To answer this, we have to first look at the participants in a real estate transaction. In a lease, there are four parties: (1) the owner (landlord); (2) the tenant; (3) the listing broker (also known as the landlord’s representative); and (4) the selling broker (also known as the tenant’s representative).
The vast majority of available properties are listed with a real estate broker. When an owner hires a listing broker to find a tenant or buyer for their building, they execute a listing agreement with that broker. These listing agreements typically have a provision for sharing the commission with another broker. Why so? Because the owner wants to maximize his/her chances of finding a tenant or buyer. A commission-sharing provision encourages everyone other than the listing broker to submit an offer because they are assured that they will be compensated.
In a transaction where the tenant is working with an exclusive tenant representative, the landlord is represented in negotiations by the listing broker and the tenant is represented by the selling broker. This ensures that the tenant’s interests are being protected by someone who has no financial incentive to see the tenant lease any particular property. As a broker who only represents tenants (and never landlords), the exclusive tenant rep’s compensation is always one half of the full commission.
What happens if the tenant works with a traditional broker? That broker is financially incentivized to see the tenant lease one of the broker’s listed properties. Why? If they have a property listed and help you lease that property, they are both the listing broker and the selling broker. That means they get both sides of the commission rather than just one—effectively doubling their compensation. How do you think that potentially affects the properties you are shown or the advice you are given? In fact, for the vast majority of lease transactions in West Michigan, the listing broker and selling broker are the same.
It is also important to point out that most traditional real estate companies advertise “tenant representation services.” Don’t be fooled—they still represent landlords so they are still financially incentivized to put you in one of their listed properties. You want a broker representing you who never works for landlords and has no listings.
During the performance of a base representation assignment (described in detail here), we might identify the need for additional services. Examples of such ancillary services include:
- Buyer representation: Applicable if the initial assessment reveals a preference to own rather than lease
- Lease review: Review existing agreement for landlord’s compliance with economic provisions
- Tenant improvement management: Coordinate construction of initial space improvements
- Move coordination: Relocation of people, furniture, and equipment
- Space planning (through a partner vendor)
- Programming study (through a partner vendor)
- Industry rent analysis: What are others in your industry paying as a percentage of sales?
- Buy vs. lease analysis: Typically part of the initial assessment
- Demographic studies: Particularly suitable for retail tenants
- Competitor mapping
- Aerial, interior and exterior photography
We rely on partnering to fill in the gaps where we may be lacking in depth or expertise. Partnering is not simply outsourcing; it involves ongoing identification of qualified, trusted vendors through direct work experience.
These partner relationships allow us to meet timing and quality benchmarks that would not be possible by simply going out to bid for services when the need arises. A case in point would be architectural services. We have three primary architectural/engineering firms we have partnered with on past assignments and would continue to use going forward. Each of the three specializes in a specific area of expertise—one does general architectural and engineering, the second specializes in space planning, and the third has a highly efficient design/build model that works particularly well in out-of-town markets.
We never charge for an initial consultation. That meeting, which typically lasts 30 minutes to a couple of hours, is designed to review your current position and discuss your options going forward. At that initial meeting, our main focus is finding out whether or not we can help you.
Assuming we collectively decide in our initial conversation that working together will be a good fit, you will need to sign a representation agreement with us. That agreement does several things, including: (1) specify that we are working together exclusively; (2) describe in detail what services we will be providing; and (3) document how we get paid for our services.
We have never had a potential client review our representation agreement and decline to sign it. That is most likely because it has very specific language allowing the client to terminate the agreement for almost any reason. The intent of the representation agreement is not to lock you into a legally binding contract. If your needs change or you decide you no longer require our services, we terminate the contract with no further obligation.
Regarding the cost of our services, in a traditional space search assignment there is no direct out-of-pocket cost to you. Nothing in life is really free, though, so how do we get paid? Assuming the property is listed on the MLS (Multiple Listing Service) and there is a commission-sharing agreement, our fee is paid by the owner. If you represent yourself in the search process, state license law precludes you from being paid any portion of the commission.
