact, the landlord may not approve of the incoming tenant or the transaction at all.

From a risk management perspective, the landlord’s actions in this kind of situation are perfectly understandable. Why would anyone swap bad credit for good credit, especially in the current economic environment where many seemingly good companies are now perceived as risky?

After reading the above, most finance executives considering acquiring real estate through a sublease or assignment transaction would likely start thinking about credit enhancement and additional security deposits. At a time when sustainable and predictable cash flow is king and the risk of loss is high, additional security deposits won’t mean a thing to most landlords.

Think about it like this: If a good credit tenant is permitted to be absolved of its obligations in exchange for a riskier tenant, and given that security deposits in commercial real estate transactions typically cover a small portion of lease obligations, what benefit would a landlord derive from any credit enhancement or additional security deposits? Few, if any, commercial mortgage lenders would even consider authorizing a landlord to whom they lend to agree to replace the good credit of an existing tenant with the questionable or unproven credit associated with an incoming tenant.

How about credit enhancement? The only way that credit enhancement would alleviate landlord and lender fears of increased risk and possible cash flow loss would be if either the outgoing original tenant or the incoming tenant guaranteed a very significant portion of a lease’s value, if not, the entire lease obligation, and could demonstrate the financial wherewithal to do so. That’s exactly what most landlords would seek in this instance. Unfortunately, guaranteeing an entire lease obligation would place the outgoing tenant right back at the starting gate of not being able to absolve itself of its financial obligations. And, most incoming tenants are unwilling to make such a commitment.

After all, landlords are as much in the business of managing risk as they are in owning buildings, generating cash flow, deploying leverage, and building equity appreciation. And, that’s precisely what landlords must do in the current economic environment to sustain themselves…manage risk very well.

This is a time, when companies are seeking to relieve themselves of surplus lease obligations, that a tenant’s strong creditworthiness will actually work against it. In this environment, there are times When Great Credit Can Be Bad. Alternative approaches to disposing of surplus real estate, including the use of lease renegotiations and other non-traditional approaches, may be a strong tenant’s best bet.

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