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Commercial Real Estate: The Dirty Secret.

How Many Can There Be?

Well in my opinion there are several but the main one that drives me insane is the process of GETTING PAID. To say that I wanted go on a nasty filthy brain flow name names companies and specific deals kind of a rant is an understatement. Instead I found a couple of great posts(with his permission) from Jack Intrator a broker in the Philly area. It is a well written and real world example of our business that we all unfortunately know too well.

Collecting Commissions. Part 1

You have just completed a retail/restaurant lease and you have earned your fee, now it’s time to collect your commission. Sound easy? Not always. Unless you have taken all the necessary precautions, inserted the proper language into your agreement you may be left with “zip” for all of your efforts.

In leasing there are many varied commission schedules and language that can be written into a commission agreement and a Letter of Intent.  My personal preference is to structure a deal with a straight commission, asking right up front for 5% of the base aggregate rent which is calculated by adding up the total base rent for the full term of the lease.  For instance, if you are doing a 10 year deal on 3,000 sq. ft. with a base rental rate of $23.00 PSF, the total base rent in year one would be $69,000.00. For the remainder of the lease, you would add in the “bumps” or the percent of increases for the term and then add each year in the 10 year base term.  Let’s assume the total rent for the full 10 year term is $731,400.00. 5% of that amount would produce a $36,570.00 Gross Commission.  Your next consideration should be how and when your commission is paid – this becomes an important factor in the deal, actually in some cases it becomes even more important than the actual commission dollars themselves. How is this possible?

It really comes down to two central elements – Time Value of Money and Risk vs. Reward.

It’s customary to ask for ½ of the agreed upon commission at lease signing and ½ at store opening.  When you have a Landlord who readily agrees to do this then great, a perfect situation. However, more times than not, these commissions become hybrids.  Let’s look at a couple of examples: already built into my Letter of Intent is a line item under commission:

Commission: Per separate agreement – 5% of he total aggregate rent.  To be paid ½ at time of lease signing and ½ at tenant possession of space. More times than not, I negotiate the lease and the more my client wants the location the less leverage I have.  It’s almost a catch 22.  I end up negotiating from a weakened position and the Landlord knows it.  After all how many times can I discuss a commission with a Landlord at first phone call?  How many times in our experience does a Landlord become upset that I am discussing the commission before my client has even seen the location? So although the above Commission language has been inserted into the LOI form, I submit a separate Commission agreement and after making some compromises still manage to negotiate a fair deal.
For instance: Based on five (5%) of total aggregate base rent of years 1 through year 5, and four (4%) of total aggregate base rent of years 6 through year 10 of base term of the lease, and four (4%) of the base term renewals – payments shall be as follows: One Half (1/2) at lease execution, One Half (1/2) at tenant possession of the space. Renewal option will be paid if and when tenant proceeds with renewal option of lease. Payable in full based on total aggregate rent and calculated years 11 to year 15 of the term of the lease.   Still a fair deal, but let’s look at one more example of a deals progression as it relates to Commission. I received a call directly from a Landlord, he asked me to find and secure a tenant for his restaurant location that other brokers were not able to attain.  I called my client, the Independent Restaurant Operator and asked if he would consider the opportunity at the site – the answer was “yes.” I immediately called the VP of Real Estate and asked the following question, was there another broker that had the listing – the answer was “No.”I then stated that I would be registering my client and his name was “X”.  I set the meeting for the next morning and immediately sent my typical LOI which included the 5% paid ½ at lease signing and ½ at tenant opening for business.  The deal progressed with several offers, counter offers and more negotiations.  There were approximately 5 drafts of the LOI and even the final signed LOI had the commission as anticipated but the Landlord avoided signing the commission agreement.
Finally after all the negotiations were completed the Landlord approached me and stated he does not pay a commission the way I asked to be paid. It did not matter to him the month of negotiations and all the correspondence that it referenced. Instead I had to accept ½ at tenant opening for business.  You are probably saying “no big deal” if you’re not familiar with how restaurant deals work. We negotiated 6 months of free rent and the tenant took an extra two months longer to open than originally planned. The worst part was the second half of my commission was paid at the 5th year anniversary of the base term.  What could I do, at that point I had to take it.
But for lessons learned: More times than not I negotiate so aggressively for my clients that I get them a whole host of concessions and  if I do not get the commission worked out at the beginning of a deal, I get burned.  Once you have your client committed to the deal you can’t pull back, you are there to represent your client’s interests, your interests take a back seat.