It can be exceedingly difficult to understand what you will have to pay every month in total occupancy costs when considering the various spaces available in the market. The best way to perform a meaningful comparison is to analyze available options on an “apples-to-apples” basis. For example, let’s say you are considering two different spaces for lease, with the following characteristics:
Space #1: 2,645 rentable square feet (SF), $8.00/SF rent
Space #2: 2,530 rentable square feet, $12.00/SF rent
On the surface, Space #1 appears to be preferable—it is larger and has a lower rent/SF. However, Space #1 has 2,645 rentable square feet but only 2,300 useable square feet and is being quoted on an “as is” basis with expenses paid on a triple net basis. Space #2 also encompasses 2,300 useable square feet and is located in a new building, so the quoted rent is “turnkey.” Moreover, expenses are allocated on a gross basis. What does this all mean? See the “Definitions” FAQ page below for a better explanation of what some of these terms mean. Adjusting these two listings for items of dissimilarity would result in the following comparison:
Space #1: Adjustments are necessary for expenses, improvements, and the common area factor. Expenses paid by the tenant will include taxes, insurance, common area maintenance, janitorial, and utilities. These expenses are estimated to total $6.00/RSF. The cost to improve the suite to suit the tenant’s requirements is $12.00/SF, which, if amortized over the 5-year initial base term, would add $3.00/SF annually to the base rent. The common area factor is 15% (2,645 RSF divided by 2,300 USF = 1.15). The full gross occupancy cost per rentable square foot is then calculated as follows: $8.00/RSF base + $6.00/RSF for expenses + $3.00/SF for improvement amortization = $ 17.00 per rentable square foot. The useable rent is calculated as follows: $17.00/RSF multiplied by the rentable factor of 1.15 = $19.55 per useable square foot.
Space #2: Adjustments are necessary for expenses and the common area factor. Expenses paid by the tenant will include only suite electrical use, estimated to be $1.00/RSF. The cost to improve the suite to suit the tenant’s requirements is zero, since this is a new building and the space is being offered on a “turnkey” basis. The common area factor is 10% (2,530 RSF divided by 2,300 USF = 1.10). The full gross occupancy cost per rentable square foot is then calculated as follows: $12.00/RSF base + $1.00/RSF for expenses + $0.00/SF for improvement amortization = $ 13.00 per rentable square foot. The useable rent is calculated as follows: $13.00/RSF multiplied by the rentable factor of 1.10 = $14.55 per useable square foot.
As you can see, the unadjusted rents suggested a highly favorable rate for Space #1, while adjusting each for items of dissimilarity reveals that the opposite is true. This is just another example of why it makes sense to be represented by a qualified and experienced professional in your search for rental space.
Gross lease vs. net lease: This refers to how operating expenses are allocated between the tenant and the landlord. The easiest way to remember this is to put the phrase “to the owner” after the lease type. For example, a gross lease becomes “gross to the owner,” which means the owner has to pay all the operating expenses out of the rental income he receives. Conversely, a net lease is “net to the owner,” so the owner keeps all the rent collected and the tenant pays the operating expenses.
This would be simple to remember if industry participants—brokers, lenders, appraisers, etc.—consistently used the same terms. Unfortunately, that is not the case. Depending on the property type and geographic location, you might hear one or more of the following terms used to describe a lease: gross, modified gross, net, triple net, or absolute net. When verifying the expense allocation for a proposed lease, we prefer to make a list of all possible expenses and then ask the owner how each is allocated. This eliminates any errors caused by incorrect assumptions.
Rentable vs. useable building area: It is important to understand the distinction between these two measurements and to continually be aware of which of the two is being referred to. The simplest way to differentiate between rentable and useable is to remember that useable is the area you can use exclusively—i.e., within your four walls—while rentable is what you pay rent on. Your lease agreement will always include a reference to the rentable area of the premises you are leasing but frequently will not mention the useable area. If you want to know what the usable area is, you will probably need to ask the owner or owner’s agent.
In the illustration below, the shaded areas represent “common areas”—those portions of the building that anyone can use. The unshaded areas—Tenant Suites 1 and 2—can only be used by the tenant and their guests. The definition of useable vs. rentable area is further illustrated by the following calculations:
Tenant suites: 600 SF (84.5%)
Common areas: 110 SF (15.5%)
Total: 710 SF (100%)
Common area factor: 710 ÷ 600 = 1.183
Useable area – Suite #1: 300 SF
Useable area – Suite #2: 300 SF
Rentable area – Suite #1: 300 x 1.183 = 355 SF
Rentable area – Suite #2: 300 x 1.183 = 355 SF
Common areas are most often found in multi-tenant, multi-story office buildings. Since most retail and industrial buildings are one story high and the tenants have separate entrances, the useable and rentable areas in those building types are the same. Calculating the rentable and useable building areas in a large multi-tenant building is a task that can be very complicated and is best left to an architect. Most architects will perform these measurements based on a set of standards published by the Building Owners and Managers Association (BOMA). Further information on the process can be found here.
