Are Brokers a necessity? In this blog post, we discuss the different types of Commercial Real Estate Brokers, exactly how much they get paid, and who should pay them (the Tenant or the Landlord).
Do you Need a Real Estate Broker?
Yes and No. Typically, Landlords do business with Real Estate Brokers. So a Broker is going to have a better idea of what the industry can withstand within that area. They’re going to be able to bring a more competent Tenant to the Landlord. Typically, the Landlord is going to take you more serious if you’re introduced by a Broker than if you’re calling them on your own, trying to sit down with somebody to discuss the possibility of renting space.
There’s Two Types of Brokers
There’s a Landlord Broker and there’s your Broker (Tenant’s Broker). The Landlords Broker is going to be the one that represents the Landlord. They’re going to be given all the particulars about the space. What it is that the Landlord is willing to give up (concessions), not give up, pricing (rent), and so forth. Your Broker represents you. The Landlords Broker represents the Landlord. Do not confuse the two. The Landlords Broker is going to try and get the Landlord the best deal for him.
Who Pays the Real Estate Brokers?
Typically, of deals that I’ve been a part of, the Landlord pays your real estate Broker a commission based on the terms of the lease. I’ve never paid a Broker and I never will, but you need to make sure that everyone understands that because I have seen it written into leases before, that the Tenant, meaning you, will responsible for the Brokers commission. Make sure everyone is clear on who is paying for the Brokers.
How Does a Real Estate Broker Get Paid?
The way that a real estate Broker gets paid, is the Landlord will take the full term of the lease, the first term initially, typically and they get about 6% as given of the base rent.
The formula looks like this:
Initial Term x 6% x Annual Base Rent = Broker Commission
If you have a 4,000 square foot site and you’re paying a base rent of $25.00 and it’s for a 10 year period, then you’re talking about a million dollars over the course of the first term, 6% being $60,000.00.
10 Years x 6% x ($25-psf x 4000-sf) = $60,000 in Brokerage Commission
Typically, if the Landlord has a representative on site, they’ll receive 3% and your Broker will receive 3% of that commission.
$60,000 / 2 = $30,000 for each Broker
or you can calculate it like this:
$1,000,000 is 10 years worth of rent in the example above, each Broker is owed 3% of that amount. $1,000,000 x 3% = $30,000 for each Broker.
If there is only one Broker involved, that Broker will get the full 6% or in the example above, they’d get the full $60,000
Never Use a Residential Broker for a Commercial Real Estate Deal
A commercial real estate Broker understands how that commercial market works. You may know a real estate Broker but if they’re not a commercial real estate Broker, you are not going to get good representation. Don’t play games with this.
What Should you Expect from your Real Estate Broker?
Your real estate Broker should be out there looking for potential sites for you. They’re going to go out into the market, they’re going to discuss your franchise concept with different shopping centers and they’ll bring potential sites back to you. You’ll go on some sort of site tour and they’ll help you in narrowing it down to the site that you want.
They’re also going to supply you with demographic information. They should give you all the particulars and demo reports in regards to your concept. If you have a specific need, be it electrical, or physical, or zoning, this is something that you would represent through the Broker to the Landlord, so that you could be assured that what it is that you need will be addressed. They’ll help you construct the LOI, the letter of intent, which is what the lease will embody. They’re your eyes and ears out in the commercial world. Your obligation is to make sure that your needs are clear and concise.
What Don’t you Get ?
A real estate Broker, the one representing you, should not be the one who negotiates your lease. They can help you with the lease, certainly on the LOI where you negotiate your rent, what you’d expect to pay per square foot and so forth, but negotiating a lease is not where they expertise is and nor should you lean on them for that. You have your own due diligence to do. You’re going to need to negotiate your own lease through an attorney.
Once this deal is signed, the Broker is done. You’re left with whatever decisions were made and there is no liability that falls back on them in the event that you made a mistake. Please understand, the Brokers main function is to locate a site that you need for your particular concept. Beyond that, it all falls on you, so make sure you line up the right people for your deals.
Work Multiple Sites
Remember when dealing with a real estate Broker, you need multiple sites. Don’t fall in love with just one site. Remember, the Broker wants to get paid, so make them earn the dollars that they’re going to get from the Landlord. You need multiple sites. If everything that you need is in this one location and it falls through, you’re going to be back to the drawing board. Make sure that you’re working multiple sites. Any of those deals you would move forward with if they fall within the right context of what it is that you’re trying to accomplish, but do not rest your whole existence based off of one site.
Remember real estate takes time
This is not a portion of the deal where you rush into it. You have got to take your time. If it becomes frustrating and you start to lower your standards and start looking at sites that you otherwise wouldn’t want to be a part of, you’re going to make a mistake and you’re going to pay for it in the long term.
A real estate Broker is there to work for you. Let this process play itself out. Do not lower your standards. Take your time with this because once this deal is signed, its yours. And if you’ve made a mistake, there is nobody that you can go back on. The liability ends with you.
Please understand, I’ve seen this take two years. It is the biggest decision that you’ll make after you decide what franchise you’re going to go with. Take your time and make sure it’s right.
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