Today’s Denver Business Journal reports that Denver office landlords are offering significant free rent to lure new office tenants. View full article. The Denver office market continues to be favorable for tenants seeking to negotiate leases for new space, or to renegotiate existing terms. If the timing is right for you, contact a commercial real estate broker or tenant representative to help with the process. Visit our website at www.thenesbittgroup.com for more details and advice.

In a legal proceeding, you would never hire the same attorney or law firm your opponent had retained. And if you were being audited by the IRS, more than likely you would have your accountant represent you. In both cases, you would hire experts to ensure your interests are well protected. Yet in commercial real estate, many business owners  looking for office space enter one-sided relationships with building owners as common practice. They do not realize the enormous impact it can have on their bottom line.

Avoid Conflicts of Interest

There is an inherent conflict of interest when a tenant negotiates directly with building owners or the leasing agent that represents them. The primary goal of a leasing agent is to get the best deal for the building – tenants,on the other hand, are looking for the most economical lease rate and flexible terms. To determine whether a broker’s interests are completely aligned with yours, you should ask yourself these questions: Am I getting the broadest spectrum of office space choices, unclouded by any listings, management agreements or hidden agendas?

In lease negotiations, are my interests being represented without compromise, or is the broker influenced by a current or potential relationship with the buildings owners? Could there be a real or perceived pressure on the broker to steer me toward certain properties? Does my broker work for a full service brokerage and property management firm? In Colorado, transaction brokerage (representation of both the owner and tenant) is very common in today’s commercial real estate practice in the Denver Office Market. Although this borders on being a conflict of interest, transaction brokerage is not dishonest or illegal as along as it’s disclose up-front to the tenant. It is however, imperative that tenants understand the implications of this type of arrangement and are aware of the pitfalls.

The bottom line is no matter how much you trust the landlord, or no matter how tempting it is to deal directly with the listing agent, it would be foolhardy to walk into negotiations without leverage and some knowledge of the market (what space is available, rental rates for comparable space, etc.) Unfortunately, it could take you countless hours, if not weeks to accumulate this type of information, and you will still leave money on the table by not being familiar with the nuances of lease negotiation.

Let an Expert Help You

Tenants have recourse – they can employ the professional services of a commercial realtor who specializes in tenant representative. In looking to hire a commercial brokerage firm, be sure to find a company that focuses on tenant representation and has little or no representation of building owners. Your tenant rep broker should also have a deep knowledge of the market where you would like to find office space. Visit our website for more information. www.thenesbittgroup.com

I’m glad you asked. Commercial real estate tenant representatives are licensed real estate professionals who perform site searches, narrow choices to review, suggest landlord concession approaches, negotiate letter of intent offers with landlords, limit occupancy costs, suggest business points to discuss during lease negotiations, and invite competing sites for a bidding contest if necessary.

Although the tenant rep has a fiduciary responsibility to act in the best interest of the tenant, he is paid through the landlord by splitting the built-in commission with the listing agent. So the tenant advantage is paid for by the landlord.

Here is how the tenant rep process works:

Tenants get assistance in analyzing space needs and showing how their business would benefit from changes in size and configuration of the business structure.

Sometimes it makes sense to stay in the current space or the same building. Even if there is an existing option to renew, a tenant rep can provide a summary of current market factors that may justify a reduction in rent rather than conforming to an automatic increase as defined by the lease in different economic times.

If a move is required, an independent search would include all available sites regardless of the landlord. Tenants get an unbiased exposure to choices that match their criteria, even those that may not be actively on the market.

Letters of intent cover the main business points to be negotiated in the lease agreement. In addition to the main business points there are other lease clauses that must be reviewed. Landlords frequently have one-sided language for lease clauses that are tilted against the tenant and need further negotiation in order to be acceptable. Particularly risky are standard clauses as defined by the landlord. The lease agreement is just as important to the tenant and may need revision to be acceptable.

Concessions, such as free rent and tenant improvement allowances, are important areas to consider in the lease negotiation process. Those and other contentious areas may require heavy-duty discussion to make the lease agreement satisfactory to the tenant. Tenant reps provide valuable assistance to reach the goal.

Finally, it is important to anticipate the future and protect the tenant from events that could cause harm if not covered in the lease agreement. Wording in the right to sublease clause may be important. Or, perhaps the landlords responsibility to rebuild after a hazardous event is too loose. Sometimes expenses landlords apply to operations should be capitalized and not passed on to the tenant. The lease language must be fair for the tenant.

