I recently had lunch with a fellow commercial real estate professional who lamented  about how some old-fashioned commercial landlords he's encountered will let a real estate transaction die, or actually kill it themselves, rather than pay a real estate commission on terms that they don't deem appropriate.  I was amazed to learn that there still exists some of those landlords.  I thought they all had died off.  What these landlords, the type to which this real estate broker referred, often consider acceptable is a substantially lesser commission amount than requested by most real estate professionals, and one that they can pay via an extended series of payments over a very long time period.

The idea behind the long-term payment schedule is most often two-fold:  One is purely cost and cashflow management (Some will say it's merely a way to make life difficult for brokers - I'm not that cynical!) .  The second is a means of sharing with the broker the risk that the tenant may not perform (pay rent!), default, or breach the lease.

Mind you, the real estate professional with whom I was chatting is no slouch.  He's not one of those whiney "How come I don't make enough money? - The world owes me a living! - All landlords are out to get me!" types.  He's a respected, accomplished pro, who knows his stuff and works for a nationally recognized commercial real estate brokerage company.  In fact, a large part of his company's practice includes representing commercial landlords.

I found it very interesting, based on what this broker told me, that in the year 2010 some landlords would rather put a transaction at risk, possibly lose a deal, before they agree to pay a market rate commission.  And, why?  The best landlords see real estate professionals as beneficial to transactions and seek to compensate them fairly.  The most successful landlords quickly dispense with  issues as minor as commission payments and agree to reasonable terms that are in-keeping with local customs.  Those landlords, the intelligent ones, recognize that losing 100% of a good deal never makes sense, especially if the reason is because of too great a focus on commissions, which in almost every case, represent  a very small percentage of transaction costs.   The best landlords by-pass that stuff and almost immediately train their energies on making the deal by negotiating favorable terms with prospective tenants.  Isn't that what it's really about anyway?

Let me clarify one thing.  Unlike many other commercial real estate brokers and advisors, I am not of the mindset that every landlord, every tenant, and every transaction must include real estate professionals.  If a landlord or tenant has the resources and the inclination to negotiate on its own behalf without engaging representation, then it should  do so.

And, another thing!  As for dealing with brokers and other real estate professionals, this is America, pal...land of the Free!  Despite many opinions about the current federal government becoming socialist, this is still a free country!  And, any landlord, company, or individual is free to conduct their business as they see fit.  A business person is allowed to agree or not agree to do business with whomever she chooses.  She can choose to pay any price for any service, so long as someone will sell it to her for that price.  That goes for landlords, tenants, brokers,  and commissions, too.

While we were at lunch, my friend commented that some landlords, no matter how outdated their approach may be, will often do almost anything they can to pay lower commissions, to pay those commissions over extended time periods, and to put those commissions at risk in the event tenants default.  I guess it is a landlord's right to do that...isn't it?  But, suggest to some of those very same landlords that they should pay commission rates that are higher than what may be customary, and watch the fireworks!  Can they have it both ways?

I get that some landlords believe tenant brokers don't work for them and that those brokers should be paid by their tenant clients.  I've written about this topic many times.  My answer to that is:  When all the landlords and tenants get together to change how brokers' compensation works, and when tenants elect to take-on the obligation to compensate their real estate advisors, I'll be out in front of that discussion.  If that change ever occurs, landlords and brokers will finally get past this issue, certain landlords will stop pressuring tenant brokers, and the entire commercial real estate industry will be more in balance, will operate more efficiently, and will be able to focus on structuring more creative transactions.  Until that time, let's stop wasting time...we've got clients to represent!

Since America is a free country, isn't it also true that real estate professionals can choose who they do business with, how much they get paid, when, and what risks they're willing to accept for the services they deliver?  The answer is a resounding "Yes!", so long as the real estate professional acts in accordance with his client's knowledge and approval, and so long as he adheres to the terms of his State's licensing regulations and requirements of conduct.

So, why would any landlord...any intelligent business person...risk 100% of any transaction because of a commission...a small percentage of any transaction?  I never have figured that one out.  There has got to be more to this story!  What am I missing?

What do you think?

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