In most of today's brokered real estate transactions, the broker representing the buyer or tenant is compensated based on a percentage of the total transaction. This system works well for the broker representing the seller or landlord, because, in most instances, sellers and landlords want the total transaction to be as large as possible, and will, consequently, compensate the broker accordingly.
For a broker representing a tenant, however, this system is archaic. It should be replaced by a method of compensation that rewards brokers for making the most cost-effective deals for their clients. Real estate brokers who represent buyers and tenants should take the responsibility for making this change. To take a business-as-usual approach is neither professional nor in the best interests of clients.
For real estate consultants to advise tenants and buyers objectively, a paradigm shift in real estate compensation needs to be implemented to focus on the client, not the broker. As such, commission-based compensation cannot work effectively: Its structure inherently benefits the broker, not the tenant or buyer.
The goal in providing real estate services to tenants and buyers should be to assure that a company's facilities support the dynamic needs of its business. Unfortunately, since the real estate industry is focused on commissions, it often rewards real estate brokers for lease and purchase terms that may be in conflict with the needs of the tenants and buyers they serve.
Traditionally, real estate brokers have been paid commissions commensurate with the size of a transaction. Under a lease scenario, a commission is determined by three components: (1) the size of the space, (2) the term for which the space is under lease, and (3) the rate per square foot applied to the space. If any one of these components increase, the commission increases. Therefore, under such a compensation scenario, what can motivate a broker to reduce any one of these components when the result will be lower compensation?
To enable the real estate consultant and client to work in a manner that meets the business needs of the client, we suggest that an alternative compensation structure be developed based on the complexity of the work required to service the project and the value added by the real estate adviser.
The consumer benefits in several ways when real estate service fees are based on the scope of the project. There is no suggestion or perception of "steering," or leading a client to a particular property. Steering can take several forms, including directing clients toward a property where a more lucrative commission is offered by a landlord, encouraging clients to take more space than necessary to meet their needs or negotiating for longer or more expensive lease terms. Fees based on the client's needs rather than on the size of the transaction assure that a real estate consultant will be "decision-neutral" when evaluating client alternatives.
Tenants and buyers in today's market place have unique real estate requirements. They demand tremendous flexibility, lower occupancy costs and up-to-the-minute technology. Compensation based on the scope of work necessary to align a company's operations with the real estate it occupies is the only logical way to guarantee that professional real estate services will serve the client, not the real estate broker.
Before engaging a real estate broker to represent your interests, be sure that your broker's method of compensation is compatible with what you want to accomplish. It may be tempting to "look the other way," considering it the broker's problem, not yours, but such action can create many misunderstandings during the course of the transaction.
For example, there are times when a larger, more costly alternative is the best choice for the client, and it's the broker's duty to make that recommendation. But when the broker is compensated on a percentage basis, the client may question the objectivity of his or her advice. Thus, real estate fees should always be based on a client's goals only.
Todd Heyman is senior account executive with The Victor S. Voinovich Co., a Cleveland-based commercial real estate firm that represents
tenants and buyers exclusively.