Tenant improvement amortization: If you lease a space that requires improvements prior to your occupancy, the cost of these improvements is often referred to as a tenant improvement allowance. A landlord will often quote base rent for a space in its current or “as is” condition. If the landlord has to spend additional money to prepare the space for your occupancy, he will reasonably expect to be reimbursed for the cost of those expenditures.
The landlord will either borrow the money to fund tenant improvements or he will (more likely) take the funds out of working capital. If he borrows the money, the funds must be paid back to the lender with interest. If the money comes out of working capital, the landlord will pay himself a rate of return since those funds will not be available for other projects (basically, he is borrowing from himself).
Let’s say you sign a five-year lease and the landlord has to spend $5,000 to get the space ready for your occupancy. A simple payback of this expenditure equally over five years with no interest would be $1,000 per year. However, the landlord will want a return on the money he is using to build these improvements. In order to accomplish this, the improvement costs are amortized over the term of the lease—that is, paid back in equal installments (the return of the funds) along with interest (the return on the funds).
Using an interest rate of 5% per year, the annual amortization factor is 0.230975. Multiplying this times the cost of $5,000 results in an annual payment of about $1,155. The annual payment has increased from $1,000 to $1,155, with the difference being the return on the investment at 5%. If the foregoing expenditures were made to improve a suite that was 1,000 square feet, the added rent of $1,155 per year would equate to a tenant improvement amortization payment of $1.16/SF. This would be added to the base rent payment.
Space condition (first-generation, second-generation, “as is,” turnkey, TI allowance): There are two basic types of space available in the market—first-generation space and second-generation space. The main difference is that first-generation space has never been occupied, while the second-generation space has been occupied at least once.
If you find a second-generation space and can live with the existing layout and finishes, you might lease it “as is.” Doing so means the building owner doesn’t have to spend any money to improve the space, so they will typically be more flexible on the rental rate and lease length.
First-generation space will normally be devoid of any interior walls or finishes (flooring, ceiling systems, etc.). The building owner will wait for the first occupant and then finish out the space based on their specific requirements. Those tenant improvements can be funded one of three ways: (1) they can be done on a turnkey basis, with the landlord responsible for all costs; (2) the landlord can provide a TI (tenant improvement) allowance, with any excess costs or changes paid for by the tenant; or (3) the tenant can pay for all the tenant improvements themselves. In scenarios 1 and 2, the tenant will be asked to sign a relatively long-term lease (7–10 years or more) and there will be little flexibility on the rental rate. Option #3 will offer more flexibility on rent and lease length while making a significant up-front financial commitment.
Although there is no scientific answer to this question, we can certainly offer some general parameters.
- Less than 1,000 SF: 3 months minimum (4–6 preferred)
- 1,000 to 5,000 SF: 4 months minimum (4–6 preferred)
- 5,000 to 10,000 SF: 5 months minimum (5–6 preferred)
- Over 10,000 SF: 6 months minimum (6–12 preferred; 15–24 months, if new construction or purchasing is an option)
- Less than 5,000 SF: 3 months minimum
- 5,000 to 20,000 SF: 4 months minimum
- Over 20,000 SF: 5 months minimum (15–24 if new construction or purchasing is an option)
If you are currently in a leased space, you have an expiration date and possibly one or more renewal options. If you have an expiration date in the next year with no contractual renewal option in the lease, does the landlord want you to stay? The landlord may be anxiously awaiting your lease expiration so he can move you out and let the adjoining tenant expand.
Conversely, they may have nothing planned for the space and would love to have you stay, assuming you can work out the details. If the landlord wants you out, you won’t have much flexibility for holding over if your replacement space isn’t available on time. This can result in costly penalties, which are normally spelled out in the lease.
Without a formal renewal option, you should contact the landlord well in advance of the expiration date. (Use the guidelines listed above.) If you do have a renewal option, it will have a notification date associated with it. The notification deadline is typically 3–6 months before the expiration date, although it can be as long as a year or more. You should contact us at least two months—preferably three—before the notification deadline so we can adequately research your alternatives.
What type of properties and locations d Add Mediaoes Michigan Commercial Space Advisors specialize in?
