Do Broker Incentives Lease Office Space?
One of the tactics a building owner and their leasing representative will use in order to create traffic and create more interest in leasing space in their project from the brokerage community is offering a bonus commission as an incentive.
This broker bonus was around before I started my career 20 years ago and candidly given the stagnant leasing market, I am very surprised this tactic has not been more prevalent in the Houston market during the recent downturn.
Transparency is the Right Policy
I know that some brokerage companies and or tenant representatives have a policy of not accepting bonus commissions or leasing incentives beyond what fee they have negotiated with their client as part of their tenant representation agreement. There are differing opinions or schools thought on this issue.
I will go on the record as saying I have accepted a bonus commission in a lease transaction where I represented a client in an office lease. However, I have never done so without disclosing this material fact to my client prior to completing the transaction.
My personal policy regarding bonus commission or leasing incentives are three fold:
- Disclose to the client
- Offer the incentive to the client
- Leave it up to the client to decide whether or not I receive the extra consideration or fee
Disclose to the client: As a tenant representative you have a fiduciary responsibility to your client to disclose this material fact. Failing to disclose this material fact not only violates this fiduciary responsibility but is also unethical and just plain bad business.
Offer the incentive to the client: My position regarding these incentives is that I have already agreed up-front with my client as what the fee will be for my services. In any situation where my client is considering a lease transaction in a building where the owner is offering a bonus commission or incentive, my policy is offer the incentive to the client for any non-cash incentive or in the case of a bonus commission percentage, then offer to put that value back into the deal in some form (i.e. rent credit or tenant improvements). The purpose of this policy is that I never want my client to perceive an incentive from the owner to the broker will influence my recommendation or advice regarding the transaction or building selection they make.
Let the client decide: Only on one occasion have I had a client accept my offer to put the value of a leasing incentive back into the deal, and I was happy to do so. In every other instance the client decided that I deserved the additional consideration, but the key point is that I let them decide after the deal was done. In this scenario the client considers the additional commission dollars as a performance bonus for a job well done.
Effective Leasing Tactic?
I have always wondered if offering a bonus commission or incentive is really an effective leasing tactic. I believe the value of any additional commission dollars is miniscule compared to the value of having the respect of my client who can recommend me to another company or friend. Wouldn’t the building owner be better served offering the value of the bonus commission to the tenant in some form?
I suppose a building owner offering a bonus commission may get a tenant representative to include his building for consideration by their clients. However, a good tenant representative should be showing the building options to his client that best fit their space needs anyway, despite what fee is being offered. So the tactic does not really seem logical to me. However, I am not naive enough to think each and every broker in the business maintains the same ethical standards. I guess the broker bonus will always be around.
What is your take on this issue?