In summary, tenant reps provide a valuable service by giving the tenant assistance in optimizing the business space for improved profitability and reducing downside risk for unknown calamity. These are some of the reasons to have a tenant representative on the tenant’s side before the commercial lease begins, during the negotiation phase, and after the lease ends.

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?

Sometimes I wish finding commercial real estate property could be made as easy as finding a home. Generally, in the residential world, all available properties are placed into a local metropolitan listing service (MLS). Residential agents maintain the MLS system, and frequently make it available to the general public. As a result, anyone with a computer can see the inventory of homes that may be available in a specific neighborhood, submarket or metropolitan area. Housing information and available properties are at the fingertips of the public 24 hours a day, 7 days a week.

Unfortunately, things are not that simple in the commercial real estate industry. Unlike a single MLS system utilized by residential agents in the Denver Metropolitan area, local commercial real estate brokers often rely on numerous commercial real estate databases to publicize and promote their properties to the public. The more popular services include CoStar, Loopnet, Xceligent, Commercial Source, Catylst, and several others.
To guaranty thorough exposure of their properties, commercial agents must post their listings on as many databases as possible, or risk that the properties are under-exposed and slow to sell or lease. Surprisingly, the majority of these databases are not promoted to the general public, and if they are, a fee based subscription service is required to search the database. As a matter of necessity, commercial agents pay these fees to equip themselves with the tools required to effectively market their clients’ properties, as well as to maintain a complete database of all properties that are available for sale or lease in a given area.

Searching for a commercial space can become very confusing and an overwhelming task for the general public. It’s because of this that we advise that you resist the urge to do it on your own. Unlike a public MLS search for a residential property, a Google search for available commercial properties will not provide a comprehensive list of properties that meet your needs. As stated above, most available commercial properties will be listed on commercial real estate databases that the public has no access to unless they have paid for a subscription. You may be able to find a few properties that meet your requirements, but will undoubtedly miss out on competing properties with lower prices and better terms. Driving through a market and calling off of “For Sale” or “For Lease” signs is also an incomplete method of gathering information about available properties. Property owners and their agents do not always advertise their listings with a sign, particularly in cases where a retail or apartment building owner does not want to alert customers or occupants that the property is for sale. So, an interested buyer may fail to identify great properties for sale or lease if they simply rely on signs posted or searches conducted on the internet.

What is the best way to build an exhaustive list of commercial properties that satisfy your needs and requirements? The answer is simple – work with an experienced commercial real estate broker. A good commercial real estate broker will have subscriptions to all of the commercial real estate databases that serve the geographic areas of interest to you. For instance, The Nesbitt Group subscribes to six different commercial real estate databases, all of which include properties for sale and lease throughout the state of Colorado. We can compile a comprehensive list of properties that meet your criteria in a matter of minutes. This accomplishes two objectives. First, it will save you the time and energy that you will have to expend in performing your own property search. Second, it will give you the peace of mind in knowing that all available properties are identified in the report.

Someday our industry will evolve to a point where all commercial listings are posted in a central listing database like the MLS). Until that time, save yourself the time and money (money you could be making focusing on your core business) and work with a commercial broker to find the right property for you.

Eric L. Nesbitt, Esq.

President/CEO – The Nesbitt Group

As a tenant in a building you may think it’s a good idea to negotiate your own commercial real estate lease directly with the landlord. You may even recognize the landlord’s broker faces a conflict of interest when he claims to serve both the landlord and tenant at the same time. You’re probably thinking, you have to pay your broker a fee.  You may also think that the landlord will pass the savings of not paying an outside broker over to you  as an existing tenant leasing office space in his building. Well, I’m here to tell you that you would be wrong. First of all, a tenant broker gets paid from the landlord and acts on your behalf as your consultant without receiving a fee from you. Also, an agreement is already in place between a landlord and the landlord’s broker regarding both sides of the commission. This commission rate is already baked into the lease rate.  So, by not having your own representative at the table negotiating the best deal possible for you, you will basically allow the landlord to get the most favorable deal possible while having the landlord’s broker get paid a larger fee. There is essentially no incentive for the landlord’s broker to negotiate the best deal possible on your behalf, as his fiduciary duties are owed to the landlord. So, the next time you are seeking to move or renegotiate your lease, make sure you hire a tenant representative broker first.

by: Ana Sandomire, Broker Associate

Thank you for visiting our new website. I hope you are enjoying navigating through the site and will plan to visit  often. We will regularly update the website with useful market information, commercial real estate tips, and our current property listings. Please do not ever hesitate to contact us if you have questions or comments.

Eric L. Nesbitt