What an Occupant Representation Agreement Should Include?
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I’m pleased to report, last week we were rewarded an assignment to represent a bustling logistics company in their search for a new warehouse location. Certainly, they may renew at their present address but that will all be put into the mix of our process. Why’d we win the deal? Aside from my charismatic personality and dashing good looks - I haven’t a clue. But I digress. We were told our thoroughness in understanding their situation, our plan, and the way we’d centered upon them vs us we’re keys. Owner centric indeed! Crafted was an agreement for our engagement. The points of said understanding I believed to be column worthy - so here goes.
Time frame. We generally base our exclusive engagement agreements on a six-month term. Certainly this can vary - but we have found, in this environment, more time is needed in the market notification and search process, therefore a few more months are needed. In some instances lease negotiations can take several weeks and this needs to be built into the time frame.
Description of the requirement. The ultimate determination of the requirement is what is in the tenant’s best interest as determined by the tenant. However, there are some general parameters of the sought after alternative that we build into our agreements. Things such as total square footage, office space within the square footage, clear height of the warehouse, sprinkler calculation, truck turning radius, and if important - things such as the power into the building, trailer storage, outside staging, and fenced yard areas.
Location. We start with Ground Zero which is the existing location, and build from there. In our experience some tenants want to stay very proximate to the existing location because of employees, suppliers, freeway proximity, and the general familiarity with the surrounding amenities. In other cases, a tenant might like to look at markets well beyond their existing location including out-of-state. In the above referenced assignment we are going to focus upon orange county, the inland empire, and potentially one location out of state which is yet to be determined. This could potentially be Arizona, Nevada, or Texas.
Rate and terms. These are difficult to pinpoint because there is such a wide variation in owner motivation these days and consequently lease rate and term expectations vary. Most tenants do you have a general idea of the lease term with which they’re willing to commit. This could be a short as three years or as long as 10 years. Therefore, we author in some general terms with the caveat that ultimately it’s as acceptable to the tenant.
What we’re authorized to do and not do. Our agreements provide for us to notify the market of the requirement - being careful to keep the tenant’s name anonymous, search the available inventory both vacant and occupied, vet these alternatives for their suitability, tour with the tenant, make proposals on behalf of the tenant and enter into the negotiations with the landlord. Obviously, we are not authorized to commit the tenant in any way to a lease. We are also not to disclose the name of the tenant unless they enable us to do so.
Escape hatch. Since most of our engagements involve a first time assignment, we include the ability for the client to cancel the contract after a certain period of time by giving us written notice. We are careful to point out that any building in which negotiations have occurred are excluded from future broker dealings for certain period of time. This is referred to as an exclusivity period or a “tail”. These can range from 30 days to 180 days.
Expectations of the Tenant. As a part of our partnership, we ask the tenant to allow us to be the clearinghouse for all information. Should they receive a submittal from another broker or hear about a building at a cocktail party - we ask them to route that through us for consideration. Additionally, the tenant is responsible to notify their landlord that they have selected an agent to consider alternatives in the marketplace. Should an aggressive owner contact our tenant directly - with the eyes toward ousting us, we ask our tenant to back us up and let the owner know we have been engaged to represent them.
Deal changes. Frequently, there are variations to the requirements as outlined. As an example - some occupants start out being tenants and convert into buyers. In some cases, their existing location becomes the best alternative for them. Finally, some locations are not considered initially and then find favor. All of these modifications must be wordsmithed into the understanding.
So why should an occupant sign an exclusive engagement with a broker? After all, it’s a bit different than listing your building for sale or lease in anticipation of the broker scouting prospects. Isn’t it more beneficial - as an occupant - to have several agents searching on your behalf? These are all questions that arise. The easiest explanation is it costs a tenant nothing to engage a broker to exclusively search on their behalf. The owner of the property is responsible for any commissions and therefore you benefit from the experience of a broker and eliminate your need to have several points of contact in your search.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at email@example.com or 714.564.7104. His website is allencbuchanan.blogspot.com.