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Exclusive Brokers: Do They Deliver?
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Exclusive Brokers: Do They Deliver?Are chain retailers that use exclusive brokers to find new locations getting what they want from their brokers? Is the economic slump prompting more retailers to cap commissions, signaling a double whammy for brokers as retail leasing slows down? In a survey by The Dealmakers of the real estate departments of 50 retailers known to have used exclusive brokers, 86 percent said they impose no cap on commissions, most said they are satisfied with the results they get from brokers, and many indicated they see brokers as a cost-free service because commissions are paid by the landlord. This, of course, ignores the economic reality that the tenant pays all the landlord’s costs, a fact only a few retail executives seemed to recognize. Some companies -- those who recognize that it’s their money talking -- pay guaranteed minimums, bridging the gap between what the landlord pays the broker and "fair market value" of the broker’s service. Most brokers are retained on a handshake, which gives their clients the option to sever the relationship anytime. Others have written contracts of as long as a year. Brokers spend their own time and money finding sites and lining up deals that may or may not close, which is a risk factor for the broker but a free service -- in theory -- for the retailer. Several retailers indicated they don’t care about the commission because the landlord pays it, but one skeptic questioned the whole notion of brokers working "for" tenants while negotiating commissions from landlords: "How can a broker work on behalf of one party and be paid by another party?" Good question, but it seems to work. Most retailers we spoke to insisted on talking "off the record," meaning they and their companies wouldn’t be named in The Dealmakers. Here are some of the interviews, including both on- and off-the-record replies: * Rack Room Shoes, a 330-unit chain of family shoe stores, doesn’t give exclusive brokers a formal contract, said Rack Room’s real estate director, Mark Hoffman. The relationship and commission is "suggested in the letter of intent," he said, at $3 per square foot. Hoffman said the commission policy hasn’t hampered the company’s ability to secure locations. * A national chain of upscale specialty stores in the 10,000 square-foot range that locates in larger markets said it uses a master broker who finds and oversees local brokers. The master broker gets an override commission on each local broker. He also acts as a filter, interviewing brokers in the prospective markets and choosing the most qualified candidates, and the company’s real estate director makes the final choice. The company said this gives them a stronger feel for unfamiliar markets, because "the broker should be more knowledgeable on the market," and eliminates the necessity of "three or four bodies in-house." While the master broker doesn’t have a finite contract term, the regional brokers get a one-year exclusive contract. * Postal Annex Plus, a 260-unit chain of shipping stores operating locations of 1,000 to 1,600 square feet in supermarket-anchored strip centers nationwide, uses 12 exclusive brokers on handshake agreements, said Doug Dreeshen, director of real estate. A broker has never asked them for a fee, Dreeshen said, because they earn their commissions from the landlords. Brokers enhance the company’s ability to secure locations, said Dreeshen, adding he "would love an exclusive in every market, but (the brokers) would need to prove themselves." Brokers are evaluated based on their ability to deliver quality sites in a "timely manner." Even with handshake deals, the company has only terminated one exclusive broker. Dreeshen said he considers exclusive brokers his "eyes and ears" in less-familiar territory. * The owner of a chain of much-sought-after housewares stores does have a cap on his exclusive broker’s commission fee, but there’s also a floor in the five-digit range. He uses one broker, nationally, on a one-year contract and guarantees a minimum commission, paying the difference between the guaranteed amount and what the landlord pays. The broker is required to report any commission received from the landlord. Why use one national exclusive broker? Because it "gives me a center of focus, a sense of strategy and keeps the company’s phone lines quieter." * A national chain of family apparel stores uses two exclusive brokers, one on each coast. Neither has a written agreement and both have been working with the company for eight years based on a handshake. The chain’s real estate director said using exclusive brokers enhances the company’s ability to find good locations. An exclusive broker, he said, also increases market knowledge and reduces expenses. Brokers have "great exposure to markets around the country that you would generally be unfamiliar with, and this is free, whereas in house you would pay for travel and other expenses." * Jeffrey Neustadt, director of real estate for Taxis, a four-unit chain of restaurants in the 2,500 to 2,800 square-foot range, has one exclusive broker and said most brokers have a four to six month exclusive. Neustadt uses an exclusive broker to gain coverage and establish contacts in those markets he is unfamiliar with. * A big chain of 1,200 square-foot service-oriented stores guarantees its broker a $5,000 commission on any deal. The company has about 80 exclusive brokers