The vast majority of our representation assignments are office, retail, or industrial space searches in the West Michigan area. However, we have also performed several multi-location space searches out of state, including three Midwest locations for a furniture retailer and four national locations for an industrial (distribution) client. Since every state has its own licensing requirements, we can engage other exclusive tenant reps for out-of-state assignments. However, we remain your primary point of contact so you get a seamless solution regardless of your requirements.
A word about our capabilities is appropriate here. Even though our goal is to be able to offer a one-stop solution to our clients’ space needs, we are also realistic enough to know that we are not qualified to perform all brokerage-related tasks that arise. If we feel that another firm is better qualified to service a client’s specific needs, we will not hesitate to recommend a solution that has little or no involvement on our part.
Let’s say your existing lease expires at the end of this year, but you have a renewal option written into the lease. This renewal option specifies how long you can stay and at what rent. Let’s assume that you like your building, you like your landlord, and you can’t picture yourself moving. This is a pretty typical scenario, and the majority of all tenants simply exercise their renewal option. Should you?
The simple answer is “it depends.” First, it will depend on whether your renewal terms are at market rates or not. If you are paying too much, you should either renegotiate or go somewhere else. But how do you decide whether your option is at a market rate? Without access to good market data and experience with how to analyze a lease, that can be a difficult and/or time-consuming process. We can help you analyze your options and recommend a course of action.
It depends on what you are trying to accomplish. If you have a property that you want to list for sale or lease, a traditional full-service broker is in a good position to handle that requirement. But what if you are looking for space to lease or a property to purchase? Does your current broker list property for sale or lease? If so, whose interests are they representing?
Residential sales agents are required to notify their clients in writing regarding who they work for—this is known as the agency disclosure statement. The State of Michigan does not require written agency disclosure in commercial transactions, presumably because a commercial client is more knowledgeable than a typical homeowner. Unfortunately, our experience has shown that clients looking for commercial properties are often unsure or incorrect regarding who their broker works for. That is one important reason why we always execute a representation agreement with our clients.
There are many real estate professionals here in Grand Rapids, and with few exceptions they are both honest and knowledgeable. However, they are also in the business to make a profit, which is where human nature kicks in. Let’s say that they have a sign on the side of a building offering office space for lease and you call them for information. If they don’t have any space in the building that fits your needs, they will typically offer to help you find space in another location. Will they show you everything that might work for you, or will they (consciously or unconsciously) show you the properties their firm has listed (which, coincidentally, provide them with the highest commission)?
When we represent a client looking for office space, we start with the universe of available properties—even some which may not be formally listed. That comprehensive list is narrowed down based on the criteria you provide us with in the initial assessment interview, not based on which space offers us the highest commission. This narrowing or filtering process occurs behind the scenes so that you are not overwhelmed with a multitude of options that have little or no applicability to your specific situation. As you can see, it is important to understand who your broker is contractually obligated to serve.
Every tenant rep assignment is custom-tailored based on the tenant’s specific situation. However, all such assignments share a number of common steps. See what a typical assignment looks like.
There are a couple of other things we do to add value during a tenant rep assignment. One is to “distill” the available information to help you make an intelligent, informed decision. We recognize that leasing or purchasing real estate can be a complicated and confusing process, so we create a simple summary of salient facts using an “apples-to-apples” comparison grid. Your time is valuable, so we only pull you into the process when we need your input.
Another valuable byproduct of working with a Tenant Rep is that we can do a good job of insulating you from sales pitches. The real estate brokerage industry can be a very lucrative career path. As a result, it attracts its fair share of aggressive salespeople. Once it becomes known that you are looking to rent space, you will be routinely contacted by agents wanting to show you the space they have listed. These calls, if answered, can be very disruptive and time-consuming. If you are working with us, a simple statement regarding our status as your representative will serve to route all calls through us (and away from you).
In addition to our involvement with leasing, we also have extensive experience as former owners and managers of several multi-tenant office buildings in the Grand Rapids area. This experience on the owner’s side gives us insight into the negotiations process that cannot easily be derived simply from being a leasing agent.
Contractually, you need to pay your rent until the end of the lease. However, that may not be your only option. Let’s say you are 8½ years into a 10-year lease and you occupy a fairly large space. Let’s also assume that your rent has increased every year based on CPI increases, while the market has remained relatively flat. When the lease was initially written, the landlord was taking the risk that CPI wouldn’t keep up with market rents, while your risk was the opposite (that the contractual rent would increase faster than market rates). We are not an advocate of seeking relief from the landlord simply because your rent is above market. However, you may have something to offer in return.