So the point is…. the only time you can openly and assertively negotiate your commission is at the very beginning, at the inception of the deal. So from lessons well learned I now incorporate the following clause in all my agreement and especially in a co-broker situation, where I am representing the tenant and another broker is representing the Landlord.

See below: Commission: Per separate agreement – 3% of the total aggregate rent.  To be paid to (Insert Agent name) ½ at lease signing and ½ at store opening for business (1st ring of the register) or first receipt of rental payment whichever is the earlier to occur. (Insert name of other Agent for LL) or any broker agrees to accept separate amount that shall not be reflected in the 3% commission.This language ties the commission to the tenant opening and also to first receipt of rental payment, whichever is the first to occur. The language protects your commission even if the tenant has free rent, when they open for business you are assured payment. If on the other hand there are delays with regard to receiving financing, permits and approvals but the tenant begins to pay rent before opening, you still receive your whole commission.  All participants in the lease process understand the risk vs. reward right up front at the signing of the Letter of Intent and there are no surprises at the end of the process.
“Another deal is done, another battle won, we feel like Brando when he walks into the sun. We have danced this deal just like a Casanova, we earned our commission and we don’t cry nickels for your pity…..It’s hard to be a Saint in the City”
– Shades of Springsteen

Collecting Commissions. Part 2

In Part 1 of  Collecting Your Commissions, “It’s Hard to Be a Saint in the City” we discussed typical clauses pertaining to commission within the Letter Of Intent. The first was for a commission without a co-broker where you were either the tenant representative broker or the listing agent and the scenario was the same, with a commission line item within the LOI that the deal was based on.  The second scenario was a co-broker or co-operating broker situation where you were the tenant representative and requested 3% of the gross commission instead of splitting a 5% commission (2.5%/2.5%) as represented in the commission agreement or the Exclusive Listing Agreement, which is the case in Part 2.

Recently, I was the tenant representative for a deal completed in PA. I represented a regional/national restaurant operation and a well known competitor within the industry represented the Landlord.  Within the very first conversation I asked about the commission and was told to include whatever I wanted in the Letter Of Intent.  I explained I would like 5%, however I knew I would be willing to negotiate, as 3% for a co-brokered deal is certainly a good situation if the commission agreement total is 5%.  Now in order to get paid per the agreement whichever way it pans out, you have to include an anticipated payment schedule.  You submit a bill and you hear nothing for a week. You make a call and you are told that they are processing it, and then another week goes by.  It’s week three and you see the landlord at a function, he promises payment and times goes by.  You want to act like the gentleman you are and leave the line of communication open, so you dance between assertive collection of your money and keeping in mind the relationship your company wants to maintain.  Hopefully you end up getting paid, however even with an Exclusive Listing Agreement where your compensation is specified and both Landlord and Broker have signed, sometimes there is a problem.  The agent anticipates commissions as earned per the ELA, but many times its hope for the best, while engineers, attorneys and other professionals charge and are paid their fee, the Real Estate Broker is the last to get paid and often the commission is renegotiated or reneged upon.

Last year, at the ICSC show in Las Vegas, I was sitting at Binion’s Casino in the old part of Las Vegas when in walks a friend and his wife, the friend is a principal partner at a well known brokerage house in the greater Philadelphia area.  We got to talking about several deals we worked on together through the years and the status with regard to non-payment.  I asked why he and his company continue to take listings like this when they have gotten burned in the past.  He said “If we don’t take the listing someone else will” I replied so what, why deal with people who don’t pay you? He commented “it’s about signage and name recognition and market share”.  To me it is real simple; if I represent a client I will show them every opportunity within the market place that fits their criteria.  But, I will also make it a point to let my client know that I have been burned by a landlord and ask them to protect me throughout negotiations.

