With the explosive growth of small businesses in the U.S., more entrepreneurs are finding themselves negotiating and closing leases without the help of a broker. While at times it makes sense to do this, using a broker in the right scenario can greatly assist in securing the best possible lease for you and your company.
Before deciding whether you need extra help, it’s important to understand what motivates brokers and how they can benefit you during a lease transaction.
Getting their attention. Knowing how brokers get paid is important to understanding their motivations — and why sometimes, they don’t return your calls. Most brokers get paid a percentage of your total lease value, which is typically between 3 and 5 percent. However, this often isn’t the full amount your broker will receive, as they usually have to share a percentage of their commission with their brokerage companies.
Getting to a signed lease can be a lot of work. This can involve conference calls or face-to-face meetings, searching for spaces that satisfy your requirements, setting up and attending property tours and actual lease negotiations themselves.
A broker will have to do these steps for a company regardless of if they’re looking for 10,000 square feet of space or 500 square feet of space, but the difference in size means that the amount the broker receives will be significantly different.
This is why you might want to — or have to — represent yourself in a lease transaction for a smaller space. If your space requirements are bigger or more complicated, then there are instances where using a broker may be in your best interest. To better understand the potential costs of working with a broker, check out our FAQ.
Knowing the landlord landscape. It’s tempting for experienced entrepreneurs to think that they can deal with the landlord directly and save money by not using a broker, expecting that the landlord will pass savings on to them. While there may be times when this is true, there are just as many situations where it isn’t necessarily the case.
While you might do a lease transaction every three to five years, brokers do many deals every month. The end result is that brokers are likely to know more about the landlords operating in the local area than you do. They know the property owning landscape well: who is flexible, who is motivated and who will go the extra mile to accommodate a tenant.
For example, let’s say you are a growing company with the stability to sign a long-term lease if desired, but want to retain a short-term lease for greater growth flexibility. In situations such as this, an experienced broker can guide you to spaces with landlords who are not only flexible, but can accommodate you in alternative buildings while under your current lease.
Let’s say you run out of space two years into a five-year lease, you may have the option to transfer your lease terms and move to a larger space in their portfolio. Additionally, as opposed to having to take a large space that is intended to be grown into, a broker may be able to negotiate rights of first refusal on adjacent spaces one or two years into your lease term, saving you from paying that rent from the onset.
Striking a creative deal. A broker may also be able to work out a plan that works best for your company’s financial needs by getting creative with how your rent escalation is constructed. If you are working on a product launch that runs on an 18-month cycle, a broker may work with you to escalate your rent accordingly instead of a traditional 12-month rent increase cycle.
If you are facing a scenario where you may have run out of space completely, they may even be able to negotiate a lease buyout with the landlord so that you can move into their new space without paying double rent.
There are no hard and fast rules on when to work with a broker. Before putting in a lot of work shaving a few percentage points off your lease by saving the landlord from a commission, ask yourself if you’re paying for something that you shouldn’t have to or if there’s any flexibility that is worth more to your company than the rent savings.
These factors could amount to much more savings than the commission saved and passed to you.