THREE BASIC FUNDAMENTALS YOU SHOULD KNOW ABOUT COMMERCIAL REAL ESTATE
May 1, 2012
Guest blogger Deb Boucher is a Vice President and Principal specializing in Tenant Representation at Cassidy Turley, the nation’s fastest growing full-service commercial real estate firm.
Dealing with a company’s “commercial real estate needs” usually competes with “corporate tax issues” in the contest for least-enjoyable-yet-vitally-important task. Understanding how commercial real estate brokerage works in the Triangle-area will help make this essential business activity a little more comfortable.
Step One: Understanding the Participants
On the most basic level, a commercial real estate transaction involves two parties: A Tenant or Buyer (the end-user), and a Landlord or Seller. The cast of characters soon grows because typically both Principals engage an “expert” to represent their interests and leverage the best possible transaction deal due to the respective expert’s intimate knowledge of the market, access to comparable deals, knowledge of competing parties, etc. These experts are usually licensed real estate brokers.
Bottom Line: Brokers are on the front line of strategic planning, space searching, design optimization, deal term negotiation and project execution every single day. As such they are used by both “sides” as outsourced expertise.
Step Two: Understanding Agency
When commercial real estate professionals are engaged in agency, they form a fiduciary relationship with their principal, pledging, at minimum:
– Loyalty (putting their principal’s interests above all others)
– Obedience (to the extent allowable by law)
– Confidentiality and Discretion (vitally important to negotiation leverage as well as to the company’s internal messaging and change management policy)
– Technical and Market Expertise and Diligence
Bottom line: Real estate professionals must be transparent—willing and able to explain their existing agency commitments and how they accommodate new representation assignments.
Step Three: Understanding Compensation, a.k.a. Demystifying the Commission
The compensation model for real estate brokerage services is different from other professional services. They are rarely paid a retainer or an accruing hourly fee. Instead, brokers work “at-risk” for months, and often years, being compensated in the form of a commission when a transaction is fully executed and sometimes not until the Tenant moves into the new space.
By law, there are NO set commission rates in the state of North Carolina. However, it is typical for the Seller (in a Purchase and Sale transaction) or the Landlord (in a Lease transaction) to fund brokerage commissions. When a Landlord hires a Listing Broker to lease his property, he promises to pay a negotiated but pre-determined commission to the Listing Broker. If a Tenant is represented by a broker, the Tenant Broker SPLITS the Listing Broker’s pre-committed commission with them. If there is no Tenant Broker, there is no commission split and the Listing Broker may retain a higher commission. A Tenant or Buyer without representation tends to have a less accurate understanding of the market, acceptable deal terms and industry knowledge (like what Landlords may be facing bankruptcy, etc.).
Bottom Line: The Seller/Landlord pays a commission to their Listing Broker who then splits their fee with a Buyer/Tenant Broker, should there be one. Not only do the services of a Buyer/Tenant Broker drive better leverage, timing and terms, there is rarely an out-of-pocket cost to the Tenant.
As a Vice President and Principal at Cassidy Turley, Deb Boucher focuses her practice on assisting end-users of space with acquisition, disposition and consolidation projects. Deb leverages a systematic and documented approach to help executives maximize the impact of their real estate decisions with the most efficient use of their time. With a degree in Design and Environmental Analysis from Cornell University and a background in Owner-representation Project Management, Deb has been advising clients in the commercial real estate world for over a decade. At the Forrest Firm, we are proud to partner with Deb Boucher to represent Triangle-area companies and meet their corporate real estate needs.