With regard to taking a listing, I will never take a listing simply for market share; however there are others who always will. The reason we are in this business is to earn commissions, and that means getting paid.  If you want to be a Saint, join the Peace Corp. We are in this line of work because we believe we can control the art of the deal and make money.  The art of the deal is the excitement that motivates guys like me. Bottom line, get your commission worked out right up front and don’t take anyone’s word for it. Still, there are some brokers who will agree to receive commissions as collected, which to me, is by far the very worst form of commission agreement. Under this scenario, you become the Landlord’s partner, sharing his down side but none of the upside, and leaving you totally unprotected. Brokers do their job when a deal is completed and should be treated with the same courtesy as any other professional who gets paid at the conclusion of their performance.   But as the story relates above, there will always be Brokers who will agree to anything in order to take a listing, they devalue themselves and they devalue their industry as well.

Second example: I am representing a national franchisee at another well known firm and referred the business to an associate from a national net-work, another broker in another state that had a personal relationship with my former company and all the Principals within the company.  A deal was completed and as usual we anticipated a 20% referral fee. I asked on several occasions during the course of 6 months for a commission schedule and was rebuffed. I did not pursue or push to bring it to a head; instead I acted like the saint and deliberately held back.  When the day came to get paid, I was told they only did a 5 year deal instead of the usual 10 year term. And that  due to a personal or long standing relationship with the company and the owner, they agreed to take a lesser commission. They were the sole Broker and accepted a 3% commission. So my 20% was based on a 3% commission not the anticipated 5%.  But who was to blame? The Saint. I tried to take the high road, showing faith that it would all get worked out and did not want to come off the bad guy with the company principals, nor sour their relationship with the broker I had referred to them.

What did I learn? Take nothing for granted. Don’t assume people will take the high road and make things right.  At the end of the day, it comes down to self interest.  Learn to ask for your commission right up front. Discuss the deal and all terms at the very beginning not at the end of the deal.  Sometimes you win and other times you lose, but never be afraid to ask.

The Point:

If Landlords could do a deal themselves, they would do it.  If you are dealing with a co-broker you need to know what his agreement is from the very start, because he may be making deals that are not typical. Discuss all details upfront and come to a clear understanding.  As a final comment, I later drove by the shopping center and noticed the broker that I did the deal with no longer had his signs on the property, but instead were replaced by another broker. I was told by the new broker that part of the pitch to gain this account was to take a discounted commission schedule and work with the bosses on their terms. Sound familiar?“Those downtown bosses, all sure talk pretty. I felt just like a back street gambler, searching for a commission.  It’s so hard to be a Saint in the City,” when you have money out on the street.  Let someone else cry nickels for your pity, it’s your commission that’s due. The sages of the industry know it’s you who make them all look pretty, you get their stores rented and you contribute to their bottom line. It’s such a fine line to dance that talk, should I be the Saint of the City?

Dirty Little Secret Or?

Is this the way it will always be? I cannot begin to chronicle the struggles and frustration I have had over these many years with Getting Paid. Many thanks to Jack for the posts and I would love to hear your thoughts comments and suggestions about this “dirty little secret”.

 

Image Credit:http://www.flickr.com/photos/daviddmuir/



 

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  • Max

    Don’t forget to add provision in the agreement regarding attorney fees. Simply, if I have to hire an attorney to persue the commission, the landlord (tenant, broker, whomever) pays my attorney fees. THAT will scare ’em.

  • M21realestate

    Duke, great article as usual. Thank you for the examples.

  • Mike H.

    Great article, as a newbie to the CRE industry I’m always excited to see people like Duke telling it like it is.

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  • Matt S

    Awesome article. Just found this site. It’s gold!

  • Gabriel

    Switching from doing residential to commercial in Texas snd your site helped. I appreciate some of the insights, the good advice, as well as behavior to watch for, and how to best avoid the head aches when possible. Thanks Gabriel

  • David

    Boy, do I wish this was fiction.