The Pros and Cons of Hiring a Broker
A good real estate broker may be key to finding the best location and negotiating the best deal possible. Here are a few reasons why:
The best locations are usually leased before they go on the market.
Unless you are very well connected in your community and know the landlords, there is no good way around this one other than by using a broker. Long before an existing tenant is out, they will have to let the landlord know that they will not be renewing their lease. Usually, the word will spread through the real estate community, but no sign is put in the window because the tenant still has rights to the space and does not want to alarm the staff or existing customers. A good broker will use their connections to sniff out spaces that will become available in the future, and the best spaces are usually leased before the sign even goes up in the window.
Many landlords will only deal with brokers.
When you call the number on the For Lease signs in the windows, you may never get a call back. Landlords and leasing agents often become frustrated with the time-consuming process of responding to and qualifying all potentially interested tenants, and they tend to ignore those without representation. It's much easier to work with a dozen brokers who will weed out those not serious than hundreds or thousands of potential tenants.
A good broker can help you negotiate a good deal.
How much space is being leased for? Do you know what the landlord has offered in terms of rent abatement or tenant improvements in the past? Any idea how likely it is that the city will require you to put in handicap accessible customer bathrooms? Is the landlord currently negotiating with any other potential tenants? Your broker should be able to answer some or all of these questions for you, and those answers can make a huge difference in selecting the right space and negotiating the best deal.
So you need a broker, but how does it work?
The broker will ask you to sign a representation agreement stating that you will work only with them for a fixed period. They will assist you in finding space and negotiating a deal. In return, you will guarantee them a commission of a certain amount. The amount differs depending on the market, but typically ranges from $10,000 to $20,000 per location.
That's a hefty price tag, but the good news is that the landlord should pay some or all of that. Because the landlord relies on brokers to find and qualify tenants (and may refuse to return your direct calls), they will usually offer a commission on the full price of the lease. A typical commission is 3%, but more or less is certainly possible. For example, let's say you lease a 1,500 square foot retail space at $50 a foot for five years. The total value of the lease is $375,000, and at 3% commission, the broker gets $11,250 from the landlord. You are responsible for paying the broker the difference between the commission in your representation agreement and the commission they get from the landlord.
In the case of larger spaces or more expensive markets, the brokers usually get 100% of their fee from the landlord, much the way residential real estate brokers are paid out of the proceeds of the sale of a house. However, if you are looking at a small and/or inexpensive space, you may have to contribute a significant amount of money to the broker's commission. The theory is that it takes roughly the same amount of time to find and negotiate a 10,000 square foot restaurant space as an 800 square foot tea shop.
Finally, you should be aware that it's up to the landlord whether or not they offer a commission at all. Smaller private landlords may refuse to provide any compensation to the broker, leaving you on the hook for the full amount!
The best locations are usually leased before they go on the market.
Unless you are very well connected in your community and know the landlords, there is no good way around this one other than by using a broker. Long before an existing tenant is out, they will have to let the landlord know that they will not be renewing their lease. Usually, the word will spread through the real estate community, but no sign is put in the window because the tenant still has rights to the space and does not want to alarm the staff or existing customers. A good broker will use their connections to sniff out spaces that will become available in the future, and the best spaces are usually leased before the sign even goes up in the window.
Many landlords will only deal with brokers.
When you call the number on the For Lease signs in the windows, you may never get a call back. Landlords and leasing agents often become frustrated with the time-consuming process of responding to and qualifying all potentially interested tenants, and they tend to ignore those without representation. It's much easier to work with a dozen brokers who will weed out those not serious than hundreds or thousands of potential tenants.
A good broker can help you negotiate a good deal.
How much space is being leased for? Do you know what the landlord has offered in terms of rent abatement or tenant improvements in the past? Any idea how likely it is that the city will require you to put in handicap accessible customer bathrooms? Is the landlord currently negotiating with any other potential tenants? Your broker should be able to answer some or all of these questions for you, and those answers can make a huge difference in selecting the right space and negotiating the best deal.
So you need a broker, but how does it work?
The broker will ask you to sign a representation agreement stating that you will work only with them for a fixed period. They will assist you in finding space and negotiating a deal. In return, you will guarantee them a commission of a certain amount. The amount differs depending on the market, but typically ranges from $10,000 to $20,000 per location.
That's a hefty price tag, but the good news is that the landlord should pay some or all of that. Because the landlord relies on brokers to find and qualify tenants (and may refuse to return your direct calls), they will usually offer a commission on the full price of the lease. A typical commission is 3%, but more or less is certainly possible. For example, let's say you lease a 1,500 square foot retail space at $50 a foot for five years. The total value of the lease is $375,000, and at 3% commission, the broker gets $11,250 from the landlord. You are responsible for paying the broker the difference between the commission in your representation agreement and the commission they get from the landlord.
In the case of larger spaces or more expensive markets, the brokers usually get 100% of their fee from the landlord, much the way residential real estate brokers are paid out of the proceeds of the sale of a house. However, if you are looking at a small and/or inexpensive space, you may have to contribute a significant amount of money to the broker's commission. The theory is that it takes roughly the same amount of time to find and negotiate a 10,000 square foot restaurant space as an 800 square foot tea shop.
Finally, you should be aware that it's up to the landlord whether or not they offer a commission at all. Smaller private landlords may refuse to provide any compensation to the broker, leaving you on the hook for the full amount!