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Tenant Reps Fill the Holes

If you haven't dealt with a tenant rep — as a renter or as a landlord — you may soon. At a time when filling shopping centers and other retail real estate is becoming a more complicated task, tenant reps are facilitating more and more deals.

“The majority of national retailers are relying on tenant reps,” says Brett Womack, a principal with the Richmond, Va., office of Divaris Real Estate Inc., one of the largest independently-owned retail brokerage firms in the Southeast. “They are outsourcing their real estate departments and relying on local professionals. This wasn't the case five years ago, but it is increasingly the way the industry is heading.”

Today, 50 percent of Divaris' business is devoted to tenant representation rather than broker leasing. That figure is as high as 65 percent at firms such as ChainLinks Retail Advisors.

While Virginia Beach, Va.-based Divaris says its clientele includes large national chains such as Best Buy, Kohl's and PETsMART, Sperry Van Ness generally gets hired to represent small tenants that need 1,000 to 10,000 square feet. “If a developer is going to do a ground-up development, a national firm like Grubb & Ellis is going to get hired,” says Burton Young, president of the Irvine, Calif.-based company's asset division. “Our expertise is more regional and we are hired to fill the toughest spaces, the last 10 percent.” That's an important benefit to landlords, because the last 10 percent is often the most profitable space in a development.

While the tenant rep's work may ultimately profit the landlord, it is also usually the landlord who winds up paying the tab. So even though the rep ostensibly serves the retailer who hires him, “nine out of 10 times the service is paid for by the owner-developer,” says Young.

Susan Kurland, an executive director with Cushman & Wakefield in New York, frequently works as a tenant rep. For example, in October, she closed a deal for 45,000 square feet on Fifth Ave. for American Girl, a high-end doll division of Mattel Inc. “I definitely represented the tenant. I was not an agent of the property, but I was paid by the developer,” she says. “While it is strange how it works, at least in urban retail, 99 percent of the time you are paid by the owner or developer.”

Of course, owners wind up getting some of their money back from the retailers over the course of the lease. Commission costs for the rep can be handled in a number of ways. The most common method is to absorb it into the overall rent. “Landlords expect to pay commission no matter who the brokers are representing,” says Kurland. “The developer pays and that cost is already figured into the deal.”

That perspective is shared by ChainLinks, which claims to be the largest retail-only real estate service provider in North America, with 450 retail brokers around the country. “Even though the bulk of our business is representations, ultimately the landlord sends a check,” says ChainLinks Chairman Troy Peple. “Presumably the commission cost is already built into the economic base of the lease.”

Even developers that try to manage all their own leasing rely on tenant reps on occasion. Take the Cordish Co., for example. The Baltimore-based firm owns and manages 10 million square feet of commercial space. It has been developing retail and entertainment space around the country for more than 40 years and has never been known as broker-friendly.

Eighty percent of Cordish's leasing is done in house. But for that last 20 percent, tenant reps often get into the act. “We tell the tenants up front we are happy to work with their brokers, but we are going to collect their fees in rents,” says David Cordish, the company's chairman.

“Sometimes tenants direct you to pay and that is fine with us,” Cordish adds. “We will pay the fee and then raise the rent. In other words, I will charge the tenant $20 a square foot if there is no outside broker. If they direct me to use an outside broker and the deal costs me $2 a square foot, then the rent becomes $22 a square foot.”

Commissions for tenant rep brokers remain fairly consistent throughout the country. In the mid-Atlantic states, Divaris commissions range from $2 per square foot to $4 per square foot. In Sacramento, Calif., Donahue Schriber Realty Group, a shopping center owner, pays tenant reps between $3 and $4 per square foot on a lease up to 10,000 square feet, says Heather Beal, vice president of development and leasing for the company's Sacramento office.

As the size of the leased space increases, Donahue Schriber uses a negotiable sliding scale. And on a ground lease, transaction brokers are paid a percentage of annual income from the first year; on a sale, brokers typically get 5 percent of the sale price net any reimbursement.

While direct retailer payment to reps is rare, it does occur. Mostly, it comes into play when an existing tenant at an older center hires a broker to negotiate a new contract with the landlord. “It's almost like a renewal,” says Young. “About 80 percent of the time when a tenant pays the fee it is either for renewal, extension or expansion.”

Occasionally, the landlord refuses to pay the broker's fee. In those cases the tenant sometimes steps up to pay. “If the landlord won't pay the compensation,” explains Young, “the tenant rep should have a line in the contract saying the tenant will compensate.”

Sometimes, too, the tenant winds up supplementing the commission. Peple says that retailers frequently pay ChainLinks brokers over and above the commission to manage the process — essentially to provide experienced manpower, resources, administrative management and coordination across geography.

Small-sized tenants are also increasingly willing to guarantee a minimum level of commission so they can get quality representation. “It is just as important for the 1,500-square-foot tenant to get good space as it is for the 5,000-square-foot tenant, yet the straight commission is roughly a third of what it would be, because the broker's fee is frequently based on square footage,” Peple explains. “It is a common scenario for tenants under 5,000 square feet to guarantee that the landlord will pay a specified commission rate and tenants will pay the rest out of their pockets. The small tenant needs a qualified professional for representation. If the commission to be paid does not justify the broker taking the tenant on as a client, then the client agrees to make up the difference.”

The additional payment option for small tenants has always been around, but Peple says it is becoming prevalent as competition for space and representation grows more fierce.

In this increasingly tense environment, owners are also sweetening the commissions for the reps of major chains. “Starbucks has cream-of-the-crop brokers in Northern California,” says Donahue Schriber's Beal. “They only lease about 1,400 square feet — and a commission of $4 a square foot might not keep them motivated. We pay them, and other tenant reps for stores such as Blockbuster, a negotiated fixed rate.”

At the end of the day the tenant rep must get paid for his work. That some owner/developers and small tenants are paying them a premium indicates just how far they have come. Tenant representation was once a sideshow to the brokerage leasing business. Now, the rep is a crucial player in filling retail space.

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