Trying to negotiate a full fee

The Brokerage Arrangement

Boston SIOR broker Rob Nagle receives a call one morning from Baltimore SIOR broker Will Downs. Will has a national exclusive representation with Barnone Security of Baltimore who needs 25-30,000 sf of warehouse/office space in the suburban Boston market. Will wants to “team up” with Rob in the assignment in which both brokers will split any receiving fees 50-50%. Barnone is a privately-held national firm with an extremely strong financial statement.

According to their arrangement, Rob is in charge of searching properties, conducting tours with Barnone officials, providing market information, landlord information, etc. Once a property has been selected, Will has the job of negotiating letters of intent, formal leases and tenant improvement issues and communicating with Barnone officials at the Baltimore headquarters.

The Building and Market Conditions

Months later, Rob and Barnone officials narrow the selection to one warehouse building in Lowell, Massachusetts (approximately 30 miles northwest of Boston). The building has been on the market for over a year. It has a great location and is in good condition. Nevertheless, its biggest drawback in the marketplace is that it has a high 24’ ceiling but only has overhead doors and no tailgate loading docks. Because of the topography, no docks could be constructed. Only a limited number of users exist for this building. For Barnone Security, however, it is perfect for its business.

The Building Tenancy

The Lowell building is represented exclusively by another local Boston SIOR Alan Green. Barnone wants at least a 10-year lease with an option to purchase. The asking rent is $ 5.00 psf, annually, net of all expenses and the tenant has strong financials. The space is currently occupied by another tenant as a tenant -at-will (30-day basis) and can vacate with 30 days notice at any time. Alan is offering a 50-50 split with any cooperating Massachusetts licensed broker who is instrumental in the consummation of a lease transaction.

The market rent for this building, if it had docks, would be closer to $6.00 psf, net of all expenses with “bumps” after the third year of a long-term lease. Therefore, the asking rent is below market and more appropriate for a non-dock warehouse building. Barnone thinks if it leases for a 10-year term, it has leverage in negotiating.

The Offer

Rob informs Will of the property. Barnone tells Rob and Will to immediately submit a LOI. They submit a letter of intent for 10 years with a lease rate commencing at $4.00 and escalating to $5.50 psf in the 10th year. They also asked for a four-month free rent period and Barnone has offered to be responsible for all its tenant improvement work.

Barnone’s brokers, Rob and Will, believe that this is a good starting point but fully expect a counter offer. Rob has also asked Alan Green if the landlord would consider paying a full fee rather than half a fee. The landlord however has responded that he does not want to discuss the brokerage fees until he knows if he has a lease agreement. If a lease is signed he would be willing to discuss a full fee.

The Problem

To the surprise of Rob and Will, however the owner accepts the offer with no counter-offer. Will is happy, but says, “We never had the chance to negotiate for a full fee.” Unfortunately they had expected to continue discussing the full fee during negotiations but the offer was accepted too quickly. The fee schedule was never confirmed or discussed either.

Before the formal lease is to be delivered or signed, Rob has to negotiate with Alan and his landlord -client for a resolution of the fee schedule and confirmation for a full fee. It is a little after the fact and their leverage isn’t quite the same. Now the landlord doesn’t remember discussing a full fee and sees no reason to offer a full fee. Alan is aware of Will and knows that he is the national rep, however, he is not aware of the arrangement between Rob and Will. Alan has not disclosed his fee schedule either but Rob and Will would like $ 0.30 psf, per year.

Your Task

With all this confusion on the fee, the following day, Barnone added to the stress by asking Rob and Will if they have consummated their arrangement on brokerage fees with the landlord. It seems Barnone is in a rush to move into the building and as just signed the lease. Barnone has not sent the lease to the landlord but wants to start tenant improvement work. Rob has told Barone to give him 24 hours to firm up the brokerage fee arrangements. Barnone is willing to wait one day. But they do not want the brokerage fees obstructing this deal. Barnone is quite pleased with the lease that they have signed. If Rob and Will create problems, Barnone has told them that they will not be used on other future assignments.

Rob has arranged a meeting with Alan Green and his client, the landlord. Will has agreed to fly up from Baltimore to attend the meeting with Rob.