Assume that your contractual rent has increased to $20/SF while the market is at $15/SF. What do you have to offer? If you occupy a reasonably large space, chances are the landlord would hate to see you go at the end of your 10-year term. If you (we) approach the landlord now and offer to extend the lease for another three or five years if he will drop to a market rate now (1½ years early), he will probably go for it. This is obviously only a good option if you are fairly comfortable that you want to stay.
Most people who are looking for rental space want to focus on the bottom-line cost, which is certainly understandable. However, this focus on economics ignores a very important component of the equation, which has a direct impact on how satisfied you will be as a tenant—ownership and management of the property.
What is superior management worth? This is not a space attribute that is readily quantifiable. Often the only person who understands the relative worth of a good manager or owner is one who has had the unfortunate experience of dealing with an unresponsive manager or with an owner who was unwilling (or unable) to correct facility deficiencies.
We have enough experience in the West Michigan area to be able to give you input regarding the ownership and management of most buildings in the area. When working outside of West Michigan, we rely on both tenant surveys and secondary data sources to gauge customer satisfaction.
There are two primary methods for occupying commercial space—as an owner or as a tenant. Each occupancy type has advantages and disadvantages.
Primary Reasons to Lease Rather Than Own
- Rent on both the land and building plus all operating expenses are fully deductible as an operating expense.
- Leasing is sometimes characterized as 100% financing, while most borrowing requires a down payment.
- If a property suffers from functional or economic obsolescence, the property owner (and not the tenant) suffers the value loss.
- If structured correctly, a lease allows a tenant to stabilize and better predict future occupancy costs.
- A lease allows the occupant more flexibility in expanding, downsizing, or relocating.
- A lease in a multi-tenant building can be an affordable way to secure a more desirable location.
- A lease can reduce or eliminate the distraction associated with real estate ownership and management.
Primary Reasons to Own Rather Than Lease
- If a company has a strong earnings record, good access to financing or cash, and can take advantage of the tax benefits associated with ownership, owning is normally less expensive than leasing. This profile is more typical for a large corporation. For individuals and small companies, leasing and financing terms may be similar, offering no measurable benefit to ownership.
- Any residual value of physical improvements made by an occupant accrue to the owner at the end of the lease.
- Tenants may be restricted from making improvements to their leased space. Owners have unlimited ability to make improvements, as long as they conform with applicable laws.
- Owners benefit from full participation in any appreciation of the property value.
How to Decide?
The lease vs. own decision typically involves consideration of both economic and non-economic costs and benefits. A qualified professional (for example, a CCIM) can prepare a detailed analysis that takes into account all of the economic variables associated with such a decision. However, such issues as pride of ownership or your willingness to participate in property management issues cannot readily be accounted for in an objective analysis. A thorough assessment will involve the careful review of both an economic analysis and a list of subjective pros and cons, which we can help you with.
The short answer to this question is that we are the only commercial real estate brokerage firm between Detroit and Chicago that offers exclusive representation services for office, retail, and light industrial properties. Remember, other local firms will offer to represent you, but they also represent landlords. You wouldn’t hire an attorney who represents both sides, so why would you let your real estate broker represent both sides?
Beyond that, we have a proven process for finding the most suitable property and then negotiating for the best lease or purchase terms, which is described in further detail here.
You certainly can represent yourself—a surprising number of prospective clients start by doing just that. I say “start” because it is rare that anyone actually finishes this process without seeking help. Here are just a few reasons why representing yourself is a bad idea:
- Time: We can easily spend 40–70 hours on a typical assignment from start to finish, doing research, attending meetings, negotiating with owners, drafting proposals or reviewing documents. Time is money—what is your time worth?
- Access to resources: While online property listing sites are becoming more common, they are not comprehensive unless you pay a subscription fee (we do). Also, the general public only has access to a part of each property record, and it takes time to learn how to use the software effectively. There are numerous additional resources we use in the research process.
- Market knowledge: Anyone can use the Internet to find available listings, but only experience and contacts will turn up the opportunities that may not be listed.
- Compensation: When we represent you, we are compensated by sharing the commission with the owner’s agent. In other words, you don’t pay us! Think you can represent yourself and get a share of the commission? The owner can’t legally pay a commission to anyone who is not licensed.
Listing agents love it when a prospect shows up unrepresented. That means they get to keep the entire commission paid by the owner rather than having to split it with someone else. Why not avoid all the work and let that commission pay for someone who is looking out for your best interest?