A Better Way to Broker
Every three years, Bill faces one task with dread: As CFO, part of his responsibility includes negotiating a lease renewal for office space. Every year, as he enters the world of commercial real estate, he feels like he’s “walking through the valley of death.”
Every dollar saved on the lease goes straight to his company’s bottom line, yet no one seems to have his best interests in mind. The landlord’s interests are clearly his own—the more space, the higher the price, the longer the term, the better. The tenant representative broker working “for him” receives most of the commission, which is calculated as a percentage of the value of the lease—again, the more space, the higher the price, the longer the term, the better. So it’s hard to believe that either one has Bill’s best interest at heart.
Bill faces the entire ordeal with dread. It has been Bill’s experience that soon into the process; he’ll find that he’s the one managing it, not his broker. He’ll show Bill various expensive properties with long-term leases that are unsuited to the objectives Bill stated at their first meeting—did he listen at all? He’s certain they could get a three-year lease with a few months of free rent, but his broker will continue to show him five-year leases with no free rent. Bill will shake his head in frustration, asking, “Why can’t I get a termination option if I’m willing to pay a fee for it!”
Bill will end up being the one who spends hours calculating office sizes to see if he can get away with less space, a job clearly not in the interest of those getting paid. Negotiations never go well. He’ll ask for termination options but will be told, “There’s no give on the other side.” He’ll wonder if his broker even tried to fight for what he wanted. His concerns will go unanswered, time will run out, and once again, he’ll sign a lease that results in a commission split between people who weren’t working as advocates on his behalf.
The above story is based on actual experience. In companies across the USA, mid-level and senior executives, CFOs, and real estate managers have reached a breaking point from their encounters with commercial real estate brokers. It’s not simply a case of poor service, lack of communication, or limited experience—though these are all factors. The commercial real estate market is in the midst of a shakedown. Amid economic recession, falling property values, and increased scrutiny of the large institutions that caused much of the economic collapse, there’s an increased awareness of the serious misalignment of interests between the client and the broker. This breakdown in the client-broker relationship is leading many to ask, “Is there a better way to broker?”
These are the hard questions that any and all individuals and companies with real estate needs should be asking of their real estate professionals.
Credit here to Dan Sullivan and his “Strategic Coach” method of training entrepreneurs; our first question is adapted from one of Dan’s core methods for teaching people to set goals and be effective in their lives.
To test whether a firm’s foals are aligned with yours and how seriously it is listening to your goals and objectives, ask this question: Assume that is it a year from now, and you and I are meeting right here to discuss the transaction that has occured, what will have to have happen for you to feel good about your progress with the deal?
If the broker’s answer doesn’t encompass the goals and objectives you have outlined for your transaction, you’re talking to the wrong person. At Cardinal, we have asked the question hundreds of times. We take the responses our clients give and make them a part of our Key Performance Indicators by which we are graded at the end of the deal.
Driven by Process, or Instinct?
Ask for samples of deliverables from past transactions that you would hope to see during your transaction — things like market reports, financial projections and spreadsheets, analyses of terms. Ask to see due diligence checklists for leases, purchases and sale negotiations. If a broker can’t provide basic process documents, you’re likely dealing with a hipshooter who believes real estate is still a “gut” business. Ask to see their “playbook”; and if they do not have one, ask for examples of best practices.
If you’re being offered a team to work on your transaction, ask exactly what each member’s area of expertise and responsibilities are. The team should be a well-rounded mix of aptitudes that makes sense to you. If the transaction involves real estate outside the local market, ask how the firm will handle out-of-market resources. Does the broker ever refer deals outside of their company or network? If not, why? You want the top team working on your transaction, regardless of whose business cards they carry.
How does your potential broker measure results? Ask this as an open-ended question and note carefully whether “client satisfaction” is mentioned. If you ask the potential broker how he or she will measure results in your transaction, is there any reference to your goals and objectives?
Next, drill down: What is the broker’s plan for achieving your goals? How are they going to help you determine how much space you need? How will they find the buyer for your challenging asset? Will they just shop you around to the usual suspects, or do they have some creative ideas about how to achieve your goals that come from outside the normal playbook?
Doing the Details
Ask detailed questions that demand specific answers. Something like, “How can you help us reduce facility expenses?” should yield a set of specific answers and (even better) examples of how the broker has helped past clients achieve this goal. Their answer will give you a good idea of whether the potential broker regards details as things that get in the way of the deal or critical steps that must be worked through regardless of the time it takes.
Drill in on negotiating tactics, skills and experience. Ask for an example of a situation where the broker’s negotiating skills reversed a deal that was going down the tubes and turned it into a win. What are their goals in a negotiation?
Listen & Learn
As we saw during the real estate executive focus group, not being listened to is a top complaint of clients. Ask your potential broker if they survey their clients. How often? What are the results?
After you’re done with the interview, think back on the time the potential broker took with you and how respectful they were of your objectives and agenda for the meeting. If they weren’t paying close attention, there’s less than zero reason to think that will change once you’re signed as a client.
Pay for Performance?
Finally, we come to the bottom line: Is the firm willing to put its fee on the line for your satisfaction? Ask about the “pig in the poke” and get “the elephant out of the room” – the reality that the brokerage’s interests aren’t necessarily aligned with yours. Will they acknowledge that fact and discuss it without becoming defensive? Tell the potential broker that you expect some portion of their fee to be put at risk until you’ve met your objectives at the end of the transaction.
Anticipate pushback on this demand; national brokerage firms generally reserve this mechanism for their largest clients. But stick to your guns. To see a list of suggested mechanisms for linking fees to objectives both quantifiable and soft, visit the Cardinal Partners resources page on our website: http://www.cardinal-partners.com. And watch closely how your potential broker acts when you open this avenue of negotiation; see what their behavior says about Point 6 above.