Exclusive Tenant Reps:
Cupbearers Lead Perilous Lives
The Dealmakers
polled approximately 300 brokers representing retailers on an exclusive basis to
get an understanding of their commission structures and co-brokerage
arrangements. To give a level of credibility to the answers and improve the
response rate, all respondents were offered anonymity. About 30 percent took us
up on that. Half of the respondents have been exclusive tenant reps for at least
seven years (one said he had been in the business for 20 years, "before
they called it tenant repping") and 77% currently represent as many as five
retailers.
The focus of the survey was to
determine how many tenant-representation agreements contain limits on the amount
of money a broker can collect rather than an open-ended per-square-foot rate or
a percentage of total rent. A lot of brokers we surveyed said they hadn’t
heard of a retailer capping the commission a developer could pay. On the other
hand, minimum commissions were common. "A minimum commission setup speaks a
lot about how much a merchant understands about the property market," said
Mike Epsteen, a broker with Epsteen & Associates (301-451-8171) and tenant
rep since 1962. "Rent pays all the costs for the landlord. If no minimum is
set then there may be a loyalty issue with the retailer."
However, a significant minority
-- 35 percent -- said at least one client has imposed a maximum commission on
one or more deals. Structuring of commissions is closely related to how much
space the retailer takes and whether a co-broker is involved. The larger the
space, the more likely the commission is based on a per-square-foot fee, with a
median range of $3 to $4. Smaller store tenants pay from 2.5 percent to 6
percent of the gross rent for the primary term. When a co-broker is involved,
commissions tend to rise to satisfy all parties. Several brokers told us that
when a co-broker gets involved the landlord will pay a 6 percent commission
rather than 4 percent. Another broker said that on larger deals, co-brokers will
drive the commission rate up to $4 a square foot from the usual $3-a-foot fee.
"Co-brokers drive up the rent," one broker stated flatly.
When we asked, "Has
co-brokering affected your ability to secure locations?" the answers were
evenly divided. Those who said no, for the most part, view it as the landlord’s
expense and said as long as the commission gets paid, there’s no problem. The
other 50% said sometimes co-brokering hinders or even kills a deal. One told us
of a deal in which a co-broker wanted the first month’s rent PLUS 5 percent of
the primary term’s gross rent. The owner of the center had its broker call the
exclusive tenant rep’s client (the lessee) to explain that the commission for
the exclusive tenant rep was killing the deal. Another broker said that in tight
markets co-brokering is difficult, adding that motivation is a key factor, and
better fees motivate. One broker who represents developers said one way to
offset co-brokerage fees is to trade commissions for a management contract on
the property.
Epsteen said brokers have always
been a cost-effective way for retailers to have eyes and ears in a specific
market. "Commissioned brokers came about as retailers tied costs together.
Brokers started with soft goods and shoe stores on the west coast because the
principals would have to travel for two days to get from coast to coast,"
Epsteen said. "It is the cheapest way to have a diversified real estate
approach and it is always ‘all about cost’ for the retailer. It is very
expensive for retailers to make a lease."
Startling results came from the
question, "How long is your exclusive?" (Meaning how much protection
do you have from your retail client?) A surprising 42 percent revealed that
their exclusivity can be canceled at anytime or with 30 days written notice. How
do they cope? The word "trust" came up several times. One explained:
"Generally our exclusives are a handshake and not in writing. Maybe that is
a mistake on my part but my first inclination is to trust someone. When you are
working closely with a company and go to battle for them, you expect they will
do the same for you. It has only once come up to bite me. Fortunately, a
handshake and one’s word still means something in our business." Another
broker noted, "one client has been with us for eight years with no
agreement. Remember that word trust?" Other brokers said six months was the
norm for new clients. Explained Paul Fetscher of Great American Brokerage
(212-557-7272): "By that time (six months), we know whether we can work
together or not." Another broker said his handshake agreements can be
canceled anytime. After all, he said, "You are only as good as you
produce."
Though we didn’t ask, several
tenant reps brought up what may be a budding trend -- retail clients dictating
who else their brokers can represent. It’s obvious that the TJ Maxx rep can’t
do Ross Store deals, but what about Target and Lowes Home Centers? Both compete
for the same square footage, says the logic behind broker restrictions.
Representing TJ Maxx and Bed, Bath and Beyond can create conflicts when there’s
a lot of overlap of housewares merchandising. This trend seems to be gathering
steam.
As to when most brokers reap the
rewards of their efforts, about 64% of the commissions are paid half at the time
the lease is executed and the balance paid when the store opens. Only 11% see a
commission in full at the time the lease is signed, while 22% wait until the
store opens to collect their fee. One respondent explained "we take payouts
like everyone else," yet only 3% of the respondents fessed up to taking
payouts after the store opened.
Fetscher said trusting the client
doesn’t mean brokers shouldn’t take steps to protect their invested time.
"I make sure there is a survival clause that says I am paid on any
locations I submitted that survive the termination of the agreement,"
Fetscher said. "I am very careful not to have less protection than I would
if I were a freelance broker who brought the site to them."
The survey showed that many
exclusive tenant reps are out there without a safety net. Everything -- from
size of commissions, to the length of exclusives and when the fees are paid --
is performance-based. If the economy continues to slow and expansion grinds to a
halt, will tenant reps be the first to feel the crunch?
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