Re: Who Pays? (I hope not me) - Posted by Kyle Miller
Posted by Kyle Miller on April 28, 2006 at 21:47:24:
Allow me to allow my thoughts from the perspective of a broker who usually represents tenants.
I highly doubt there is anything in the law in any state that would mandate you pay a commission, and most everything is always negotiable anyway. You can require the new tenant to pay the broker, but then they would just require that much more reduced rent. Also, Ray is absolutely right (as is natural for a successful investor with far more experience than me) about the bigger picture.
I work in Silicon Valley, and although the Bay Area is certainly not the biggest metro area out there, it’s reasonably large. Even in such an area, the commercial brokerage community is surprisingly small and word gets around quickly. Naturally, we’ll do right by our clients and show them the best spaces at the best prices for their requirements, but all things being equal, I’m not going to show a client a sublease if he wants a long-term deal and I know the owner of that property is likely to try and cut me out/make me work for his benefit for free.
I also agree that the cleanest method is to let the first tenant out, contingent on a new lease with the new tenant. If the first tenant wants to sublease due to underutilized space and financial difficulty, having a more stable tenant would probably be preferrable anyway.
However, as the owner, I would probably require that the first tenant pay me the amount the commission would have been to get out of the lease, plus any difference in price (if any) between the sublease rate and a (presumably) higher market rate. That should cover the economic cost you already probably paid for an earlier commission and a potential ongoing cost. Your new lease would naturally also be at least 3% higher (since the new tenant’s lease is not limited by the original lease covering different needs, the new tenant is not tied into the original tenant’s financial stability, and other sublease issues). I imagine that 3%, the lack of vacancy/advertising costs/no listing broker costs/etc. should easily pay the procuring broker’s commission.
I would like to disagree on one point, naturally influenced by my perspective. I know Ray/other people have suggested it in other posts, but don’t dribble out the commision monthly. Perhaps that’s done in other regions or with smaller brokerages, but that would certainly make me decide to take a client elsewhere. The broker has given you another 7.5 years of tenancy and brought you economic gain (provided a lease is signed), and his job is done, so please pay him. It seems like just one more administrative task. If you’re concerned about the new tenant’s long-term stability or have cash flow issues, just require a bigger deposit. Naturally, the new tenant won’t like that, but you can explain that’s it’s part of the overall deal to get them the long-term lease that they want. Furthermore, you can release it back to them over time (such as 1 free month per year for x-years) until your cash flow/their stability no longer warrant it.
Hope that helps, give you a different perspective, or at least provides you with some more (negotiating) ideas. I know I’m in a forum dominated by owners, so I also hope nobody throws sticks or stones (or at least ones that aren’t too sharp).