Who Pays? (I hope not me) - Posted by Randy

Real Estate Investing
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Posted by Bob Smith on April 29, 2006 at 13:18:09:

>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.

If the tenant only lasts 3 years of a 10 year lease and then defaults, are you going to rebate part of your commission? If you’re confident in the quality of the tenant you’re bringing to the table, why not get paid for what you deliver?

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Who Pays? (I hope not me) - Posted by Randy

Posted by Randy on April 27, 2006 at 16:39:51:

I have an industrial building who’s tenant is moving out and subletting the building to a new tenant for the remaining 2.5 years left on the lease. The new tenants want a 10 year lease that will, of course, extend 7.5 years beyond the current lease.

Here is my question: Of course when the new tenant signs a sublease agreement with my old tenant, my old tenant will have to pay leaseing agent’s fee. But what about the lease that comes into effect after the old lease expires? That would be the lease between me and the new tenant. Will I have to pay a leasing agent’s fee on that lease???

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Re: Who Pays? (I hope not me) - Posted by Don McClain

Posted by Don McClain on April 27, 2006 at 17:12:03:

Everything is negotiable. Don’t forget that. Who procured the new tenant? Why does the new tenant sign a new 10 year lease now? He could just do a 2.5 year sub-lease and negotiate at the end of the term.

Let me know if I can be of assistance and remember - ITS ALL NEGOTIABLE!!!

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Re: Who Pays? (I hope not me) - Posted by Randy

Posted by Randy on April 27, 2006 at 21:21:22:

The new (sub)tenant was found by the old tenant’s leasing agent. But the new (sub)tenant does not want a 2.5 year deal. They want to be sure they will have a business location for much longer than that. I think that will be the case with whoever ends up renting the building. So actually there will be two leases – the sub lease with the old tenant, and a lease with me after the sub lease expires. I am wondering in this situation if it is normal for the listing agent to expect payment from me for finding the tenant.

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Re: Who Pays? (I hope not me) - Posted by ray@lcorn

Posted by ray@lcorn on April 28, 2006 at 09:08:53:

Randy,

Be careful you’re not stepping over dollars to pick up dimes.

You’ve got two issues here.

First, assuming the existing lease allows the tenant to sublease I would expect that right is subject to your approval. Use it to regain control of the deal. Right now you’re being driven by the existing tenant, and that must be reversed.

Look at it this way… the new tenant is not willing to take the space on a 2.5 year deal. They want the certainty that they can stay longer. So your existing tenant does not have a doable deal without your help. What you’re going to do for them is let them out of the last 2.5 years of their lease without a penalty. End of story for existing tenant.

Second, you don’t want to create a reputation in the broker community that you’re a chisler on commissions. Bad business, bad faith, and very short-sighted.

You can turn the situation to your advantage by telling the broker up front you will not cut him/her out of the deal if you can pay the commission in monthly installments as the rent is received. Then structure the lease to include the commission so the tenant is paying it, along with the appropriate conditions that a long-term lease demands, such as CPI escalators, maintenance, improvements, etc.

That makes the 10-year deal much more attractive to the tenant than the hybrid sub-lease, gets the existing tenant out of the loop, puts the broker on your side, and you get a much better lease than the one you’ve got.

ray

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Re: Who Pays? (I hope not me) - Posted by Kyle Miller

Posted by Kyle Miller on April 28, 2006 at 21:47:24:

Randy,

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).

Best regards,
Kyle

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I think I see it now - Posted by Randy

Posted by Randy on April 29, 2006 at 13:29:29:

I want to thank all of you for responding to my question. I see the situation more clearly now ? there should not be two leases, but just one lease (and therefore one commission, which I agree should be paid without complaint), between me and the new tenant. And the old tenant should be let loose from their lease.

But before I let the old tenant go, I should extract some payment from them because:

  1. I will have a weaker tenant. The old tenant is a rock-solid national corporation. The new tenant is a small privately held business.

  2. The rent will be about $35,000 per year less than what my old tenant pays. Ouch. The old lease rate was a bit beyond the market rate, which was set when they purchased the business from the previous landlord (The old landlord built the business and the building and then sold the business to the big national corporation, but kept the building, until he sold it to me).

So I with the above in mind, I think my opening position in the negotiation should be:

Old tenant pays, $125,000 to me to cover the lower rent and weaker tenant, plus pays the leasing agent?s commission and the TIs. It may be important to know that the lease costs the old tenant about $250,000 per year.

Does this seem reasonable?