and said the exclusivity is for six months initially, but can be canceled with 30 days notice. * Vern Netler, director of Atlanta Bread Co.’s real estate department, said there’s no cap on his brokers’ commissions. The company operates a 90-unit chain of gourmet food stores using spaces of 4,000 to 4,500 square feet in freestanding, end cap and pad locations. Netler said he wants his brokers "immersed daily" in the market, so he insists brokers live in the targeted market area, even if they work for a large brokerage firm with offices nationwide. Exclusives are established with a handshake, and the company uses brokers because nationwide expansion is leading the company into areas they don’t know intimately, Netler said. The company has 10 to 12 exclusive brokers. * Steve Gunning, real estate director at Wolf Camera Inc., said the company uses regional brokers. Wolf Camera is a national 650-unit chain of photographic specialties and photo processing stores operating 2,500 square foot stores in malls, strip centers, freestanding and downtown areas. There is no commission cap, because the company believes in the "traditional relationship" in which the broker is paid by the landlord only. Gunning said using brokers is "less expensive" than paying employees scattered across the country. The company has about 20 exclusive brokers, on handshake contracts. * A national chain of upscale women’s casual apparel and accessories stores in the 1,800 to 2,500 square foot range declined to discuss commissions and how their brokers are paid. At one time, the company had a head broker managing a team of brokers, but now uses key reps in major metro areas for their local market knowledge. The company has about 40 brokers on handshake agreements. * There are no caps at Great Clips, a 1,388-unit national chain of hair salons leasing 800 to 1,200 square-foot sites in power centers and community strip centers. Dean Wieber, senior vice president of real estate, said the company prefers commissions to "be applicable to the markets he’s working in." He said brokers "provide local market knowledge" and "local landlord relationships." About 52 brokers work for the company on contracts with 30-day cancellation clauses. * "Preferred" brokers, rather than exclusive, are used by a large regional western chain of grocery stores. This company leases 15,000 to 30,000 square feet in strips, freestanding and urban/downtowns. Commissions are capped at a per-square-foot amount. The company said the square footage of their sites is "high enough to keep the brokers’ incentive up" while the company can control cost. The company can get the "same performance without an exclusive contract," our contact said, adding that contracts can "tie your hands if you have an incompetent working for you," defining "incompetent" as someone who misses obvious opportunities. He emphasized the importance of "mutuality of trust" between both parties, and compared the broker-retailer relationship to a "marriage." The company uses three or four major national brokerage houses in different sub-markets. * Ted Frumkin of Rubio’s Restaurants Inc., a 122-unit chain of restaurants using 2,000 to 2,200 square feet in power and specialty centers in the western U.S., said the company not only doesn’t cap commissions, it also guarantees a minimum fee of $10,000, so that the broker will give Rubio’s sites higher priority than lower-paying deals. Frumkin said this has enhanced the company’s ability to secure locations and the company gets "a certain degree of loyalty this way." Frumkin said he treats brokers "like an extension of the company," cultivating a trust relationship. Exclusive brokers also cost less than in-house real estate people. Brokers "allow you to expand your span of control" across the country, while keeping expenses down. About nine brokers work for Rubio’s on handshake deals which include territorial rights. So it seems brokers in general are holding their own and may avoid a recessionary double whammy, as long as retailers perceive value in exclusive broker deals, as many of those we surveyed clearly do. Still, every broker is up against what may, or may not be, a growing attitude among retailers, especially those who might have worked in a real estate department that was eliminated to cut costs. This attitude was exemplified by the comments of one who asked not to be named: "The whole notion of brokers ‘representing’ tenants and being paid by owners is a modern-day version of the Emperors New Clothes. No one wants to say out loud how absurd this situation is," he said. "What ever happened to the concept of fiduciary obligation? How can a broker work on behalf of one party and be paid by another party ? This silliness grew out of the downsizing created by the downturn in the 80s, when some corporate beancounter thought that they could save money by eliminating their real estate department and having brokers do the same job. I wonder if anyone has ever ... calculated how much this farce has cost them." Some might argue, however, that using independent brokers has saved many companies the cost of salaries, office and travel expenses that come with an in-house real estate department. As for who a broker actually represents, any money paid by a landlord to a broker has to come from a paying tenant, so it makes little difference who writes the check. And if landlord and tenant are happy with each other and happy with the deal, the broker clearly represented both sides well.
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