I am bringing up an important issue that every prospective tenant representation client either asks or has in the back of their mind. That is since they are not writing us a check how do we get paid?
Contrary to common misnomers a real estate broker doesn’t work for free. There is a cost to employ a tenant representative to the client however, after you read further, you are going to see the expense is more than offset by the savings that are created by a professional tenant office broker.
How Dallas Office Brokers Get Paid
In the Dallas office market a landlord’s agent will typically earn a four to a five percent commission from their property owner when a lease is executed by a tenant. Their primary role is to represent both parties fairly but their responsibility it represent the interests of the landlord. Consequently they will position all negotiations, contacts and correspondence to get the best results for their client.
It is important to recognize that every lease is truly nothing more than a financial transaction to a landlord. It is all about the bottom line and the yield that each lease generates and how the quoted rate compares to the overall market.
In order to get the yield that is required the landlord needs to manipulate the building’s expenses and income. Based upon the yield result of these numbers the rental rate and other expenses the tenant pays will be adjusted accordingly.
- Base Rent
- Operating Expense Reimbursements
- Electricity Reimbursements
- Parking Fees
- Construction Amortization
- Operating Expenses (Insurance, Taxes, Utilities, Janitorial ect….)
- Construction Cost
- Brokerage Commission
By employing the services of a tenant representation firm the commission structure will change for the landlord’s agent. Traditionally the landlord’s agent’s fee will be decreased to offset some of the expense of the tenant representative’s fee.
I want to show you a simple analysis (please note that there are many more variables but my purpose is to give you a general how the commission is calculated into your rent).
Example Landlord’s Yield Analysis To Determine An Office Rental Rate
Lets assume that you sign a lease for $28.00 per square foot and it is a 2,500 square foot space in a 2,500 square foot building. There are no other types of income associated with the lease. Furthermore the landlord’s total annual expense is $10.00 per foot and they paid $1,000,000 for the building. There are two different commission scenarios. One doesn’t have a tenant representative and the landlord only pays a commission to their broker and the other is that you have a professional helping you with the lease that is 100% loyal to you working in your best interests.
Net Rental Yield = ((Annual Rent-Annual Expenses)/Total Property Cost) x 100%
No Tenant Representation and a commission of 5% is paid through the tenant’s rent to the landlord of $3,500
(($70,000 – ($25,000+3,500))/$1,000,000 = 4.15% Net Rental Yield (NRY) for the landlord
So lets assume that you hire a tenant representative. The commission structure is going to change. The landlord’s agent will now receive a commission of 2.5% and your tenant representative will receive a fee of 4.5%. These are common rates in the Dallas office market but they are negotiable. Now lets use the same example.
With tenant representation and a commission paid through the tenant’s rent to the landlord of $4,900.
(($70,000 – ($25,000+4,900))/$1,000,000 = 4.01% Net Rental Yield (NRY) for the landlord.
The easiest solution for the landlord to maintain the same NRY is to increase the rent from $28.00 to $28.56. So the total rental income would now be $71,400 for the landlord. So if you have heard that there is no expense to hiring a tenant representative this simple example proves that there could be an increase in the actual rental rate.
Why Hire An Office Tenant Representative Broker?
So why on earth would you want to hire a professional tenant representative? Because there is a lot more than yield analysis to the landlord. Yes it is an important factor but they also know the market rental rates for Dallas office space. Since over eighty percent of the office leases done in the Dallas office market have a tenant representative involved the market rental rates tend to have the additional commission calculated into the “market rent.” An seasoned asset manager is going to understand the yield analysis but they also know that the market has this fee already build into the competitors rental rates so why would they lower their rate if you choose not to have professional representation?
The value of a real estate investment is directly related to the income the property generates. In the example above the owner would spend an additional $1,400 for the commission but they would also increase the buildings overall value by $23,300 if there is a capitalization rate of 6%. This concept is worthy of a blog of its own but the point a wise asset manager focuses on the yield but there are other important factors that are taken into account.
Since tha Dallas office space market is very active and demand is high for space the current driver for rental rates is more the market rental rate. Now on some of the lower end class c office buildings market rental rate will be less of a factor but class a space it is reported to investors every quarter and it is a major factor in asset valuation.
Based upon years of representing our clients we know our service has been of a major benefit to our clients.
Benefits Our Clients Receive
- Increased Free Rent
- Higher Construction Allowances
- Renewal Options
- Rights of First Refusal
- Market Analysis
- Inside Dallas office space information
- Guidance to avoid common pitfalls tenants make
- Lease Flexibility
- Confidence in their office space rental decision
If you are talking with a broker and they say their isn’t any expense for their service remember that the landlord does factor into their rental rate the cost of a commission. However, if you do choose to not have a professional Dallas tenant representation broker help you with your transaction remember that their is still a commission being paid out of your rental payment to the landlord’s agent and they are not working for your best financial interests. You can easily level the playing field by employing a professional to help you with your next Dallas office space decision.