Looking for commercial office space is a tedious process. Tenants are rarely equipped to handle the complexity and scope of the commercial real estate world, which is fraught with technical terms, lengthy negotiations, and stacks of paperwork. That’s why tenant brokers exist. With their expertise and knowledge of the local market, they provide an invaluable asset to potential tenants before, during, and throughout the length of a commercial real estate lease. And at no upfront cost to the tenant, there’s little reason not to take advantage of their experience and insights.
But once you begin your search for a reputable tenant broker, you’ll be faced with the prospect of entering an exclusive broker agreement with a commercial broker. As with any formal agreement, you’ll want to carefully weigh your options before making your decision.
What’s an Exclusive Broker Agreement?
Commercial exclusive broker agreements vary in specific language between different states, but most states look toward the California Association of Realtors contract for reference, which breaks down the responsibilities required by both parties entering an exclusive broker agreement:
- Broker Responsibilities:
As part of the exclusive broker agreement, your commercial real estate broker will agree to conduct market research to find a list of potential properties to present to the tenant. Furthermore, they will promise to disclose material facts, prepare and review any paperwork necessary, prepare offers on your behalf, and conduct inspections of potential properties.
- Tenant Responsibilities:
With an exclusive broker agreement, brokers are securing a potential tenant to prevent against lost time and opportunity on their part should the tenant go with another representative and close a deal. Therefore, tenants promise to consider the properties provided by the broker, act in good faith, qualify for the terms of a potential commercial real estate lease, carefully review the documents provided, and cooperate with the broker throughout the process.
When Does an Exclusive Broker Agreement Matter?
Commercial real estate transactions have potential implications for all parties involved – landlords, tenants, and brokers. Therefore, due to the length of the closing process and the potential for a high commission, commercial real estate brokers prefer to work exclusively with a tenant for their own protection.
Because a broker might work on a client’s project for several months, it’s important to protect their time and energy spent toward those efforts and avoid losing a tenant to another broker. There’s also the case of fee structures, which can be paid out upon the signing of the lease agreement or throughout the life of the lease itself. These are paid by the landlord and built into any commercial real estate lease agreement, so a broker may not see the reward of their work until the ink is dry.
It’s also more likely that you’ll encounter an exclusive broker agreement with a large real estate purchase or long-term commercial real estate lease, as the transaction will be more sizable and valuable to the broker compared to, say, renting an apartment or a small office space.
Should a Tenant Sign an Exclusive Broker Agreement?
There are several benefits for a tenant to sign an exclusive broker agreement, but it’s important to proceed cautiously.
Signing a letter of representation shows your broker that you have confidence in their work and that they’ll benefit from the commission after you sign a lease. Though you won’t directly contribute to their fee, they’ll work on your behalf to ensure you get the right fit for your budget and needs without sacrificing any percentage of the representation fee.
Before entering into an exclusive broker agreement, it’s important to ask the broker to demonstrate some value before choosing to move forward. This could be in the form of a list of potential properties that match your criteria, providing a market analysis or survey, or offering some promised criteria during any future negotiation process. Either way, it’s important that you find a good match for a tenant/broker relationship and set some ground rules in order to find mutual success.
The biggest benefit of signing an exclusive broker agreement rather than working with multiple brokers through non-exclusive means is that it demonstrates to potential landlords that you’re a serious contender in the commercial real estate market in your city. You’re committed to growth and expansion and your broker considers you a valuable client that they don’t want to see walking out of their door. Most importantly, it shows your prospective landlords that they’ll need to compete to get your business, which may result in more enjoyable lease terms.
Exclusive vs. Non-Exclusive Broker Agreements
As mentioned, exclusive broker agreements constitute a written, binding agreement between tenants and brokers, with both sides committing to certain aspects in order to pursue a commercial real estate deal. That means that a tenant is not allowed to consider partnerships with another broker in their search for a property. Non-exclusive broker agreements, more common in smaller deals, have no such arrangement, allowing tenants to consider every opportunity in their quest for new office space.
Tenants with an exclusive broker agreement tend to be more attractive candidates in the eyes of prospective landlords, showing that they’re committed to finding a high-value property for their company. It also benefits the tenant, allowing a single broker to focus on their needs rather than dealing with several brokers rushing to close a deal before their competition in order to secure their commission.
The Benefits of Signing an Exclusive Broker Agreement
- Working with a single, committed professional: Working with brokers in a non-exclusive way may sound like a more ideal option for tenants, but because you’ll have multiple brokers working for you in a mad dash to close a deal and secure their commission, you may not get the best fit for your budget or situation – just the first available property.
- You don’t have to give up all your options: Despite the name of the agreement, there are options for tenants if the broker turns out to be the wrong fit. For example, you could request a 90-day commitment with the option to extend. You may be required to compensate the broker for their time as a result, but in the long run, finding the right tenant/broker relationship is the most important part.
- Legitimacy in the eyes of landlords: Because you’re signed to an exclusive agreement with a broker, it signals to potential landlords that you’re a viable, valuable asset to the broker’s firm and that you’re serious about finding a high-value property for your business. It shows you’re there to compete, and they’ll meet that accordingly – which may benefit you in the negotiation process down the road.
There’s no easy road when it comes to navigating the commercial real estate market, let alone the intricacies that arise when you work exclusively with a broker. However, finding the right partner for any business endeavor can make or break any transaction. Armed with this insight, your search for the perfect space for your first or expanding venture should be easier than ever.